The Problem Set is provided to you to enable you to practice the concepts outlined in the textbook. Select THREE completed problems from the assignment and post your solutions to those problems. In your solutions, provide an explanation as to why you choose the answer. 1. If RF = 6 percent, b = 1.3, and the ERP = 6.5 percent, compute Ke(the required rate of return). 2. If in problem 1 the beta (b) were 1.9 and the other values remained the same, what is the new value of Ke? What is the relationship between a higher beta and the required rate of return (Ke)? 3. Assume the same facts as in problem 2, but with an ERP of 9 percent. What is the new value for Ke? What does this tell you about investors’ feelings toward risk based on the new ERP? 4. Assume D1 = $1.60, Ke= 13 percent, g = 8 percent. Using Formula 7″�5, for the constant growth dividend valuation model, computeP0. 5. J. Jones investment bankers will use a combined earnings and dividend model to determine the value of the Allen Corporation. The approach they take is basically the same as that in Table 7″�2 in the chapter. Estimated earnings per share for the next five years are: 2008 $3.20 2009 3.60 2010 4.10 2011 4.62 2012 5.20 a. If 40 percent of earnings are paid out in dividends and the discount rate is 11 percent, determine the present value of dividends. Round all values you compute to two places to the right of the decimal point throughout this problem. b. If it is anticipated that the stock will trade at a P/E of 15 times 2012 earnings, determine the stock’s price at that point in time and discount back the stock price for five years at 11 percent. c. Add together parts a andb to determine the stock price under this combined earnings and dividend model. 6. A company has $200,000 in inventory, which represents 20 percent of current assets. Current assets represent 50 percent of total assets. Total debt represents 30 percent of total assets. What is stockholders’ equity? 7. In the year 2007, the average firm in the S&P 500 Index had a total market value of fives times stockholders’ equity (book value). Assume a firm had total assets of $10 million, total debt of $6 million, and net income of $600,000. a. What is the percent return on equity? b. What is the percent return on total market value? Does this appear to be an adequate return on the actual market value of the firm? . A firm has the following financial data: Current assets � � $600,000 Fixed assets � � � 400,000 Current liabilities � 300,000 Inventory � � � 200,000 If inventory increases by $100,000, what will be the impact on the current ratio, the quick ratio, and the net-working-capital-to-total-assets ratio? Show the ratios before and after the changes. 9. Given the following financial data, compute: 10. Assume the following financial data: Shares outstanding…………………………………………………………………. 24,000 a. Compute the P/E ratio (stock price to earnings per share). b. Compute the book value per share (note that book value equals stockholders’ equity). c. Compute the ratio of stock price to book value per share. d. Compute the dividend yield. e. Compute the payout ratio. 11. Security Analyst A thinks the Collins Corporation is worth 14 times current earnings. Security Analyst B has a different approach. He assumes that 45 percent of earnings (per share) will be paid out in dividends and the stock should provide a 4 percent current dividend yield. Assume total earnings are $12 million and that 5 million shares are outstanding. a. Compute the value of the stock based on Security Analyst A’s approach. b. Compute the value of the stock based on Security Analyst B’s approach. c. Security Analyst C uses the constant dividend valuation model approach presented in Chapter 7 as Formula 7″�5 on page 147. She uses Security Analyst B’s assumption about dividends (per share) and assigns a growth rate, g, of 9 percent and a required rate of return (Ke) of 12 percent. Is her value higher or lower than that of the other security analysts? 12. Using the formula for the security market line (Formula 21″�7 on page 534), if the risk-free rate (RF) is 7 percent, the beta (bi) is 1.25, and the market rate of return (KM) is 11.8 percent, compute the anticipated rate of return (Ki). 13. If another security had a lower beta than indicated in problem 10, would Kibe lower or higher? What is the logic behind your answer in terms of risk? 14. The capital market line (CML) as defined by the capital asset pricing model is characterized by all of the following except 15. The beta coefficient is a measure of 16. Systematic risk is rewarded with a premium in the marketplace because 17. Which of the following are assumptions of the capital asset pricing model? 18. The correlation coefficient: 19. The standard deviation of a risk-free asset is: 20. A good way to minimize risk and receive an optimum return on your portfolio is: