Module 7 The Meaning and Measurement of Risk Assignment

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The Meaning and Measurement of Risk 

Complete the following problems:

  • Problem 7-1: Standard Deviation
  • Problem 7-2: Holding-Period Gain and Return
  • Problem 7-3: Capital Asset Pricing Model
  • Problem 7-4: Breakeven Point and Selling Price
  • Problem 7-5: Operating Leverage

You can access the problem details by excel file.

Direction:

Complete the problems in an Excel spreadsheet. Be sure to show your work to receive credit.

Unformatted Attachment Preview

MODULE 7 CT PROBLEMS THE MEANING AND MEASUREMENT OF RISK AND RETURN CT 7 - 1 Chapter 6 STANDARD DEVIATION Given the following probabilities and returns for UAE Corporation, find the Expected Return and standard deviation. DATA PROBABILITY RETURNS 0.15 5% 0.30 7% 0.40 12% 0.15 20% Solution Expected return DEVIATION Deviation Squared Probability 0.15 0.30 0.40 0.15 Probability x Deviation Squared Variance Standard Deviation CT 7 - 2 HOLDING PERIOD GAIN AND RETURN Chapter 6 Suppose you purchased 30 shares of UAE Corporation stock for SAR 22.35 per share on February 1. On October 1 of the same year, you sold 30 shares of the stock for SAR 52.10 per share. Calculate the holding-period SAR gain for the shares you sold, assuming no dividend was distributed, and the holding period rate of return. DATA Purchase price Selling price Shares sold Solution: Holding-period gain Holding-period return CT 7 - 3 Chapter 6 CAPITAL ASSET PRICING MODEL Using the CAPM, estimate the appropriate required rate of return for the three stocks listed here, given that the risk-free rate is 8% (eight percent) and the expected return for the market is 14% (fourteen percent). DATA Stock A B C Beta 1.30 0.80 0.55 Risk-free rate Market rate Solution: Stock A B C Returns CT 7 - 4 BREAKEVEN POINT AND SELLING PRICE UAE Industries will manufacture and sell 450,000 units next year. Fixed costs will total SAR 825,000, and variable costs will be 38% thirty-eight percent) of sales. a. The firm wants to achieve a level of earnings before interest and taxes of SAR 290,000. What selling price per unit is necessary to achieve this result? b. Set up a pro forma income statement to verify your solution to part a. Solution: DATA Sell Fixed Costs Variable Costs 450,000 825,000 38% A) EBIT Sales = Avg selling price = B) Sales Total VC Revenue before FC Total FC EBIT 0.00 0 0 0 0 CT 7 - 5 Chapter 12 OPERATING LEVERAGE Buraydah Company manufactures a complete line of electronics. The average selling price for the various products is SAR 820. The associated variable cost is SAR 510 per unit. Fixed costs for the firm averay SAR 325,000 annually. a. What is the break-even point in units for the company? b. What is the dollar sales volume the firm must achieve to reach the break-even point? c. What is the degree of operating leverage (i.e., the ratio of the percent change in EBIT divided by the corresponding percent change in sales) for a production and sales level of 3,000 units for the firm? (Calculate to three decimal places.) d. What will be the projected effect ono earnings before interest and taxes if the firm's sales level should increase by 20 percent from the volume noted in part c. Solution: DATA Avg selling price Avg Variable Cost Fixed costs A) Breakeven pt in units = B) Sales volume = C) Sales level Operating leverage = D) Sales increase EBIT increase =
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Explanation & Answer

Attached.

MODULE 7 CT PROBLEMS
THE MEANING AND MEASUREMENT OF RISK AND RETURN
CT 7 - 1
Chapter 6
STANDARD DEVIATION
Given the following probabilities and returns for UAE Corporation, find the Expected Return and
standard deviation.
DATA
PROBABILITY
RETURNS
0.15
5%
0.30
7%
0.40
12%
0.15
20%
Solution

Expected return

DEVIATION

10.65%

Deviation Squared
0.32%
0.13%
0.02%
0.87%
Variance
Standard Deviation

CT 7 - 2
HOLDING PERIOD GAIN AND RETURN

Probability
0.15
0.30
0.40
0.15

Probability x
Deviation
Squared
0.0479%
0.0400%
0.0073%
0.1311%
0.2263%
4.76%

Chapter 6

Suppose you purchased 30 shares of UAE Corporation stock for SAR 22.35 per share on February 1. On
O...


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