 BBA3301 Columbia Southern University Financial Management Questions

BBA3301

Columbia Southern University

4 questions

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1. Caswell Enterprises had the following end-of-year stock prices over the last five years and paid no dividends. Time Caswell 1 \$12 2 9 3 7 4 6 5 8 •Calculate the average rate of return for each year from the above information.. •What is the arithmetic average rate of return earned by investing in Caswell's stock over this period?. •What is the geometric average rate of return earned by investing in Caswell's stock over this period?. •Considering the beginning and ending stock prices for the five-year period are the same, which type of average rate of return best describes the annual rate of return earned over the period (arithmetic or geometric)?. •The annual rate of return at the end of year 3 is what percent? 2. On December 5, 2007, the common stock of Google, Inc. (GOOG) was trading at \$698.51. One year later, the shares sold for \$301.99. Google has never paid a common stock dividend. What rate of return would you have earned on your investment had you purchased the shares on December 5, 2007? The rate of return you would have earned is what percent? 3. The common stock of Plaxo Enterprises had a market price of \$9.45 on the day you purchased it just 1 year ago. During the past year, the stock paid a dividend of \$1.43 and closed at a price of \$11.66. What rate of return did you earn on your investment in Plaxo's stock? The rate of return you earned on Plaxo's stock is what percent? 4. Syntex is considering an investment in one of two stocks. Given the information that follows, which investment is better based on the risk (the standard deviation) and return? Given the information in the table, what percent is the rate of return for Stock B? STOCK A Probability 0.20 0.60 0.20 STOCK B Return 10% 16% 21% Probability 0.10 0.40 0.40 0.10 Return -7% 5% 13% 20% ...
Purchase answer to see full attachment Kindly see attached files with the answer to the different questionsI've included both a pdf and a doc version so that you can use any of them if you can't read the equations used in the calculation of the different variables

Problem 1.
Average rates of return for each year taking into account the stock price from the previous year:
𝐴𝑅𝑅(𝑠𝑒𝑐𝑜𝑛𝑑 𝑦𝑒𝑎𝑟) = 9 − 12 = −\$3
𝐴𝑅𝑅(𝑡ℎ𝑖𝑟𝑑 𝑦𝑒𝑎𝑟) = 7 − 9 = −\$2
𝐴𝑅𝑅(𝑓𝑜𝑢𝑟𝑡ℎ 𝑦𝑒𝑎𝑟) = 6 − 7 = −\$1
𝐴𝑅𝑅(𝑓𝑖𝑓𝑡ℎ 𝑦𝑒𝑎𝑟) = 8 − 6 = \$2

Annual rates of return:
𝐴𝑅𝑅(𝑠𝑒𝑐𝑜𝑛𝑑 𝑦𝑒𝑎𝑟) =
𝐴𝑅𝑅(𝑡ℎ𝑖𝑟𝑑 𝑦𝑒𝑎𝑟) =

7−9
= −0.22
9

𝐴𝑅𝑅(𝑓𝑜𝑢𝑟𝑡ℎ 𝑦𝑒𝑎𝑟) =
𝐴𝑅𝑅(𝑓𝑖𝑓𝑡ℎ 𝑦𝑒𝑎𝑟) =

9 − 12
= −0.25
12

6−7
= −0.14
7

8−6
= 0.33
6

Arithmetic average rate of return over the 5-year period:
𝐴𝑟𝑖𝑡ℎ𝑚𝑒𝑡𝑖𝑐 𝐴𝑅𝑅 =

(−0.25) + (−0.22) + (−0.14) + 0.33
= −0.0704 = −7.04%
4

Geometric average rate of return over the 5-year period:
4

𝐺𝑒𝑜𝑚𝑒𝑡𝑟𝑖𝑐 𝐴𝑅𝑅 = (√(1 − 0.25) ∗ (1 − 0.22) ∗ (1 − 0.14) ∗ (1 + 0.33) − 1) = −0.0964 = −9.64%

Analysis:
The geometric average rate of return provides a better approximation to the annual rate of return over the
considered period as it takes into account the compounding effect of interest rates.

Annual rate of return for the third year:
𝐴𝑅𝑅(𝑡ℎ𝑖𝑟𝑑 𝑦𝑒𝑎𝑟) =

7−9
= −0.22 = −22%
9

Problem 2.

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎�... strongboss5 (3555)
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