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# Instructions

2. You will enter the required information into the shaded cells.
3. The cells are coded:
a. T requires a text answer.

## b. C requires a calculation. You cannot perform the operation on a calculator

in the cell. You will enter the calculation in the cell, and only the final answe
be able to review your calculation and correct, if necessary.

Instructions

## he operation on a calculator and then type the answer

cell, and only the final answer will show in the cell. I will
if necessary.

## Principles of Corporate Finance, Concise, 2nd Edition

a)What was the standard deviation of the market returns?
Find the standard deviation by completing the table with the appropriate formulas
Year

2004
2005
2006
2007
2008

12.5
6.4
15.8
5.6
-37.2

Total
Average
Std. Deviation

C
C

Difference from
Average
C
C
C
C
C

## b)Calculate the average real return.

Find the average real return by completing the table with the appropriate formulas
TIP: formula for real return can be found in the Classroom Course Tools, Resources, Financial Formulas
Year
Nominal Return (%)
Inflation (%)
2004
2005
2006
2007
2008

12.5
6.4
15.8
5.6
-37.2

Average

## Principles of Corporate Finance, Concise, 2nd Edition

3.3
3.4
2.5
4.1
0.1

Squared Difference
C
C
C
C
C
C
C
C

Real Return (%)
C
C
C
C
C
C

Problem 7-11

## Each of the following statements is dangerous or misleading. Explain why.

a. A long-term United States government bond is always absolutely safe.
b. All investors should prefer stocks to bonds because stocks offer higher long-run rates of return.
c. The best practical forecast of future rates of return on the stock market is a 5- or 10-year average of historical returns.

a.

b.

c.

ge of historical returns.

Problem 8-6
Suppose that the Treasury bill rate were 6% rather than 4%. Assume that the expected return on the market stays at 10%. Use
in Table 8.2 (p. 193) - also provided below.

## a. Calculate the expected return from Dell.

b. Find the highest expected return that is offered by one of these stocks.
c. Find the lowest expected return that is offered by one of these stocks.
d. Would Ford offer a higher or lower expected return if the interest rate were 6% rather than 4%? Assume that the expected m
return stays at 10%.
e. Would Exxon Mobil offer a higher or lower expected return if the interest rate were 8%?

Formula

Calculation

B./C.
Stock

Beta (B)

Revised T Bill
Risk-Free Rate

Market Return

Expected
return

Amazon

2.16

Ford

1.75

Dell

1.41

Starbucks

1.16

Boeing

1.14

Disney

0.96

Newmont

0.63

Exxon Mobil

0.55

0.5

Campbell Soup

0.3

B. Highest

C. Lowest

Interest rate

4%

Rate of return

Higher or lower?

6%
C

Interest rate

4%

8%

Rate of return

Higher or lower?

## Principles of Corporate Finance, Concise, 2nd Edition

Problem 8-18
Some true or false questions about the APT:
a. The APT factors cannot reflect diversifiable risks.
b. The market rate of return cannot be an APT factor.
c. There is no theory that specifically identifies the APT factors.
be true but not very useful, for example, if the relevant factors change unpredictably.
Respond to each question - true or false - and why.

a.

b.

c.

d.

d. The APT mo