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[Solved]Explain the difference between the type of risk each bank faces. Which bank faces less risk? Why?

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[Solved]Explain the difference between the type of risk each bank faces. Which bank faces less risk? Why?

You bought a stock one year ago for $50 per share and sold it today for $55 per share. It paid a $1 per share dividend today.

a. What was your realized return?

b. How much of the return came from dividend yield and how much came from capital gain?

 

Consider two local banks. Bank A has 100 loans outstanding, each for $1 million, that it expects will be repaid today. Each loan has a 5% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $100 million outstanding, which it also expects will be repaid today. It also has a 5% probability of not being repaid. Explain the difference between the type of risk each bank faces. Which bank faces less risk? Why?

Consider the following two, completely separate, economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move together—in good times all prices rise together and in bad times they all fall together. In the second economy, stock returns are independent—one stock increasing in price has no effect on the prices of other stocks. Assuming you are risk-averse and you could choose one of the two economies in which to invest, which one would you choose? Explain.

What does the beta of a stock measure?

Betas with Respect to the S&P 500 for Individual Stocks

Company

Ticker

Industry

Equity Beta

General Mills

GIS

Packaged Foods

0.20

Consolidated Edison

ED

Utilities

0.28

The Hershey Company

HSY

Packaged Foods

0.28

Abbott Laboratories

ABT

Pharmaceuticals

0.31

Newmont Mining

NEM

Gold

0.32

Wal-Mart Stores

WMT

Superstores

0.35

Clorox

CLX

Household Products

0.39

Kroger

KR

Food Retail

0.42

Altria Group

MO

Tobacco

0.43

Amgen

AMGN

Biotechnology

0.44

McDonald’s

   

MCD

Procter & Gamble

PG

Household Products

0.47

Pepsico

PEP

Soft Drinks

0.51

Coca-Cola

KO

Soft Drinks

0.54

Johnson & Johnson

JNJ

Pharmaceuticals

0.59

PetSmart

PETM

Specialty Stores

0.75

Molson Coors Brewing

TAP

Brewers

0.78

Nike

NKE

Footwear

0.91

Microsoft

MSFT

Systems Software

1.01

Southwest Airlines

LUV

Airlines

1.09

Intel

INTC

Semiconductors

1.09

Whole Foods Market

WFM

Food Retail

1.10

Foot Locker

FL

Apparel Retail

1.11

Oracle

ORCL

Systems Software

1.12

.com/”>Amazon.com

AMZN

Internet Retail

1.13

Google

GOOG

Internet Software and Services

1.14

Starbucks

SBUX

Restaurants

1.20

Walt Disney

DIS

Movies and Entertainment

1.21

Cisco Systems

CSCO

Communications Equipment

1.23

Apple

AAPL

Computer Hardware

1.26

PulteGroup

PHM

Homebuilding

1.28

Dell

DELL

Computer Hardware

1.41

.com/”>salesforce.com

CRM

Application Software

1.47

Marriott International

MAR

Hotels and Resorts

1.48

eBay

EBAY

Internet Software and Services

1.48

Coach

COH

Apparel and Luxury Goods

1.60

Macy’s

   

M

Juniper Networks

JNPR

Communications Equipment

1.71

Williams-Sonoma

WSM

Home Furnishing Retail

1.72

Tiffany & Co.

TIF

Apparel and Luxury Goods

1.80

Caterpillar

CAT

Construction Machinery

1.85

Ethan Allen Interiors

ETH

Home Furnishings

1.95

Autodesk

ADSK

Application Software

2.14

Harley-Davidson

HOG

Motorcycle Manufacturers

2.23

Advanced Micro Devices

AMD

Semiconductors

2.24

Ford Motor

F

Automobile Manufacturers

2.38

Sotheby’s

BID

Auction Services

2.39

Wynn Resorts Ltd.

WYNN

Casinos and Gaming

2.41

United States Steel

X

Steel

2.52

Saks

SKS

Department Stores

2.57

 

Suppose the market risk premium is 5% and the risk-free interest rate is 4%. Using the data in Table 10.6 (also shown above), calculate the expected return of investing in

a. Starbucks’ stock.

b. Hershey’s stock.

c. Autodesk’s stock.

 

You own three stocks: 600 shares of Apple Computer, 10,000 shar
es of Cisco Systems, and 5,000 shares of Colgate-Palmolive. The current share prices and expected returns of Apple, Cisco, and Colgate-Palmolive are, respectively, $500, $20, $100 and 12%, 10%, 8%.

a. What are the portfolio weights of the three stocks in your portfolio?

b. What is the expected return of your portfolio?

c. Suppose the price of Apple stock goes up by $25, Cisco rises by $5, and Colgate-Palmolive falls by $13. What are the new portfolio weights?

d. Assuming the stocks’ expected returns remain the same, what is the expected return of the portfolio at the new prices?

 

Suppose Autodesk stock has a beta of 2.16, whereas Costco stock has a beta of 0.69. If the risk-free interest rate is 4% and the expected return of the market portfolio is 10%, what is the expected return of a portfolio that consists of 60% Autodesk stock and 40% Costco stock, according to the CAPM?

 

Unida Systems has 40 million shares outstanding trading for $10 per share. In addition, Unida has $100 million in outstanding debt. Suppose Unida’s equity cost of capital is 15%, its debt cost of capital is 8%, and the corporate tax rate is 40%.

· a. What is Unida’s unlevered cost of capital?

· b. What is Unida’s after-tax debt cost of capital?

· c. What is Unida’s weighted average cost of capital?

ou would like to estimate the weighted average cost of capital for a new airline business. Based on its industry asset beta, you have already estimated an unlevered cost of capital for the firm of 9%. However, the new business will be 25% debt financed, and you anticipate its debt cost of capital will be 6%. If its corporate tax rate is 40%, what is your estimate of its WACC?


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  • Title: [Solved]Explain the difference between the type of risk each bank faces. Which bank faces less risk? Why?
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  • Post Date: 2021-09-28T11:40:24+00:00
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