fcf 9th edition chapter 12

8/13/2019 FCF 9th Edition Chapter 12

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Chapter 12Problems 1-24

Input boxes in tan

Output boxes in yellow

Given data in blue

Calculations in red

Answers in green

NOTE: Some functions used in these spreadsheets may require tha

the "Analysis ToolPak" or "Solver Add-In" be installed in Excel.To install these, click on the Office button

then "Excel Options," "Add-Ins" and select

"Go." Check "Analyis ToolPak" and

"Solver Add-In," then click "OK."


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Chapter 12Question 1

Input area:

Initial price 91$

Dividend paid 2.40$

Ending share price 102$

Output area:

Total return 14.73%


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Input area:

Initial price 91$

Dividend paid 2.40$


Output area:

Dividend yield 2.64%

Capital gains yield 12.09%


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Input area:

Initial price 91$

Dividend paid 2.40


Output area:

Total return -6.15%

Dividend yield 2.64%

Capital gains yield -8.79%


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Input area:

Initial price 1,040$

Coupon paid 70$

Ending price 1,070$

Inflation rate 4%

Output area:

a. Dollar return 100.00$

b. Nominal return 9.62%

c. Real return 5.40%


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Input area:

Nominal return 12.30%

Inflation rate 3.10%

Output area:

a. Nominal return 12.30%

b. Real return 8.92%


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Input area:

Long-term government 5.80%

Long-term corporate 6.20%


Output area:

Real long-term government return 2.62%

Real long-tern corporate return 3.01%


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Input area:

Year X Y

1 8% 16%

2 21% 38%

3 17% 14%

4 -16% -21%

5 9% 26%

Output area:

X

ActualReturn

AverageReturn Deviation

1 0.08 0.08 0.00

2 0.21 0.08 0.13

3 0.17 0.08 0.09

4 (0.16) 0.08 (0.24)

5 0.09 0.08 0.01

Total 0.39

Average return 7.80%

Variance 0.020670

Standard Deviation 14.38%

X

ActualReturn


1 0.16 0.15 0.01

2 0.38 0.15 0.233 0.14 0.15 (0.01)

4 (0.21) 0.15 (0.36)

5 0.26 0.15 0.11

Total 0.73Average return 14.60%


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Variance 0.048680

Standard Deviation 22.06%


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SquaredDeviation

0.00000

0.01742

0.00846

0.05664

0.00014

0.08268

SquaredDeviation

0.00020

0.054760.00004

0.12674

0.01300

0.19472


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Input area:

YearLarge

Stocks T-bills

1970 3.94% 6.50%

1971 14.30% 4.36%

1972 18.99% 4.23%

1973 -14.69% 7.29%

1974 -26.47% 7.99%

1975 37.23% 5.87%

Output area:

Large company stocks

YearActualReturn


SquaredDeviation

1970 0.0394 0.0555 (0.0161) 0.00026

1971 0.1430 0.0555 0.0875 0.00766

1972 0.1899 0.0555 0.1344 0.01806

1973 (0.1469) 0.0555 (0.2024) 0.04097

1974 (0.2647) 0.0555 (0.3202) 0.10253

1975 0.3723 0.0555 0.3168 0.10036

Total 0.3330 0.26983Average return 5.55%

Variance = 0.053967

Standard deviation = 23.23%

T-bill returns

YearActualReturn


SquaredDeviation

1970 0.0650 0.0604 0.0046 0.00002

1971 0.0436 0.0604 (0.0168) 0.00028

1972 0.0423 0.0604 (0.0181) 0.00033

1973 0.0729 0.0604 0.0125 0.00016

1974 0.0799 0.0604 0.0195 0.000381975 0.0587 0.0604 (0.0017) 0.00000

Total 0.3624 0.00117Average return 6.04%

Variance = 0.000234



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Average observed risk premium

Year Actual Average DeviationSquaredDeviation

1970 (0.0256) (0.0049) (0.0207) 0.00043

1971 0.0994 (0.0049) 0.1043 0.01088

1972 0.1476 (0.0049) 0.1525 0.02326

1973 (0.2198) (0.0049) (0.2149) 0.046181974 (0.3446) (0.0049) (0.3397) 0.11540

1975 0.3136 (0.0049) 0.3185 0.10144

Total (0.0294) 0.29758Average return -0.49%

Variance = 0.059517


d. Before the fact, for most assets the risk premium will be positive; investors

demand compensation over and above the risk-free return to invest their

money in the risky asset. After the fact, the observed risk premium can benegative if the asset's nominal return is unexpectedly low, the risk-free rate is

unexpectedly high, or if some combination of these two events occurs.


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Input area:

Year Returns

1 7%

2 -12%

3 11%

4 38%

5 14%

Output area:

X

ActualReturn


1 0.07 0.12 (0.05)

2 (0.12) 0.12 (0.24)

3 0.11 0.12 (0.01)

4 0.38 0.12 0.26

5 0.14 0.12 0.02

Total 0.58


Variance = 0.032030

Standard Deviation = 17.90%


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SquaredDeviation

0.00212

0.05570

0.00004

0.06970

0.00058

0.12812


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Input area:

Stock return 11.60%

Average inflation 3.50%

Average T-bill rate 4.20%

Output area:

a. Average real return 7.83%

b. Average nominal risk premium 7.40%


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Input area:

Stock return 11.60%

Average inflation 3.50%

Average T-bill rate 4.20%

Output area:

Average risk-free real return 0.68%

Average real risk premium 7.15%


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T-bill rate were the highest in the early eighties. This was a

period of high inflation and is consistent with the Fisher effect.


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Input area:

Purchase price 1,030.00$

Coupon rate 8.00%

Current YTM 7.00%

Maturity (years) 6

Settlement 01/01/08

Maturity 01/01/14


Output area:

Current price 1,047.67$

Nominal return 9.48%

Real return 5.07%


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Input area:

Year Returns

1 7%

2 -12%

3 18%

4 19%


Output area:

Sum of all returns 52.50%

Sum of known returns 32.00%

Missing return 20.50%

X

ActualReturn


SquaredDeviation

1 0.070 0.11 (0.035) 0.00123

2 (0.120) 0.11 (0.225) 0.050633 0.180 0.11 0.075 0.00563

4 0.190 0.11 0.085 0.00723

5 0.205 0.11 0.100 0.01000

Total 0.525 0.07470Average return 0.1050

Variance = 0.018675

Standard Deviation = 13.67%


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Input Area:

Year 1 3%Year 2 38%Year 3 21%Year 4 -15%Year 5 29%Year 6 -13%

Output Area:

Arithmetic return 10.50%

Geometric return 8.60%


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Input area:

Year Price Dividend1 60.18$ -$2 73.66$ 0.60$3 94.18$ 0.64$4 89.35$ 0.72$5 78.49$ 0.80$6 95.05$ 1.20$

Output area:

Year

Capital GainsYield

DividendYield

TotalReturn

1 to 2 22.40% 1.00% 23.40%2 to 3 27.86% 0.87% 28.73%3 to 4 -5.13% 0.76% -4.36%4 to 5 -12.15% 0.90% -11.26%5 to 6 21.10% 1.53% 22.63%

Arithmetic return 11.83%

Geometric return 10.58%


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Input area:

Long-term corporate bonds


Standard deviation 8.40%

Return less than -2.20%

Output area:

Probability less than -2.20% = 15.87%

Range Lower return Upper return95 percent -10.60% 23.00%

99 percent -19.00% 31.40%


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Input area:

Small company stocks



Output area:

Return to double money = 100%

Probablity of doubling = 0.550%

Return to triple money = 200%

Probablity of tripling = 0.00000100913%


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It is impossible to lose more than 100% of your investment.

Therefore, return distributions are truncated at the lower tail

at -100 percent.


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Input area:

Year T-bills Inflation1973 7.29% 8.71%1974 7.99% 12.34%1975 5.87% 6.94%1976 5.07% 4.86%1977 5.45% 6.70%1978 7.64% 9.02%1979 10.56% 13.29%1980 12.10% 12.52%

Output area:


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T-bills

YearActualReturn


SquaredDeviation

1990 0.0729 0.0775 (0.0046) 0.000021991 0.0799 0.0775 0.0024 0.000011992 0.0587 0.0775 (0.0188) 0.00035

1993 0.0507 0.0775 (0.0268) 0.000721994 0.0545 0.0775 (0.0230) 0.000531995 0.0764 0.0775 (0.0011) 0.000001996 0.1056 0.0775 0.0281 0.000791997 0.1210 0.0775 0.0435 0.00190Total 0.6197 0.00431

Average return 0.0775

Variance = 0.000616


Inflation

YearActualReturn


SquaredDeviation

1990 0.0871 0.0930 (0.0059) 0.000031991 0.1234 0.0930 0.0304 0.000931992 0.0694 0.0930 (0.0236) 0.000561993 0.0486 0.0930 (0.0444) 0.001971994 0.0670 0.0930 (0.0260) 0.000671995 0.0902 0.0930 (0.0028) 0.000011996 0.1329 0.0930 0.0399 0.001591997 0.1252 0.0930 0.0322 0.00104Total 0.7438 0.00680

Average return 0.0930

Variance = 0.000971


Average observed real return

YearActualReturn


SquaredDeviation

1990 (0.0131) (0.0140) 0.0009 0.000001991 (0.0387) (0.0140) (0.0247) 0.000611992 (0.0100) (0.0140) 0.0040 0.000021993 0.0020 (0.0140) 0.0160 0.000261994 (0.0117) (0.0140) 0.0023 0.00001

1995 (0.0127) (0.0140) 0.0013 0.000001996 (0.0241) (0.0140) (0.0101) 0.000101997 (0.0037) (0.0140) 0.0103 0.00011Total (0.1120) 0.00110

Average return (0.0140)

Variance = 0.000157



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d. The statement that T-bills have no risk refers to the fact that there is only anextremely small chance of the government defaulting, so there is little defaultrisk. Since T-bills are short-term, there is also very limited interest rate risk.However, as this example shows, there is inflation risk, i.e. the purchasingpower of the investment can actually decline over time even if the investor

is earning a positive return.


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Input area:



Return less than 0.00%

Output area:

Probability less than 0.00% = 26.93%


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Input area:

Long-term corporate bonds



T-bills



a. Return greater than 10.00%


b. Return greater than 10.00%


c. Return less than -4.18%

Return greater than 10.56%

Output area:

a. Probablity of return > 10.00% = 32.55%

Probabilty of return < 0.00% = 23.02%

b. Probablity of return > 10.00% = 2.28%

Probabilty of return < 0.00% = 11.01%

c. Probablity of return < -4.18% = 10.83%

Probabilty of return > 10.56% = 1.46%

fcf 9th edition chapter 12

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