Author Question: Fred's Frankfurters has an expected return of 18.9. The market has an expected return of 13.5. If ... (Read 221 times)

cartlidgeashley · **on:** Jul 10, 2018

Fred's Frankfurters has an expected return of 18.9. The market has an expected return of 13.5. If the risk free rate is 5, calculate the Treynor Index. (Round to two decimal places)

A) 13.90
B) 5.40
C) 5.18
D) 8.48
E) 7.50

Question 2

You want to invest in a stock that pays 3.50 annual cash dividends for the next six years. At the end of the six years, you will sell the stock for 22.50. If you want to earn 12.5 on this investment, what is a fair price for this stock if you buy it to

A) about 25.94
B) about 25.29
C) about 12.45
D) about 14.25

ergserg · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

D

Answer to Question 2

Answer: B
Explanation: B) The fair price is the present value of the selling price plus the present value of the dividend stream. Thus, today's price (P) = (future price PVIF) + (dividend stream PVIFA)
= (22.50 0.493270) + (3.5 4.053838) = 11.099 + 14.188 = 25.287, or about 25.29.
MODE = END
INPUT 6 12.5 ? -3.5 -22.5
KEY N I/Y PV PMT FV
CPT 25.29