CORPORATE FINANCE

Tutorial 5
Discussion Questions

1. Spartan Sofas, Inc. is selling for $50.00 per share today. In one year, Spartan will be selling for
$48.00 per share, and the dividend for the year will be $3.00. What is the cash return and the
rate of return on Spartan stock?

2. You are considering investing in a project with the following possible outcomes:

States Probability of Occurrence Returns

Economic boom 15% 16%
Economic growth 45% 12%
Economic decline 25% 5%
Depression 15% -5%

i. Calculate the expected rate of return for this investment.

ii. Compute the standard deviation for this investment.
iii. Calculate the coefficient of variation for this investment

3. Compute the expected return, the standard deviation and the coefficient of variation of an
investment that has the following expected scenario:

States Probability of Occurrence Returns

Recession 15% 2%
Economic growth 60% 9%
Economic decline 25% 15%

4. Consider the following information:

States Probability Stock A Return Stock B Return

Recession 0.2 0.05 -0.15
Normal 0.5 0.08 0.10
Growth 0.3 0.12 0.15

i. Expected return for both stocks

ii. Standard deviation for both stocks
iii. Identify the riskier stock for both stocks
5. Roddy Richards invested $12014.88 in Wooten Meat Distributors (W.M.D.) five years ago.
The investment had yearly arithmetic returns of -9.7%, -8.1%, 15%, 7.2%, and 15.4%.

i. What is the arithmetic average return of Roddy Richard's investment?

ii. What is the geometric average return of Roddy's Richard's investment?
iii. How much money did Roddy Richards receive when he sold his shares of W.M.D.?

6. How does a risk averse investor compensate for risk that he / she invests in?