Compute the standard deviation of the expected return given these three economic

Question

Compute the standard deviation of the expected return given these three economic states, their Likelihoods, and the potential returns: 6.8% 16.5% 21.5% 46.4% Crab Cakes Ltd. has 5 million shares of stock outstanding selling at $15 per share and an issue of $10 million in 10 percent, annual coupon bonds with a maturity of 25 years, selling at 97 percent of par ($1000). If Crab Cakes* weighted average tax rate is 30 percent, its next dividend is expected to be $1.00 per share, and all future dividends are expected to grow at 5 percent per year, indefinitely, what is its WACC? 8.42% 10.84% 11.16% 11.52% A company's current stock price is $84.50 and it is to pay a $3.50 dividend next year. since analysts estimate the company will have a 10% growth rate. what is its expected return? 4.14% 4.26% 10.00% 14.14% Compute the expected return given these three economic states, their likelihoods, and the potential returns: 3.5% 7.0% 7.5% 12.5%

Explanation / Answer

Solution 9:

Here we first need to compute expected return of the stock:

Economic State

P

R

P x R

Fast Growth

0.1

50%

0.05

Slow Growth

0.6

8%

0.048

Recession

0.3

-10%

-0.03

0.068

Expected return = sum of P x R

                                = 0.068

Economic State

P

R

R-ER

P x (R-ER)^2

Fast Growth

0.1

50%

43.200%

0.0186624

Slow Growth

0.6

8%

1.200%

8.64E-05

Recession

0.3

-10%

-16.800%

0.0084672

0.027216

Standard Deviation= (sum of P x (R-ER)^2)^0.50

                                      = (0.027216)^0.50

                                     =16.50%

Therefore, Standard deviation would be 16.5%.

Economic State

P

R

P x R

Fast Growth

0.1

50%

0.05

Slow Growth

0.6

8%

0.048

Recession

0.3

-10%

-0.03

0.068

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