The common stock of Leaning Tower of Pita Inc., a restaurant chain, will generat
ID: 2759526 • Letter: T
Question
The common stock of Leaning Tower of Pita Inc., a restaurant chain, will generate payoffs to investors next year, which depend on the state of the economy, as follows:
The company goes out of business if a recession hits. Assume for simplicity that the three possible states of the economy are equally likely. The stock is selling today for $80.
A) Calculate the rate of return to Leaning Tower of Pita shareholders for each economic state. (Negative amounts should be indicated by a minus sign. Enter your answers as a percent rounded to 2 decimal places.)
B) Calculate the expected rate of return and standard deviation of return to Leaning Tower of Pita shareholders. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)
Dividend Stock Price Boom $9 $195 Normal Economy 6 90 Recession 0 0Explanation / Answer
Answer :-
(A) Boom
Rate of Return = Dividend + [(Stock price - Selling price) / Selling price]
= 9 + [(195 - 80) / 80]
= 9 + [115 / 80]
= 9 + 1.44
= 10.44 %
Normal Economy
Rate of Return = Dividend + [(Stock price - Selling price) / Selling price]
= 6 + [(90 - 80) / 80]
= 6 + [10 / 80]
= 6 + .13
= 6.13 %
Recession
Rate of Return = Dividend + [(Stock price - Selling price) / Selling price]
= 0 + [(0 - 80) / 80]
= 0 + [-80 / 80]
= 0 + -1
= -1 %
(B) Expected Return
Expected Return = 5.13%
Probabilty Return (%) Expected Return (%) Boom .33 10.44 =(10.44 * .33) = 3.44 Normal Economy .33 6.13 =(6.13 * .33) = 2.02 Recession .33 -1 =(-1 * .33) = -.33 TOTAL = 5.13%Related Questions
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