CHAPTER 1

INTRODUCTION TO CORPORATE FINANCE

1. Agency Problems Who owns a corporation? Describe the process whereby the owners
control the firm’s management. What is the main reason that an agency relationship exists
in the corporate form of organization? In this context, what kinds of problems can arise?
2. Not-for-Profit Firm Goals Suppose you were the financial manager of a not-for-profit
business (a not-for-profit hospital, perhaps). What kinds of goals do you think would be
appropriate?
3. Goal of the Firm Evaluate the following statement: Managers should not focus on the
current stock value because doing so will lead to an overemphasis on short-term profits at
the expense of long-term profits.
4. Ethics and Firm Goals Can the goal of maximizing the value of the stock conflict with
other goals, such as avoiding unethical or illegal behavior? In particular, do you think
subjects like customer and employee safety, the environment, and the general good of
society fit in this framework, or are they essentially ignored? Think of some specific
scenarios to illustrate your answer.
5. International Firm Goal Would the goal of maximizing the value of the stock differ for
financial management in a foreign country? Why or why not?
6. Agency Problems Suppose you own stock in a company. The current price per share is
$25. Another company has just announced that it wants to buy your company and will pay
$35 per share to acquire all the outstanding stock. Your company’s management
immediately begins fighting off this hostile bid. Is management acting in the shareholders’
best interests? Why or why not?
7. Agency Problems and Corporate Ownership Corporate ownership varies around the
world. Historically, individuals have owned the majority of shares in public corporations in
the United States. In Germany and Japan, however, banks, other large financial institutions,
and other companies own most of the stock in public corporations. Do you think agency
problems are likely to be more or less severe in Germany and Japan than in the United
States?
8. Agency Problems and Corporate Ownership In recent years, large financial institutions
such as mutual funds and pension funds have become the dominant owners of stock in the
United States, and these institutions are becoming more active in corporate affairs. What
are the implications of this trend for agency problems and corporate control?
9. Executive Compensation Critics have charged that compensation to top managers in the
United States is simply too high and should be cut back. For example, focusing on large
corporations, Larry Ellison of Oracle has been one of the best-compensated CEOs in the
United States, earning about $76.9 million in 2013. Are such amounts excessive? In
answering, it might be helpful to recognize that superstar athletes such as Cristiano
Ronaldo, top earners in the entertainment field such as James Cameron and Oprah Winfrey,
and many others at the top of their respective fields earn at least as much, if not a great
deal more.
10. Goal of Financial Management Why is the goal of financial management to maximize
the current value of the company’s stock? In other words, why isn’t the goal to maximize
the future value?

CHAPTER 2
ACCOUNTING STATEMENTS AND CASH FLOW

1. Liquidity True or false: All assets are liquid at some price. Explain.

2. Accounting and Cash Flows Why might the revenue and cost figures shown on a standard
income statement not represent the actual cash inflows and outflows that occurred during a
period?

3. Accounting Statement of Cash Flows Looking at the accounting statement of cash flows,
what does the bottom line number mean? How useful is this number for analyzing a
company?

4. Cash Flows How do financial cash flows and the accounting statement of cash flows
differ? Which is more useful for analyzing a company?
5. Book Values versus Market Values Under standard accounting rules, it is possible for a
company’s liabilities to exceed its assets. When this occurs, the owners’ equity is negative.
Can this happen with market values? Why or why not?

6. Cash Flow from Assets Why is it not necessarily bad for the cash flow from assets to be
negative for a particular period?

7. Operating Cash Flow Why is it not necessarily bad for the operating cash flow to be
negative for a particular period?

8. Net Working Capital and Capital Spending Could a company’s change in net working
capital be negative in a given year? (Hint: Yes.) Explain how this might come about. What
about net capital spending?

9. Cash Flow to Stockholders and Creditors Could a company’s cash flow to stockholders be
negative in a given year? (Hint: Yes.) Explain how this might come about. What about cash
flow to creditors?

10. Firm Values Referring back to the Ford example at the beginning of the chapter, note
that we suggested that Ford’s stockholders probably didn’t suffer as a result of the reported
loss. What do you think was the basis for our conclusion?
EXERCISES
1. Building a Balance Sheet Sankey, Inc., has current assets of $4,900, net fixed assets of
$25,000, current liabilities of $4,100, and long-term debt of $10,300. What is the value of
the shareholders’ equity account for this firm? How much is net working capital?

2. Building an Income Statement Shelton, Inc., has sales of $435,000, costs of $216,000,
depreciation expense of $40,000, interest expense of $21,000, and a tax rate of 35 percent.
What is the net income for the firm? Suppose the company paid out $30,000 in cash
dividends. What is the addition to retained earnings?

3. Market Values and Book Values Klingon Cruisers, Inc., purchased new cloaking
machinery three years ago for $9.5 million. The machinery can be sold to the Romulans
today for $6.5 million. Klingon’s current balance sheet shows net fixed assets of $5.2 million,
current liabilities of $2.4 million, and net working capital of $800,000. If all the current
assets were liquidated today, the company would receive $2.6 million cash. What is the
book value of Klingon’s assets today? What is the market value?

4. Calculating Taxes The Stefani Co. had $198,000 in taxable income. Using the rates from
Table 2.3 in the chapter, calculate the company’s income taxes. What is the average tax
rate? What is the marginal tax rate?

5. Cash Flow to Creditors The 2014 balance sheet of Jordan’s Golf Shop, Inc., showed long-
term debt of $1.625 million, and the 2015 balance sheet showed long-term debt of $1.73
million. The 2015 income statement showed an interest expense of $185,000. What was the
firm’s cash flow to creditors during 2015?

6. Cash Flow to Stockholders The 2014 balance sheet of Jordan’s Golf Shop, Inc., showed
$510,000 in the common stock account and $3.6 million in the additional paid-in surplus
account. The 2015 balance sheet showed $545,000 and $3.85 million in the same two
accounts, respectively. If the company paid out $275,000 in cash dividends during 2015,
what was the cash flow to stockholders for the year?
7. Cash Flows Ritter Corporation’s accountants prepared the following financial statements
for year-end 2015:
a. Explain the change in cash during 2015.
b. Determine the change in net working capital in 2015.
c. Determine the cash flow generated by the firm’s assets during 2015.
INCOME STATEMENT 2015 BALANCE SHEET
Revenue $790 December 31
Expenses 575 2015 2014
Depreciation 90 Assets
Net income $125 Cash 80 60
Dividends $95 Other current assets 185 170
Net fixed assets 405 385
Total assets $670 $615
Liabilities and Equity
Accounts Payable 140 125
Long-term debt 160 150
Stockholders' equity 370 340
Total liabilities and equity $670 $615
2015
8. Building an Income Statement During the year, the Senbet Discount Tire Company had
gross sales of $925,000. The firm’s cost of goods sold and selling expenses were $490,000
and $220,000, respectively. Senbet also had notes payable of $740,000. These notes carried
an interest rate of 4 percent. Depreciation was $120,000. Senbet’s tax rate was 35 percent.
a. What was Senbet’s net income?
b. What was Senbet’s operating cash flow?

9. Calculating Total Cash Flows Schwert Corp. shows the following information on its 2015
income statement: sales = $215,000; costs = $117,000; other expenses = $6,700;
depreciation expense = $18,400; interest expense = $10,000; taxes = $25,370; dividends =
$9,500. In addition, you’re told that the firm issued $8,100 in new equity during 2015 and
redeemed $7,200 in outstanding long-term debt.
a. What is the 2015 operating cash flow?
b. What is the 2015 cash flow to creditors?
c. What is the 2015 cash flow to stockholders?
d. If net fixed assets increased by $28,400 during the year, what was the addition to net
working capital (NWC)?

10. Using Income Statements Given the following information for O’Hara Marine Co.,
calculate the depreciation expense: sales = $44,000; costs = $27,500; addition to retained
earnings = $5,200; dividends paid = $1,670; interest expense = $1,850; tax rate = 40 percent.

CHAPTER 3
DISCOUNTED CASH FLOW VALUATION

Exercises
1. Simple Interest versus Compound Interest First City Bank pays 7.5 percent simple
interest on its savings account balances, whereas Second City Bank pays 7.5 percent interest
compounded annually. If you made a $7,000 deposit in each bank, how much more money
would you earn from your Second City Bank account at the end of 10 years?

2. Calculating Future Values Compute the future value of $1,000 compounded annually for
a. 10 years at 6 percent.
b. 10 years at 12 percent.
c. 20 years at 6 percent.
d. Why is the interest earned in part (c) not twice the amount earned in part (a)?
3. Calculating Present Values For each of the following, compute the present value:

4. Calculating Interest Rates Solve for the unknown interest rate in each of the following:
5. Calculating the Number of Periods Solve for the unknown number of years in each of the
following:

6. Calculating the Number of Periods At 6.5 percent interest, how long does it take to
double your money? To quadruple it?

7. Calculating Present Values Imprudential, Inc., has an unfunded pension liability of $550
million that must be paid in 20 years. To assess the value of the firm’s stock, financial
analysts want to discount this liability back to the present. If the relevant discount rate is 6.4
percent, what is the present value of this liability?

8. Calculating Rates of Return Although appealing to more refined tastes, art as a collectible
has not always performed so profitably. During 2010, Deutscher-Menzies sold Arkie under
the Shower, a painting by renowned Australian painter Brett Whiteley, at auction for a price
of $1,100,000. Unfortunately for the previous owner, he had purchased it three years earlier
at a price of $1,680,000. What was his annual rate of return on this painting?

9. Perpetuities An investor purchasing a British consol is entitled to receive annual

payments from the British government forever. What is the price of a consol that pays $125
annually if the next payment occurs one year from today? The market interest rate is 3.9
percent.
10. Simple Interest versus Compound Interest First Simple Bank pays 4.1 percent simple
interest on its investment accounts. If First Complex Bank pays interest on its accounts
compounded annually, what rate should the bank set if it wants to match First Simple Bank
over an investment horizon of 10 years?

11. Calculating Annuities You are planning to save for retirement over the next 30 years. To
do this, you will invest $750 per month in a stock account and $250 per month in a bond
account. The return of the stock account is expected to be 11 percent per year, and the
bond account will earn 6 percent per year. When you retire, you will combine your money
into an account with an annual return of 8 percent. How much can you withdraw each
month from your account assuming a 25-year withdrawal period?

12. Growing Perpetuities Mark Weinstein has been working on an advanced technology in
laser eye surgery. His technology will be available in the near term. He anticipates his first
annual cash flow from the technology to be $215,000, received two years from today.
Subsequent annual cash flows will grow at 3.8 percent in perpetuity. What is the present
value of the technology if the discount rate is 10 percent?

13. Perpetuities A prestigious investment bank designed a new security that pays a
quarterly dividend of $2.75 in perpetuity. The first dividend occurs one quarter from today.
What is the price of the security if the APR is 5.3 percent, compounded quarterly?

14. Annuity Present Values What is the present value of an annuity of $5,500 per year, with
the first cash flow received three years from today and the last one received 25 years from
today? Use a discount rate of 8 percent.
15. Growing Annuity Southern California Publishing Company is trying to decide whether to
revise its popular textbook, Financial Psychoanalysis Made Simple. The company has
estimated that the revision will cost $135,000. Cash flows from increased sales will be
$48,000 the first year. These cash flows will increase by 4 percent per year. The book will go
out of print five years from now. Assume that the initial cost is paid now and revenues are
received at the end of each year. If the company requires a return of 10 percent for such an
investment, should it undertake the revision?
16. Calculating Loan Payments You need a 30-year, fixed-rate mortgage to buy a new home
for $250,000. Your mortgage bank will lend you the money at an APR of 4.5 percent for this
360-month loan. However, you can only afford monthly payments of $950, so you offer to
pay off any remaining loan balance at the end of the loan in the form of a single balloon
payment. How large will this balloon payment have to be for you to keep your monthly
payments at $950?

17. EAR versus APR You have just purchased a new warehouse. To finance the purchase,
you’ve arranged for a 30-year mortgage for 80 percent of the $5,200,000 purchase price.
The monthly payment on this loan will be $27,500. What is the APR on this loan? The EAR?

CHAPTER 4
INVESTMENT CRITERIAS

1. Calculating Payback Period and NPV Maxwell Software, Inc., has the following mutually
exclusive projects.

a. Suppose the company’s payback period cutoff is two years. Which of these two projects
should be chosen?
b. Suppose the company uses the NPV rule to rank these two projects. Which project should
be chosen if the appropriate discount rate is 15 percent?
2. Calculating Discounted Payback An investment project has annual cash inflows of $5,000,
$5,500, $6,000, and $7,000, and a discount rate of 12 percent. What is the discounted
payback period for these cash flows if the initial cost is $8,000? What if the initial cost is
$12,000? What if it is $16,000?

3. Calculating IRR Compute the internal rate of return for the cash flows of the following
two projects:
4. Calculating Profitability Index Bill plans to open a self-serve grooming center in
storefront. The grooming equipment will cost $265,000, to be paid immediately. Bill expects
aftertax cash inflows of $59,000 annually for seven years, after which he plans to scrap the
equipment and retire to the beaches of Nevis. The first cash inflow occurs at the end of the
first year. Assume the required return is 13 percent. What is the project’s PI? Should it be
accepted?

5. NPV versus IRR Consider the following cash flows on two mutually exclusive projects for
the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 14
percent.

b
As a financial analyst for BRC, you are asked the following questions:
a. If your decision rule is to accept the project with the greater IRR, which project should
you choose?
b. Because you are fully aware of the IRR rule’s scale problem, you calculate the incremental
IRR for the cash flows. Based on your computation, which project should you choose?
c. To be prudent, you compute the NPV for both projects. Which project should you choose?
Is it consistent with the incremental IRR rule?

6. Comparing Investment Criteria Wii Brothers, a game manufacturer, has a new idea for an
adventure game. It can market the game either as a traditional board game or as an
interactive DVD, but not both. Consider the following cash flows of the two mutually
exclusive projects for the company. Assume the discount rate for both projects is 10
percent.

a. Based on the payback period rule, which project should be chosen?

b. Based on the NPV, which project should be chosen?
c. Based on the IRR, which project should be chosen?
d. Based on the incremental IRR, which project should be chosen?

7. Profitability Index versus NPV Hanmi Group, a consumer electronics conglomerate, is

reviewing its annual budget in wireless technology. It is considering investments in three
different technologies to develop wireless communication devices. Consider the following
cash flows of the three independent projects available to the company. Assume the
discount rate for all projects is 10 percent. Further, the company has only $40 million to
invest in new projects this year.

a. Based on the profitability index decision rule, rank these investments.

b. Based on the NPV, rank these investments.
c. Based on your findings in (a) and (b), what would you recommend to the CEO of the
company and why?

8. NPV and Multiple IRRs You are evaluating a project that costs $75,000 today. The project
has an inflow of $155,000 in one year and an outflow of $65,000 in two years. What are the
IRRs for the project? What discount rate results in the maximum NPV for this project? How
can you determine that this is the maximum NPV?

9. Payback and NPV An investment under consideration has a payback of six years and a
cost of $573,000. If the required return is 12 percent, what is the worst-case NPV? The best-
case NPV? Explain. Assume the cash flows are conventional.

10. Calculating IRR Consider two streams of cash flows, A and B. Stream A’s first cash flow is
$11,600 and is received three years from today. Future cash flows in Stream A grow by 4
percent in perpetuity. Stream B’s first cash flow is -$13,000, is received two years from
today, and will continue in perpetuity. Assume that the appropriate discount rate is 12
percent.
a. What is the present value of each stream?
b. Suppose that the two streams are combined into one project, called C. What is the IRR
of Project C?
c. What is the correct IRR rule for Project C ?

CHAPTER5
BOND VALUATION

1. Valuing Bonds What is the price of a 15-year, zero coupon bond paying $1,000 at
maturity, assuming semiannual compounding, if the YTM is:
a. 6 percent?
b. 8 percent?
c. 10 percent?

2. Valuing Bonds Microhard has issued a bond with the following characteristics:
Par: $1,000
Time to maturity: 20 years
Coupon rate: 7 percent
Semiannual payments
Calculate the price of this bond if the YTM is:
 a. 7 percent
b. 9 percent
c. 5 percent

3. Bond Yields Watters Umbrella Corp. issued 15-year bonds 2 years ago at a coupon rate of
5.9 percent. The bonds make semiannual payments. If these bonds currently sell for105
percent of par value, what is the YTM?

4. Bond Yields A Japanese company has a bond outstanding that sells for 106 percent of its
¥100,000 par value. The bond has a coupon rate of 2.8 percent paid annually and matures in
21 years. What is the yield to maturity of this bond?

5. Zero Coupon Bonds You find a zero coupon bond with a par value of $10,000 and17 years
to maturity. If the yield to maturity on this bond is 4.9 percent, what is the dollarprice of the
bond? Assume semiannual compounding periods.

6. Valuing Bonds Yan Yan Corp. has a $2,000 par value bond outstanding with a coupon rate
of 4.9 percent paid semiannually and 13 years to maturity. The yield to maturity of the
bond is 3.8 percent. What is the dollar price of the bond?

7. Valuing Bonds Union Local School District has bonds outstanding with a coupon rate of
3.7 percent paid semiannually and 16 years to maturity. The yield to maturity on these
bonds is 3.9 percent, and the bonds have a par value of $5,000. What is the dollar price of
the bond?

8. Zero Coupon Bonds You buy a zero coupon bond at the beginning of the year that has a
face value of $1,000, a YTM of 6.3 percent, and 25 years to maturity. If you hold the bond
for the entire year, how much in interest income will you have to declare on your tax
return? Assume semiannual compounding.
9. Bond Yields Hacker Software has 6.2 percent coupon bonds on the market with 9 years to
maturity. The bonds make semiannual payments and currently sell for 104 percent of
par. What is the current yield on the bonds? The YTM? The effective annual yield?

10. Bond Yields RAK Co. wants to issue new 20-year bonds for some much-needed
expansion projects. The company currently has 6.4 percent coupon bonds on the market
that sell for $1,063, make semiannual payments, and mature in 20 years. What coupon rate
should the company set on its new bonds if it wants them to sell at par?

11. Finding the Bond Maturity Erna Corp. has 9 percent coupon bonds making annual
payments with a YTM of 7.81 percent. The current yield on these bonds is 8.42 percent.
How many years do these bonds have left until they mature?
12. Zero Coupon Bonds Suppose your company needs to raise $50 million and you want to
issue 30-year bonds for this purpose. Assume the required return on your bond issue will be
6 percent, and you’re evaluating two issue alternatives: A semiannual coupon bond with a 6
percent coupon rate and a zero coupon bond. Your company’s tax rate is 35 percent.
Assume semiannual compounding.
a. How many of the coupon bonds would you need to issue to raise the $50 million? How
many of the zeroes would you need to issue?
b. In 30 years, what will your company’s repayment be if you issue the coupon bonds? What
if you issue the zeroes?
c. Based on your answers in (a) and (b), why would you ever want to issue the zeroes? To
answer, calculate the firm’s aftertax cash outflows for the first year under the two different
scenarios. Assume the IRS amortization rules apply for the zero coupon bonds.

14. Valuing Bonds The Frush Corporation has two different bonds currently outstanding.
Bond M has a face value of $30,000 and matures in 20 years. The bond makes no payments
for the first six years, then pays $800 every six months over the subsequent eight years, and
finally pays $1,000 every six months over the last six years. Bond N also has a face value of
$30,000 and a maturity of 20 years; it makes no coupon payments over the life of the bond.
If the required return on both these bonds is 6.4 percent compounded semiannually, what is
the current price of Bond M? Of Bond N?
CHAPTER 6
STOCK VALUATION

1. Stock Values The next dividend payment by ECY, Inc., will be $2.90 per share. The
dividends are anticipated to maintain a growth rate of 5.5 percent, forever. If the stock
currently sells for $53.10 per share, what is the required return?

2. Stock Values For the company in the previous problem, what is the dividend yield? What
is the expected capital gains yield?

3. Stock Values Shiller Corporation will pay a $2.75 per share dividend next year. The
company pledges to increase its dividend by 5 percent per year, indefinitely. If you require a
return of 11 percent on your investment, how much will you pay for the company’s stock
today?
4. Stock Valuation Suppose you know that a company’s stock currently sells for $67 per
share and the required return on the stock is 10.8 percent. You also know that the total
return on the stock is evenly divided between a capital gains yield and a dividend yield. If it’s
the company’s policy to always maintain a constant growth rate in its dividends, what is the
current dividend per share?

5. Growth Rate The newspaper reported last week that Bennington Enterprises earned$29
million this year. The report also stated that the firm’s return on equity is 17 percent.
Bennington retains 80 percent of its earnings. What is the firm’s earnings growth rate?
What will next year’s earnings be?

6. Stock Valuation Universal Laser, Inc., just paid a dividend of $2.90 on its stock. The
growth rate in dividends is expected to be a constant 6 percent per year, indefinitely.
Investors require a 15 percent return on the stock for the first three years, a 13 percent
return for the next three years, and then an 11 percent return thereafter. What is the
current share price for the stock?

7. Non constant Growth Metallica Bearings, Inc., is a young start-up company. No dividends
will be paid on the stock over the next nine years, because the firm needs to plow back its
earnings to fuel growth. The company will pay a dividend of $17.50 per share in 10 years
and will increase the dividend by 5.5 percent per year thereafter. If the required return on
this stock is 12 percent, what is the current share price?
8. Non constant Dividends Bucksnort, Inc., has an odd dividend policy. The company has
just paid a dividend of $9 per share and has announced that it will increase the dividend by
$4 per share for each of the next five years, and then never pay another dividend. If you
require a return of 12 percent on the company’s stock, how much will you pay for a share
today?

9. Differential Growth Synovec Corp. is experiencing rapid growth. Dividends are expected
to grow at 30 percent per year during the next three years, 18 percent over the following
year, and then 8 percent per year indefinitely. The required return on this stock is 11
percent, and the stock currently sells for $65 per share. What is the projected dividend for
the coming year?

10. Non constant Growth and Quarterly Dividends Pasqually Mineral Water, Inc., will pay a
quarterly dividend per share of $.90 at the end of each of the next 12 quarters. Thereafter,
the dividend will grow at a quarterly rate of 1 percent, forever. The appropriate rate of
return on the stock is 10 percent, compounded quarterly. What is the current stock price?

11. Stock Valuation and Cash Flows Fincher Manufacturing has projected sales of $135
million next year. Costs are expected to be $76 million and net investment is expected to be
$15 million. Each of these values is expected to grow at 14 percent the following year, with
the growth rate declining by 2 percent per year until the growth rate reaches 6 percent,
where it is expected to remain indefinitely. There are 5.5 million shares of stock outstanding
and investors require a return of 13 percent return on the company’s stock. The corporate
tax rate is 40 percent.
a. What is your estimate of the current stock price?
b. Suppose instead that you estimate the terminal value of the company using a PE
multiple. The industry PE multiple is 11. What is your new estimate of the company’s
stock price?
12. Non constant Growth Storico Co. just paid a dividend of $3.40 per share. The company
will increase its dividend by 20 percent next year and will then reduce its dividend growth
rate by 5 percentage points per year until it reaches the industry average of 5 percent
dividend growth, after which the company will keep a constant growth rate forever. If the
required return on Storico stock is 13 percent, what will a share of stock sell for today?

CHAPTER 7
RISK AND RETURN

1. Calculating Returns Suppose a stock had an initial price of $64 per share, paid a dividend
of $1.20 per share during the year, and had an ending share price of $73. Compute the
percentage total return. What was the dividend yield? The capital gains yield?

2. Calculating Returns Suppose you bought a bond with a 5.8 percent coupon rate one year
ago for $1,030. The bond sells for $1,059 today.
a. Assuming a $1,000 face value, what was your total dollar return on this investment over
the past year?
b. What was your total nominal rate of return on this investment over the past year?

3. Calculating Returns and Variability Using the following returns, calculate the average
returns, the variances, and the standard deviations for X and Y:

4. Calculating Returns and Variability You’ve observed the following returns on SkyNet Data
Corporation’s stock over the past five years: 21 percent, 17 percent, 26 percent, 27
percent, and 4 percent.
a. What was the arithmetic average return on the company’s stock over this five-year
period?
b. What was the variance of the company’s returns over this period? The standard
deviation?

5. Holding Period Return A stock has had returns of 14.38 percent, 8.43 percent, 11.97
percent, 25.83 percent, and -9.17 percent over the past five years, respectively.
What was the holding period return for the stock?

6. Calculating Returns You purchased a zero coupon bond one year ago for $160.53. The
market interest rate is now 7.5 percent. If the bond had 25 years to maturity when you
originally purchased it, what was your total return for the past year?

7. Portfolio Expected Return You own a portfolio that is 20 percent invested in Stock X, 45
percent in Stock Y, and 35 percent in Stock Z. The expected returns on these three stocks
are 11 percent, 17 percent, and 14 percent, respectively. What is the expected return on the
portfolio?

9. Calculating Returns and Standard Deviations Based on the following information,

calculate the expected return and standard deviation for the two stocks:

10. Covariance and Correlation Based on the following information, calculate the expected
return and standard deviation of each of the following stocks. Assume each state of
the economy is equally likely to happen. What are the covariance and correlation
between the returns of the two stocks?
11. Covariance and Correlation Based on the following information, calculate the expected
return and standard deviation for each of the following stocks. What are the covariance and
correlation between the returns of the two stocks?