Sunday
March 29, 2015

Homework Help: Finance

Posted by Brandon on Wednesday, March 7, 2007 at 8:47pm.

Jim Bob is a stock picking genius. Every year, based on his system, he has the ability to invest $100 (only) in a security that is expected to earn a 20% return over the next year. That security always has a beta of one. Assume that the risk free rate is 4%, and the market risk premium is 6%. Assume that Jim Bob organized his trading company as a corporation, and has one share of stock outstanding and no debt. The gains from his security trading every year are paid out as dividends, so he always invests $100, and he can pass his techniques on to his kids, so Jim Bobís firm is expected to last in perpetuity. Ignore taxes.

What is the NPV of his trading opportunity each year? Should he buy the security every year?

Answer this Question

First Name:
School Subject:
Answer:

Related Questions

math/stock - You want to create a $75,000 portfolio comprised of two stocks plus...
fiance - You want to create a $75,000 portfolio comprised of two stocks plus a ...
Finance - You are planning to save for retirement over the next 15 years. To do ...
Finance - If you invest 30% of your funds in Lucent stock, with an expected rate...
finance - A stock has a beta of 2.0. A security analyst who specializes in ...
finance - Assume investors expect a 2.0% real rate of return over the next year...
Finance - You are planning to save for retirement over the next 35 years. To do...
Finance - You are considering buying 100 shares of TEXAS INC common stock. The ...
Personal Finance Concept - Bernie and Pam Britten together earn $100,000 a year...
finance - How does an investor earn more than the return generated by the ...

Members