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Key facts and assumptions concerning Wegman Company, at December 12, 2007,
appear below Answer
1.
Asset X Asset Y
Value Value
Year Cash Flow Beginning Ending Cash Flow Beginning Ending
2000 1,000 20,000 22,000 1,500 20,000 20,000
2001 1,500 22,000 21,000 1,600 20,000 20,000
2002 1,400 21,000 24,000 1,700 20,000 21,000
2003 1,700 24,000 22,000 1,800 21,000 21,000
2004 1,900 22,000 23,000 1,900 21,000 22,000
2005 1,600 23,000 26,000 2,000 22,000 23,000
2006 1,700 26,000 25,000 2,100 23,000 23,000
2007 2,000 25,000 24,000 2,200 23,000 24,000
2008 2,100 24,000 27,000 2,300 24,000 25,000
2009 2,200 27,000 30,000 2,400 25,000 25,000
Beta (X) 1.60
Beta (Y) 1.00
Risk Free Rate 0.07
EMPR 0.05
a. Calculate the annual rate of return for each asset in each of the 10 preceding years,
and use those values to find the average annual return for each asset over the 10-year
period. b. Use the returns calculated in part a to find (1) the standard deviation and (2)
the coefficient of variation of the returns for each asset over the 10-year period 20002009. c. c. Use your findings in parts a and b to evaluate and discuss the return and risk
associated with each asset. Which asset appears to be preferable? Explain. d. Use the
CAPM to find the required return for each asset. Compare this value with the average
annual returns calculated in part a.
e. Compare and contrast your findings in parts c and d. What recommendations would
you give Mary with regard to investing in either of the two assets? Explain to Mary why
she is better off using beta rather than the standard deviation and coefficient of
variation to assess the risk of each asset.
2. Key facts and assumptions concerning Wegman Company, at December 12, 2007,
appear below. Using this information, answer the questions following.
Q 5.
Facts and Assumptions
Yield to maturity on long-term government bonds 5.0%
Yield to maturity on company long-term bonds 7.0%
Market price of risk (EMRP) 6.9%