BUS 401 Week 2 DQ1 Problem 5-6 and Problem 6-3

Annuity and Capital Asset Pricing Model. Complete Study Problem 5-6 from the end of Chapter 5 and Study Problem 6-3 from the end of Chapter 6 and post your answers to the discussion board. Remember to complete all parts of the problems and report the results of your analysis. In problem 6-3, be sure to include your answer to Part b: Why is it a fair rate?

5-6 (Present value of an annuity) What is the present value of the following annuities?

a.$2,500 a year for 10 years discounted back to the present at 7 percent

b.$70 a year for 3 years discounted back to the present at 3 percent

c.$280 a year for 7 years discounted back to the present at 6 percent

d.$500 a year for 10 years discounted back to the present at 10 percent

6-3 (Required rate of return using CAPM)

a.Compute a fair rate of return for Intel common stock, which has a 1.2 beta. The risk-free rate is 6 percent, and the market portfolio (New York Stock Exchange stocks) has an expected return of 16 percent.

b.Why is the rate you computed a fair rate?