Risk and return - implications for managers and investors the concept of risk and return is subjective for different people, as well as for corporations. read and assess the following financial decisions. keeping everything else constant, are the following actions good financial decisions? base your decisions on the understanding of risk and return, solely from a theoretical finance perspective. joe is an average investor. his financial advisor gave him options of investing in stock a, with a σ of 12%, and stock b, with a σ of 9%. both stocks have the same expected return of 16%. joe can pick only one stock and decides to invest in stock b. good financial decision? yes no the technology boom in the late 1990s enticed everyone. wilson is an average investor, and he invested all his money in technology stocks. good financial decision? yes no erin wants to invest in a hedge fund that has had a very strong performance track record. the hedge fund has given its investors a return of over 60% for the past five years. although erin is tempted to put her money in the fund, she decides to conduct due diligence on the hedge fund’s assets, because she is aware that past performance is no guarantee of future results. good financial decision? yes no

Balance sheet the assets of dallas & associates consist entirely of current assets and net plant and equipment. the firm has total assets of $2 5 million and net plant and equipment equals $2 million. it has notes payable of $150,000, long-term debt of $750,000, and total common equity of $1 5 million. the firm does have accounts payable and accruals on its balance sheet. the firm only finances with debt and common equity, so it has no preferred stock on its balance sheet. a. what is the company's total debt? b. what is the amount of total liabilities and equity that appears on the firm's balance sheet? c. what is the balance of current assets on the firm's balance sheet? d. what is the balance of current liabilities on the firm's balance sheet? e. what is the amount of accounts payable and accruals on its balance sheet? [hint: consider this as a single line item on the firm's balance sheet.] f. what is the firm's net working capital? g. what is the firm's net operating working capital? h. what is the explanation for the difference in your answers to parts f and g?

Calculate the cost of each capital component—in other words, the after-tax cost of debt, the cost of preferred stock (including flotation costs), and the cost of equity (ignoring flotation costs). use both the capm method and the dividend growth approach to find the cost of equity.calculate the cost of new stock using the dividend growth approach.what is the cost of new common stock based on the capm? (hint: find the difference between re and rs as determined by the dividend growth approach and then add that difference to the capm value for rs.)assuming that gao will not issue new equity and will continue to use the same target capital structure, what is the company’s wacc? e. suppose gao is evaluating three projects with the following characteristics.each project has a cost of $1 million. they will all be financed using the target mix of long-term debt, preferred stock, and common equity. the cost of the common equity for each project should be based on the beta estimated for the project. all equity will come from reinvested earnings.equity invested in project a would have a beta of 0.5 and an expected return of 9.0%.equity invested in project b would have a beta of 1.0 and an expected return of 10.0%.equity invested in project c would have a beta of 2.0 and an expected return of 11.0%.analyze the company’s situation, and explain why each project should be accepted or rejected g

Under t, the point (0,2) gets mapped to (3,0). t-1 (x,y) →