Essay on Homework Business Policy

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Week 3 - Homework P4-1. A best-selling author decides to cash in on her latest novel by selling the rights to the book’s royalties for the next four years to an investor. Royalty payments arrive once per year, starting one year from now. In the first year the author expects $400,000 in royalties, followed by $300,000, then $100,000, and then $10,000 in the three subsequent years. If the investor purchasing the rights to royalties requires a return of 7 percent per year, what should the investor pay?
A4-1 P = $400,000+$300,000+$100,000+$10,000=$725,122.13 1.071 1.072 1.073 1.074 P4-12. Bennifer Jewelers recently issued 10-year bonds that make annual interest payments of $50. Suppose you purchased one of these …show more content…
Suppose also that the current Treasury bill yield is 1.5%, but the historical average return on Treasury bills is 4.1%. Estimate the expected return on stocks and explain how and why you arrived at your answer.
A7-1
T-bills are expected to return 1/5%+7.6%=9.1%
T-bills yeilds are expected to return 4/1%+7.6%=11.7%
The current expectation is 9.1% and over the long haul, one can expect 11.7% return. b. Suppose that, over the long run, the risk-premium on stocks relative to Treasury bonds has been 6.5%. The current Treasury bond yield is 4.5%, but the historical return on T-bonds is 5.2%. Estimate the expected return on stocks and explain how and why you arrived at your answer.
Based on T-bills, expected returns are 4.5%+6.5%=11%.
Historical returns, expected returns are 5.2%+6.5%=11.7% c. Compare your answers above and explain any differences.
Bond yields appear to provide better long run stock returns. T-bills rates may have more variables but may stray from the long

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