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Keith_Richards [23]
4 years ago
6

Based on the past 23 years, Westerfield Industrial Supply's common stock has yielded an arithmetic average rate of return of 10.

5 percent. The geometric average return for the same period was 8.57 percent. What is the estimated return on this stock for the next 4 years according to Blume's formula?
Business
1 answer:
professor190 [17]4 years ago
5 0

Answer:

10.3% (approx)

Explanation:

Given that,

Geometric average = 8.57%

Arithmetic average = 10.5%

Time period: future period, T = 4 years

Time Period: Past period, N = 23 years

According to Blume's formula,

Estimated return on this stock:

= [(T - 1) ÷ (N - 1)] × Geometric average + [(N - T) ÷ (N - 1)] × Arithmetic average

= [(4 - 1) ÷ (23 - 1)] × 8.57% + [(23 - 4) ÷ (23 - 1)] × 10.5%

= [3 ÷ 22] × 0.0857 + [19 ÷ 22] × 0.105

= 0.1363 × 0.0857 + 0.863 × 0.105

= 0.012 + 0.091

= 0.103

= 10.3% (approx)

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The computation of the residual income is shown below:

Residual income = Net operating income - Minimum required income  

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Here

Minimum required income   =   Average operating assets × Minimum required rate of return  

= $415,000 × 13%    

= $53,950

This should be the answer and the options provided are wrong

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In 2015, the city of Berkeley instituted a tax on sugar-sweetened sodas. Suppose that the tax increased the price of a typical s
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(g) Between 0 and -S7.5k because residents can substitute to other products

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Data given in the question

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