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The internal rate of return (IRR) and the net present value (NPV) techniques are 2 investment decision tools that satisfy the 2 major criteria for the correct evaluation of capital projects. This criterion is that the techniques should incorporate the use of cash flows and the use of the time value of money. This makes them viable techniques for evaluating investment proposals.The Net Present Value is one of the techniques that are used by firms when evaluating which investment proposals to take on board and which ones to reject. The net present value is calculated by discounting all flows to the present and subtracting the present value of all inflows.As cited by Petrochilos G 2004, the
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Not necessarily. If a beta were to double, its expected return would not double. According to the SML equation, an increase in beta will increase a company’s return by an amount equal to the market risk premium times the change in beta.
PORTFOLIO BETA 1.12%
RISK FREE 6%
MARKET RETURN 13%
RATE OF RETURN 10.9%
a. RISK FREE
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Market Value of Company A
Source of Capital Percent of total Rate of return
Bonds 40% 6.2%
Preferred Stocks 10% 8%
Common Stocks 50% 12.4%
Task A: Calculation of Weighted Average Cost of Capital (WACC)
Formula for WACC = [D/V(1-Tc)Rd] + (E/V x Rc) + (E/V x Rp)
D/V = percentage of financing that is debt
E/V = percentage of financing that is equity
Tc = Corp. Tax Rate
Rd = return on debt
Rc = return on common stock (equity)
Rp = return on preferred stock (equity)
WACC = (.40 x .062) + (.50 x .124) + (.10 x .08)
= .0248 + .062
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relationship between a portfolio's returns and the market returns. It is a measure of
the portfolio's nondiversifiable risk
-Asset allocation identifying and selecting the asset classes appropriate for a specific investment
portfolio and determining the proportions of those assets within the portfolio
-Required rate of return minimum rate of return necessary to attract an investor to purchase or hold a
security (given risk)
Risk Premium the additional return expected for assuming risk
-Capital asset pricing model (CAPM) an equation stating that the expected rate of return on a project is a
function of the risk free rate, the investment's systematic risk, and the expected risk premium
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Capital Budgeting Case
NPV or net present value illustrated as the present value of an investment’s annual free cash flow less the investment’s initial outlay (Keown, Petty, & Martin 2014 Pg. 314). While assessing both Corporation A and Corporation B, NPV formula’s represented by (present value of all the future annual free cash flows) - (the initial cash outlay). Calculations of Corporation A, has a 10% rate of return and the present value of the free cash flow is $270,980. Subtracting the initial $100,000 outlay leaves an NPV of $170,980. Corporation B has an 11% rate of return and the present value of the free cash flow is $290,252. Subtracting the initial $150,000
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amount is based on certain interest rate and time period that is also referred to as discounting. The rate of return is the amount of money earned based on the amount of money invested to track all different types of investments. The average rate for short term investments and compound rate for long term investments are two ways the rate of return can be calculated. Based on the risk of the investment, a higher project rate of return relates to riskier investments and a lower projected rate of return relates to safer investments.
Week 2 DQ2 Choice 2
What is a loan amortization schedule? How would you use it to determine your loan interest rate? What factors would affect your choice
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Business and Management
Assignment #2: Risk Assessment, Portfolio Management
Corp. Investment Analysis—FIN550
July 27, 2011
Assignment #2: Risk Assessment, Portfolio Management
1. You are given the following long-run annual rates of return for alternative investment instruments:
• US Government T-Bills 3.5%
• Large-cap common stocks 12.1%
• Long-term corporate bonds 6.2%
• Long-term government bonds 5.6%
• Small-capitalization common stock 14.6%
The annual rate of inflation during the period was 2.9%. Compute the real rate of return on these investment alternatives.
Invest. Category Rate of Return Rate of Inflation Real Rate of Return
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a) Compute the expected return and standard deviation for a portfolio comprised of 60% invested in the stock of company A and 40% invested in the stock of company B.
b) If you want to achieve an expected rate of return of 8%, what must be the investment proportions of your portfolio of Stock A & B? What will be the resulting standard deviation?
c) What is the expected return and standard deviation if the investment portfolio in part (a) is financed at 50% margin, i.e., you put up only 50 percent of the total amount and borrows the balance from the broker? Assume a margin interest of 5%.
3. Your friend, a mutual fund manager, claims that her equity fund has an
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where r = total rate of return and p = probability
i) Using expected values and standard deviations, calculate the expected return and risk of the two investments.
ii) Bearing in mind that inflation is expected to be 5% in the next twelve months, which investment would you advise Mr Woolly to make?
iii) What other factors would you take into consideration?
Solution to Exercise 1(i)
The expected return on the government bond is 5.10% pa, calculated as follows (see p41 for full explanation):
If we assume that the bond is risk-free, then the return is certain (in nominal terms), and the risk, as measured by the
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investment is expected to produce more wealth for the shareholders.
The internal rate of return (IRR)method allows a company to see what rate of return would make the investment a wash--the invested amount would generate that amount of return (when adjusted for the discount rate). If the calculated break-even interest rate is greater than the expected interest factor, then the project would represent a positive return on investment. I think an example most of us could understand is if I buy a repo home with the intention of renting the house out. I have to invest $50,000 to purchase the home and will be paying 5% interest over the next 20 years. Using the IRR method, I would find out
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will need to buy a separate product for a finish coating.
Capital Budget Evaluation Techniques
Guillermo has many evaluation techniques to choose from to make his capital investment decision. He can also combine more than one technique. The following is a description of the techniques he might use.
Finding the Net Present Value (NPV) is one evaluation technique. Net Present Value is a comparison of the present value of the future cash inflows to the cost of projectors by subtracting the cost of the investment from the present value of the future cash inflows (Edmonds, et. al., 2007). “A positive net present value indicates the investment will yield a rate of return higher than 12
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2. Using the CAPM compute the expected return rate of return for companies A and B. Assume a market risk premium of 3% a risk-free rate of 4% a Beta for company A of .90 and a Beta for company B of 1.3.
The answer would be using CAPM
Expected rate of return = r e=rr +B(r m-rf).
Company A expected rate of return = re = 4%+-0.323 (3%)=3.03%
Company b Expected rate of return = re=4%+0.386 (3%)=5.158%
3. Using the CAPM computer the expected rate of return for a portfolio with 25% stake in company A and 75% stake in company B. Assume a Market Rcik Premium of 3% and a Risk Free Rate of 4%
The average return on the portfolio is 4.2%
The standard deviation is 3.7%
The portfolio has a return that is between A and B, but a better risk chance. The standard deviation and the CV show that.
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actual, after-the-fact return the investor receives. The realized yield is more relevant, of course, but it is not knowable ahead of time. A bond’s calculated yield to maturity is the promised yield.
7. The yield to maturity is the required rate of return on a bond expressed as a nominal annual interest rate. For noncallable bonds, the yield to maturity and required rate of return are interchangeable terms. Unlike YTM and required return, the coupon rate is not used as the interest rate in bond cash flow valuation, but is a fixed percentage of par over the life of the bond used to set the coupon payment amount. For the example given, the coupon rate on the bond is still 10 percent, and the
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CONTROLLING THE RATE OF RETURN
Return on investment is normally used to judge the managerial performance in an investment center. Managers therefore try to control and improve the ROI of their investment center.
Rate-of-return regulation was used most regularly to determine reasonable prices for goods supplied by utility companies. This regulation is considered fair due to the fact that they give the company the opportunity to recover costs incurred by providing consumers with their goods or services while simultaneously protecting consumers from paying exorbitant prices that would provide these companies with monopolistic profits. Under this method of regulation, government regulators
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Chapter 5 (Basic Stock Valuation):
Problems (Page 182-183): #1, #2, #4, #6, #8, #9 #11, #12, and #13.
∵ Last dividend (D0) $1.50
First 3 year growth rate 5%
Long-run growth rate 10%
∴ g = 5% g = 10%
Year 0 1 2 3 4 5
Dividend $1.50 $1.50(1.05) $1.50(1.05)2 $1.50(1.05)3 $1.74(1.1) $1.91(1.1)
$1.50 $1.58 $1.65 $1.74 $1.91 $2.11
5-2 (Hint: Find the intrinsic value of the common stock if the dividends are expected to grow at a constant rate)
∵ Dividend at the end of the year (D1) $1.50
Constant growth rate (g) 7%
Required rate of return (rS) 15%
∴ The value per share of the company’s stock (＾P0) = D1 / (rs – g)
= $1.50 / (15% - 7%)
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4. If annual interest rate is 5%: (a) PV = C*(PV factor) = C*[1-(1/(1+R)T)]/R = ($10,000/0.05)*[1-(1/(1+0.05)6)] = $50,756.92
(b) PV = C/R = $10,000/0.05 = $200,000
-To compare with the present value of the annuity, the perpetuity needs to be discounted
PV/(1+R)T = $200,000/(1+0.05)10 = $122,782.65
At interest rate of 5%, I prefer the perpetuity (b).
If annual interest rate is 10%: (a) PV = C*(PV factor) = ($10,000/0.10)*[1-(1/(1+0.10)6)] = $43,552.61
(b) PV = ($10,000/0.10)/(1+0.10)10 = $38,554.33
At interest rate of 10%, I prefer the annuity (a). As interest rate increases, I prefer the cash flow to start compounding sooner.
5. (a) Annual return = EAR = (1+APR/250)250
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on the bond was 4.43%. To buy the bond, investors pay the ask price. The investor would pay 105.66 percent of par value. With $1,000 par value, this means paying $1,056.6 to buy a bond.
9. Coupon payment = interest = .05 × 1000 = 50
Capital gain = 1100 – 1000 = 100
Rate of return = = = .15 = 15%
10. Tax on interest received = tax rate × interest = .3 × 50 = 15
After-tax interest received = interest – tax = 50 – 15 = 35
Fast way to calculate:
After-tax interest received = (1 – tax rate) × interest = (1 – .3)× 50 = 35
Tax on capital gain = .5 × .3 × 100 = 15
After-tax capital gain = 100 – 15 = 85
Fast way to calculate
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expenses will be $60,000, which will also increase by 10% each year after that. The depreciation expense of this corporation will be $10,000 each year, a tax rate of 25%, with a discount rate of 11%.
In analyzing which corporation would be the best fit for our company to acquire, the following information was gathered: a 5-year projected income statement, a 5-year projected cash flow statement, net present value (NPV), and internal rate of return (IRR).
Interpretation of Net Present Value (NPV) and Internal Rate of Return (IRR)
When analyzing the net present values of both Corporation A and Corporation B, it is determined that the net present value is higher for Corporation B. This value
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out our monthly payment
C=6,950,000/48.6287143 C= $142,925
After calculating these numbers, I’ve concluded that it’s a good decision for AirJet Best Parts, Inc. to go with this loan. With a high APR rate and a higher loan payment of $142,925, I get a good monthly payment.
Evaluating Competitor’s Stock
1. Using the dividend growth model and assuming a dividend growth rate of 5%, what is the rate of return for one of three key competitors? Use Yahoo Finance to obtain the latest dividend amount and price for one selected company.
Using the required rate of return formula, we can determine the rate of the Raytheon Company. Its current dividend price is $2.42; the growth rate
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A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond?
Calculating PV factor:
i= required return = 9% = 0.09
n= 10 years
Using Cash Flow of $1000 to calculate present value,
Cash flow= $1000
PV factor = 1/(1+i)^n = 0.42241
PV = $1000*0.42241= 422.41
Using Coupon Rate to calculate present value of Annuity
Cash flow= $1000 * 7.4/100 = $74
PV factor = (1/i)*(1- 1/(1+i)^n) = 6.4176
So, PV = $74*6.4176 = 474.90|
So the fair value of bond = 474.90+422.41
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Team B Portfolio
Mireya Gomez, Marina Kriofske, Raven Schatz
September 7, 2015
Professor Richard Smith
Procter & Gamble
Procter & Gamble has been in business for 178 years. Dividends have consecutively increased in the past 59 years. The common stock five year average return for Procter & Gamble is 73.66. The average rate of return for the past five years is 4.17 percent. Procter & Gamble's industry is personal products. The company streamlined its businesses into five industry-based groups. The groups are global baby, feminine and family care; global beauty; global health; global grooming; and global fabric and home care. The five
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Wacc for Verizon Communications Inc
Answer the following questions concerning WACC:
1. What is the WACC of the company?
The WACC for Verizon Communications Inc. is 4.74%
2. What does WACC represent to the firm?
The WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. It is the rate of return required by investors. Investors use WACC as a tool to value a project. If the project is below WACC, it will not generate enough return for the Investor.
3. How does Beta influence the WACC?
Beta represents the measure of risk of the company. When using the capital asset pricing model, the beta coefficient is an index of risk
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Running header: CRUNCHING THE NUMBERS
CRUNCHING NUMBERS Abstract The public sector faces complex challenges when allocating financial resources in the most productive way in accordance with government policies. The capital budget process in the public sector explores a variety of objectives to determine the best financial impact for the federal, state, and local government entities. The process chooses capital projects from a number of potential options based on several factors such as payback periods, internal rate of return, and the net present value for each project. Each factor should work together effectively to ensure the greatest return in the least amount of time. This
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B) Dividends per share are expected to grow at a constant rate forever is the condition when using the constant growth model. Real world stocks do not satisfy the constant growth assumptions because it is not realistic to assume that you grow your business constantly at the same rate each year.
2:A) Expected Return=(.60/27)+5.5=7.72%
Expected Dividend Yield= .60/27.00=2.22%
Expected Capital Gains Yield= growth rate=5.5%
When comparing the two expected returns, the return has decreased and the stock price has increased. This is a usual indication that the value of the stock has gone up which would
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Function (Standard Deviation):
8.24 Realized yield: Trevor Price bought 10-year bonds issued by Harvest Foods five years ago
for $936.05. The bonds make semiannual coupon payments at a rate of 8.4 percent. If the current
price of the bonds is $1,048.77, what is the yield that Trevor would earn by selling the bonds today?
9.15 Preferred stock valuation: The First Bank of Ellicott City has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.65 on this stock. What is the current price of this preferred stock given a required rate of return of 11.6 percent?
Function: Pp = Dp / r
Pp = Preferred Stock Price
Dp = Preferred Dividend (6.6% - Calculate from 1.65% times 4 [quarterly])
r = require return (11.6%)
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discounting the annual net cash flows and comparing that present value figure to the original investment dollar amount (www.associatedcontent.com, 2009). A positive net present value it indicates the value of the firm will increase by a certain amount and should be accepted. If the net present value is negative the firm value will decrease in value that the project should be rejected (www.associatedcontent.com, 2009).
The internal rate of return will provide Guillermo with a percentage of profitability and provide the company with results in whether or not a project will meet the cost of capital (www.associatedcontent.com, 2009). The internal rate of return takes into account the time value of
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. Diversification reduces risk because prices of different securities do not move exactly together. - The amount of possible risk reduction through diversification depends on the correlation (see later) An asset’s risk and return are important in how they affect the risk and return of the portfolio The risk-return trade-off for a portfolio is measured by the portfolio expected return and standard deviation, just as with individual assets
PORTFOLIO EXPECTED RETURN
The expected return of a portfolio is the weighted average of the expected returns of the respective assets in the portfolio
Portfolio rate of return
fraction of portfolio rate of return + x in second asset on second asset
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forgoing present for future consumption
* SDR = rate of time preference
* If the future increase in net benefits > present costs (via consumption rate of interest, CRI) = project passes a potential compensation test
* Possible for the winners to compensate the losers
* Still have sufficient gains to allow for pareto efficiency
* Ex. Net return available to individual savers is 2% per year
Project cost (to taxpayers) = $1M this year
Net benefit = $3.2M in 50 years
* forgoing current consumption of $1M and lending at 2%, return = $2.72M in 50 yrs
* therefore, the $3.2M benefit will be preferred
* If we ignore intragenerational redistributions, we can
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14.10%, and to compare 3M’s net income and revenue growth with its competitors, 3M has its market share grown. 
| MMM | AVY | DD | JNJ | Industry |
Quarterly Rev Growth | 14.10% | 2.70% | 19.20% | 8.30% | 14.50% |
Net Income | 4.28B | 296.50M | 3.38B | 11.61B | N/A |
The growth of 3M’s net income and revenue means that 3M is taking more and more market share right now, so it could be believed that 3M would has its ROE continue rising.
CAPM and Valuation Techniques Analysis of 3M
Under The Capital Asset Pricing Model, Required return rate could be calculated as the formula as “Required rate of return = Risk-free rate + Beta (Expected Return Rate- Risk-free
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analyze the risks associated with each stock, a Risk-Free rate of interest must be established in order to calculate the required rate of return for each stock. This information along with the stock’s beta, standard deviation, and variance will be measured on both a stand-alone basis and collectively in the portfolio.
Risk-Free Rate of Return:
The Risk-Free rate of Return represents the interest rate that would exist on a riskless security if no inflation were expected. One security considered to be a riskless security when analyzing stock data is the government T-bill. The logic behind considering this to be a riskless investment is because if necessary interest payments are not made
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20. You have a portfolio of the following four shares:
Share | Beta | Investment |
A | 0.80 | 100,000 |
B | 1.25 | 100,000 |
C | 1.00 | 075,000 |
D | 0.60 | 125,000 |
What is the expected rate of return on your portfolio if the risk-free rate of return is 9 per cent and the expected market rate of return is 16 per cent?
21. In year I, Mr. Suresh bought two stocks A and 13 (face value Rs.IO each) in large numbers in the open market at the then prevailing price. After five years, he would like to know the performance of these two stocks in terms of their annual returns vis-a-vis the market. Also, he would like to know whether to hold these two stocks or not. Hence he
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full-time employees working 2,000 hours per year and earning $12.00 per hour. They would also receive the same benefits as other production employees, 18% of wages, in addition to $2,500 of health benefits.
It is estimated that the raw materials will cost 25¢ per can and that other variable costs would be 5¢ per can. Since there is currently unused space in the factory, no additional fixed costs would be incurred if this proposal is accepted.
It is expected that cans would cost 45¢ each if purchased from the current supplier. The company's minimum rate of return (hurdle rate) has been determined to be 12% for all new projects, and the current tax rate of 35% is anticipated to remain
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profit of A$0.48 million.
c. We may use forwards to hedge foreign exchange risk by fixing the exchange rate now for settlement in a future period. Forward contracts are tailor-made but are not traded on organized exchange. There will be counter-party risk, just in case one of the parties does not honor the contract.
3. Suppose a U.S. investor plans to invest in a U.K. firm with stock price currently selling for 40 pounds per share. The investor has a budget of $10,000 and the current exchange rate is $2 / pound.
a. How many shares can this investor buy ?
b. Fill in the following table for rates of return after 1 year in each of the 9 scenarios.
c. When is the dollar
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why interest rate should cover the opportunity cost of lending the money to the borrower. Also, interest rate should cover the inflation rate in the economy, as by time the lender receives the principal again due to inflation, the money will be of less value than when first lent to the borrower.
So, if the interest rate doesn’t cover both the opportunity cost and inflation, it’ll be irrational decision to lend the money.
For example, if the lender can invest in some real estate and construction projects with an average return of 10% & if inflation is 10%, then the interest rate should be more than 20% to be rational choice for the lender to lend the money.
Interest rate in Egypt
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FFinance: principles of Finance (part 1)
Financial markets and management
Valuation of investment
Value of investment = value of investment’s cash flows
* Concept of present value: value of investment = PV(CF°, CF1, CF2…)
Important characteristics of cash flows:
* Time: for the same amount of money, now is preferred to tomorrow
* Uncertainty: risk and return (1 for sure is preferred to half a chance to get 2)
Opportunity cost of capital:
Definition: opportunity cost of capital is the expected rate of return offered by equivalent investments in financial markets
Net present value (investment rule)
Definition: NPV of an investment is the current market value of its cash
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Use the rate-of-return data for the stock and bond funds presented in Spreadsheet 6.1, but now assume the probability of each scenario is as follows: severe recession: 0.10; mild recession: 0.20; normal growth:0.35; boom: 0.35.
(a) Would you expect the mean return and variance of the stock fund to be more than, less than, or equal to the values computed in Spreadsheet 6.2? Why?
The variance is expected to increase because the probabilities of the extreme outcomes are now higher.
The mean return would be probably similar to the original one.
(b) Calculate the new values of mean return and variance for the stock fund using a format similar to Spreadsheet 6.2. Confirm
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a. Determine the current value of the bond if present market conditions justify a 14 percent required rate of return.
PV = CF^n / (1 +i) ^n
PV = CF n / (1 + i)^4
PV = 70 / (1 + .14) ^4
PV = 70 / (1.14) ^4
PV = 70/ 1.14 + 70/ 1.30 + 70/ 1.48 + 70/ 1.69
PV = 61.40 + 53.85 + 47.30 + 41.42 = $203.97
PV of the par value = 1,000
PV = $203.97 + 1,000 = $1203.97
b. Now, suppose Twin Oaks' four-year bond had semiannual coupon payments. What would be its current value? (Assume a 7 percent semiannual required rate of return. However, the actual rate would be slightly less than 7 percent because a semiannual coupon bond is slightly less risky than an annual coupon bond).
PV = 35
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zero since the security is backed by the U.S.
government; this security is commonly considered the risk-free asset.
2. The term structure of interest rates is the relationship of the rate of return to the time to maturity for
any class of similar-risk securities. The graphic presentation of this relationship is the yield curve.
3. For a given class of securities, the slope of the curve reflects an expectation about the movement of
interest rates over time. The most commonly used class of securities is U.S. Treasury securities.
a. Downward sloping: Long-term borrowing costs are lower than short-term borrowing costs.
b. Upward sloping: Short-term borrowing costs are lower than long-term
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% depreciation of the U.S. dollar against FX basket is smaller.
The reason is that Mexico only take 28% of trade share of United States, there are also other trade
partners whose currency also could affect the nominal exchange rate for U.S. For this question, U.S.
dollar only depreciated 1.31% against Chinese yuan, which bring down the number of overall
depreciation of U.S. dollar against foreign currency basket.
a. The investor's return on euro-denominated Dutch deposits is
b. Using forward cover, the euro-denominated return on British deposits is
c. Yes, there is an arbitrage opportunity because the
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maturity. When bonds have a shorter maturity, the interest rates are not as high. The reasoning behind is this is simple. The investor’s money is not locked up as long.
The (Z) would have the lowest interest rate since it has more liquid than bonds.
Explain how an economist could use the slope of the yield curve to analyze the probability that a recession will occur and why the spread may matter.
The yield curve displays what interest rates represent compared to the maturity. Usually the yield curve is upward sloping since the longer you invest your money, the higher your return should be. However, if the slope is negative, this is an indication that a recession is coming.
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, commercial banks help their customers in obtaining credit from other sources through the letter of credit arrangement.
Short-term unsecured promissory notes issued by companies
(Price at end of year - Price at start + Dividends during year) / Price at start of year
[(69 - 60 + 2.4)/60]*100 for percent = (11.4/60) * 100 = 19%
β = (R - Rf) / (Rm - Rf)
R = Expected Rate of Return
Rf = Risk Free Interest Rate
Rm = Expected Market Return
β = Stock Beta = (18-8)/(15-8)
Answer is 1.42857 = 1.429
(B) Beta coeffici ent is given by the following formulas: 7.4/4.8=1.54
|Β= |Covariance of Market Return
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| | | |
| |The risk free rate is 5%, return on the market index is 12% and the variance of the return on the index is 25 (%)2. You are required to | |
| |a. Construct a portfolio using Sharpe’s portfolio optimization model. | |
| |b. Verify whether the stocks selected in optimum portfolio have higher utility than the rejected stocks, if the risk tolerance of Mr. | |
| |Mittal is 40
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costs are considered fixed or variable (Baker & Baker, 2014).
Cash flow reporting is an important tool used when constructing a capital expenditure budget. However, there are four different capital budgeting methods that can be used to report the cash flow: payback method, accounting rate of return, net present value (NPV), and internal rate of return (IRR). Each of these methods have their own unique advantages, disadvantages, and purposes. The payback method, which is based on cash flow, recognizes the cash flow that is needed to redeem the cash that was originally invested. This method may be easier for managers to understand, and it shows risks. Unfortunately, it does consider
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| Calculate LoansRUS monthly payments | 10 | |
| Calculate LoansRUS total payments | 5 | |
| Decision | 5 | |
Task 2: | Bond Evaluation | | |
| At what coupon rate will the market price equal the par value? | 10 | |
| What is the difference between the coupon rate and the YTM | 10 | |
| What factors will contribute to the riskiness of bonds | 10 | |
| Positive and negative covenants and their effect on bond price? | 10 | |
Task 3: | Evaluating Competitor’s Stock | | |
| Determine the required return for a key competitor: | | |
| Screen Shot | 3 | |
| Calculations | 7 | |
| Calculate the share price given a constant
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have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0
5) The required returns on all stocks have fallen by the same amount
Assume that the risk-free rate is 5%. Which of the following statements is CORRECT?
1) If a stock has a negative beta, its required return under the CAPM would be less than 5%.
2) If a stock's beta doubled, its required return under the CAPM would also double.
3) If a stock's beta doubled, its required return under the CAPM would more than double.
4) If a stock's beta were 1.0, its required return under the CAPM would be 5%.
5) If a stock's beta were less than 1.0, its required return
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a A tax rate that increases as the tax base increases is an example of what kind of tax rate structure?
b A tax rate that remains the same as the tax base increases is an example of what kind of tax rate structure?
c A tax rate that increases as the tax base decreases is an example of what kind of tax rate structure?
b A tax rate structure where the tax rate remains at the same rate regardless of the tax base is:
A. A progressive rate structure.
B. A proportional rate structure
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RETURN ON CAPITAL INVESTMENT IF SOLD IN MONTH 12 AT R2 000 000
1ST Year Nett income : R150 000 per annum
Interest cost on bank loan : R 90 000 per annum
= NETT INCOME AFTER EXPENSES : R 60 000 PER ANNUM
Assume R60 000 is a return of R500 000 initial capital investment and in
of opportunity cost on the R500 000. –
R60 000 / R500 000 x 100 = 12% return which is an acceptable return on investment given the lending rate is only 9%.
Assume interest on the loan was only payable for the first 24 months,
thus R90 000 (1st year). This amount has been covered by
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The value of a company today, based on how much money it’s going to make in the future
Dividend discount model (DDM)
Free cash flow to equity – determine the fair value of companies
One must consider
* Future sales growth, profit margins
* Discount rate – depends on a risk-free interest rate
1. Forecast period & forecasting revenue growth
* How far we should project cash flows
* Excessive return period
* One can guess based on the company’s competitive and market position
Company competitive position
* 1 year:
* Slow-growing company
* Operates in highly competitive, low margin industry
* 5 years: