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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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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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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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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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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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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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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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Present value = Return / 1+5%
95.24 = 100 / 1.05
What do you notice?
We notice that there is an INVERSE relation between the interest rate & the market price of bonds ( its present value)..
THAT IS ,when interest rate rises price of bond falls & vice versa. When market price of bonds falls, interest rate rises & vice versa.
SO THE SPECULATORS DEMAND FOR MONEY IS AFFECTED BY THE INTEREST RATE. Example:
IF THe interest rate RISES (ie price of bonds falls) speculators buy bonds & the quantity demanded of money FALLS & vice versa.
Thus , the money demand curve that shows the relation between the interest rate & the quantity demanded of money by speculators is
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rate of return of 9%, below the client accepts risk under the reasonable rate of return 7%; alternatives can achieve wards, life quality promotion, increased security spending targets, the internal reward rate can be increased to 6.8%, the difficulty is not great.
1. insurance product configuration plan
According to Mr. xiang’s wishes, we from the minimum coverage of insurance product configuration of 5 percent, based on the expectation of buy a 5million house in 8 years and because the client Mr. xiang has smoking for 20 years, his wife cares about his health problem.So I think a personal accident insurance with 6 million is needed, so Mr. xiang has to spend 22000$ every
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is a non-arbitrage condition which says that the returns from borrowing in one currency, exchanging that currency for another currency and investing in interest-bearing instruments of the second currency, while simultaneously purchasing futures contracts to convert the currency back at the end of the holding period, should be equal to the returns from purchasing and holding similar interest-bearing instruments of the first currency. If the returns are different, an arbitrage transaction could, in theory, produce a risk-free return.
Looked at differently, interest rate parity says that the spot price and the forward or futures price of a currency incorporate any interest rate differentials
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For Final exam
1. Stock A has a required return of 10 percent. Its dividend is expected to grow at a constant rate of 7 percent per year. Stock B has a required return of 12 percent. Its dividend is expected to grow at a constant rate of 9 percent per year. Stock A has a price of $25 per share, while Stock B has a price of $40 per share. Which of the following statements is most correct?
a. The two stocks have the same dividend yield. *
b. If the stock market were efficient, these two stocks should have the same price.
c. If the stock market were efficient, these two stocks should have the same expected return
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Nominal interest rate-the growth rate of your money. Real interest rate- the growth rate of your purchasing power. the real rate of interest is the nominal rate reduced by the loss of purchasing power resulting from inflation. the approximation rule overstates .The approximation rule is more exact for small inflation rates and is perfectly exact for continuously compounded rates. rr=rn-i ;rr=(rn-i)/1+i; conventional certificates of deposit offer a fuaranteed nominal rate of interest; Because future inflation is risky, the real rate of return is risky even when the nominal rate is risk free. Supply, Demand and governement actions determine the real interest rate. The nominal interest rate
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future inflows of cash must be compared with the interest rate that Guillermo could receive on the investment somewhere else. Another technique is to calculate the internal rate of return of each investment opportunity. The investment that uses the most cash to turn the larger profit is considered to be the best option. Even if one investment has a higher rate of return, if it does not use a large enough investment figure, it may not be the best option (Edmonds, et al., 2007). Another technique that Guillermo could use is the payback period. This technique simply calculates the estimated time it will take to recover the initial investment. The time value of money is not considered in
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total dividend for the last year as a proportion of the share price. In bonds, the yield is the same as the coupon rate ("Yield", 2013).
Rate of Return
Rate of Return is a percentage of the total amount invested. It is usually, although not always, calculated annually ("Rate Of Return", 2013).
Return on Investment
Return on investment is a profitability measure that evaluates the performance of a business by dividing net profit by net worth ("Return On Investment (roi)", 2013). It is not the same as profit. It deals with the money invested and the return you realize on that money based on the net profit of the business.
Cash Flow is the amount of cash that can actually be taken
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Chapter 6. Risk, Return, and CAPM
Dollar return: Amount to be received-Amount invested
Rate of return: Amount received-Amount investedAmount invested
Stand-alone risk is the risk an investor has in just holding the one asset
Expected rate of return: r=i=1npiri Where P is probability of i outcome and r is the rate of return
The more leptokurtic the distribution, the more likely the actual outcome will be closer to the expected return.
Measuring Standalone Risk: Standard Deviation
1. Expected Rate of return
2. Deviationi= ri-r
3. Variance=σ2=i=1n( ri-r)2Pi
4. Standard Deviation=σ=Variance
5. Or use Excel of Financial calculator
Using Historical Data to Measure
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a. PV- Present Value, the beginning amount.
Int- Interest per year
FV- Future Value or ending amount in an account where N is the number of periods the money is left in the account.
PVA- Present value annuity
FVA- Future value annuity and the ending value of a stream of equal payments.
M- Number of compounding period per year
I nom- The nominal , or quoted, interest rat
b. Opportunity cost rate- is the rate of return you can earn on an alternative investment of a similar risk.
c. Annuity- a series of equal periodic payments for a specific number of periods.
Lump sum payment- When you
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CV GH = 1.03.
[pic]S&P 50 = 16.4%.
CV S&P 50 = 1.10.
Standard deviation and coefficient of variation are measures of dispersion about the mean, and hence measure total risk. Total risk is the relevant measure of risk only for assets held in isolation.
Of the two total risk measures, coefficient of variation is the better one because it relates risk to the expected rate of return; that is, it standardizes the measure. (Note that a measure such as semivariance, which measures only downside risk, may be a better total risk measure than either standard deviation or coefficient of variation. However, if return distributions are approximately symmetric, then semivariance
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rate of return (IRR). We shall conclude that the net present value method is better than the other possible methods of analyzing investments.
Net Present Value
The two most important measures of investment worth are called the discounted cash flow (DCF), measures. It is desirable to explain the concept of the present value of a future sum because in one way or another this concept is utilized in both these measures. The present value of $100 payable in two years can be defined as that quantity of money necessary to invest today at compound interest in order to have $100 in two years. The rate of interest at which the money will grow and the frequency at which it will be compounded will
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The bonds are callable in 5 years at a call price of $1,050. What is their yield to maturity?
What is their yield to call?
316 (6-4) An analyst has modeled the stock of a company using the Fama-French three-factor
model. The risk-free rate is 5%, the market return is 10%, the return on the SMB portfolio
(rSMB) is 3.2%, and the return on the HML portfolio (rHML) is 4.8%. If ai = 0, bi = 1.2, ci =
−0.4, and di = 1.3, what is the stock’s predicted return? 307
317 (6-7) Suppose rRF = 5%, rM = 10%, and rA = 12%.
a. Calculate Stock A’s beta.
b. If Stock A’s beta were 2.0, then what would be A’s new required rate of return?
MINI CASE chapter 1
bi ðri; t − rRF; tÞ ¼ ai þ biðrM; t − rRF; tÞ þ ciðrSMB; tÞ þ diðrHML; tÞ þ ei; t
Answers Page 786
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division and financial decisions for capital investment based upon these hurdle rates.
If you break the hurdle rates out for each division it shows that the Services division has a hurdle rate of 8.8%, using market value available date and the Products and Systems division has a hurdle rate of 10.4%, using market value data of similar risk companies. Comparing these to the averaged company hurdle rate of 9.3% shows that the services division’s capital projects would bring a higher rate of return to the company than the P&S divisions; even though this would not be seen if you were only looking at an average. The P&S division projects could actually have negative returns based on the
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13.86 percent annual return. For this to be true, what must the robot have sold for new in 1965?
3. Wilma borrows $250,000 for 150 days. How much interest will she have to pay if the interest rate is?
(a) 8% pa simple interest
(b) 8% pa compounding daily
4. You have just made your first $1,500 contribution to your individual superannuation retirement account. Assuming you earn a 9.5 percent rate of return and make no additional contributions, what will your account be worth when you retire in 40 years? What if you wait 12 years before contributing? (Does this suggest an investment strategy?)
5. You have been offered the following cash flow choices.
(i) $2,000 immediately
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preferred = 10/(100-2) = 10.2%
3. A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals 6 percent. What is the estimated cost of common stock equity (retained earnings)?
Cost of RE = 6 + (14-6)1.2 = 15.6%
4. A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.
Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of
2 percent of the face value would be required in addition to the discount of $40. The coupon payment is semi-annual. Additionally, the firm's marginal tax rate is 40 percent.
Preferred Stock: The
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Business Finance Summary
Business Finance, Investors, Firms and Markets
• Investments in assets are important because assets generate the cash flows that are needed to meet operating expenses and provide a return to owners of the business.
• Financing decisions involved generating funds internally or form external sources to the business. Such as by issuing debt or equity securities.
• Financing charges amount to non-operating cash flows
• The required rate of return caters for the costs to both shareholders and debt holders for funds committed to the project. Therefore, using the required rate of return involves the financing charges being incorporated into the discount rate NOT
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usually paid every six months.
9. Capital: Is the financial assets or the financial value of assets, such as cash. Capitals lets an business know how much financial resources is available for usage.
10. Debt: Is the amount of money that someone borrows from another party. Most new business have to use debt as an method to start their business; while older organization may credit debt because their new purchases is more than they can afford at the current time.
11. Yield: Is the income return on an investment. Yield refers to the dividends or interest received from a security.
12. Rate of Return: Is the gain or loss on an investment over a specific period. The rate of return
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asset base for the 2016.
Salesforce.com uses four main investment appraisal techniques namely the payback period, internal rate of return, net present value and the modified internal rate of return. The internal rate of return as used in the company refers to the rate of return needed to breakeven on a project. IRR therefore indicates the rate of return at which the company will realize zero NPV.
IRR is a reliable tool given that it indicates the probable rate of return that the company will receive on the investment. However, the indication of a rate instead of the real amount derivable from the investment. This raises the risk of the firm investing in small
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Under Amour, Inc. is a performance based apparel company that is quickly growing to become one of the top companies in the industry. They are known for high-quality, innovative products that are giving athletes a competitive advantage. This paper describes the history of the company, analyzes the company’s performance and required rate of return, discusses the projected future growth rate of earning, values the company, and provides a recommendation to buy stock at the estimated price target of
Keywords: stock analysis, return on equity, projected future growth rate, required rate of return, intrinsic value
A Summary and Technical Analysis of the Under Armour, Inc. (UA
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growth rate of 3.5%, what is the required rate of return for the company you selected? Include a screen shot of the market watch page from which you gathered the data. (15 pts)
2. Using the rate of return from part 1 above, what should be the current share price of AirJet Best Parts, Inc. if the company maintains a constant 5% growth rate in dividends and the most recent dividend per share paid on the stock was $1.50? Show your calculations. (10 pts)
3. Assume AirJet Best Parts has also a preferred stock issue. The most recent dividend per share paid on the stock was also $1.50, the same as the common stock. Which one would you think has a higher price, the preferred stock or the
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After a short period of foundation Home Essentials grow very fast and spread over different countries in various regions of the world. It can be said that the secret of this success are creating solutions for the basic problems of the sector which are high capital need, rate of return and innovations.
Due to past experience, Exline give an importance on faster rate of return in order to have an advantage over his competitors. To provide this, he had an agreement with a Chinese furniture manufacturer and supplied more quality furniture for lower pricess. Thus, although, other his competitors return their capitals after 12-15 months, it was taking 6 months for him. Also, due to his supplier
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scale, when α+β<1 is decrease return of scale. Solow growth model is talking about production, too. And Solow’s model has saving and technology involved.
A=.0008, A represents the efficiency of production.
α=.94 that means 1% increase in labor causes output to increase .94%.
β=.51 that means 1% increase in capital causes output to increase .51%.
α+β=.94+.51=1.45>1 that means it is increase return of scale.
6. As we can see from the graph, unemployment rate was every unstable, is always down to the bottom right after it reach the peak. The highest point in the history is 10.9 percent in 1982. And the lowest point in the history is only 2.5 percent in 1953. The
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Response: 1+r = (300)/(240) = 1.25; r = 25 %
13. The rate of return is also called:
A) Discount rate
B) Hurdle rate
C) Opportunity cost of capital
D) All of the above.
14. The present value formula for one period cash flow is:
A) PV = C1(1 + r)
B) PV = C1/r
C) PV = C1/(1 + r)
D) None of the above
15. The net present value formula for one period is:
A) NPV = PV cash flows/initial investment
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investments. This is because the yield on longer-maturity corporate bonds is by definition a long-term implied return. In contrast, market-wide equity price fluctuations typically do not affect market participants’ expected long-term return on equity investments. Despite the fact that it seems reasonable to increase the expected rate of return on corporate bonds during the credit crisis, doing so has some unwanted reporting consequences. In particular, the loss from the unexpected decline in bond prices has been recognized as a component of comprehensive income, whereas (part of) the future increase in prices will be recognized in the income statement. This asymmetric treatment of gains and losses
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firm has a return on equity of 17.5%. Calculate Marshall’s debt ratio. A. 50% B. 30% C. 60% D. 40%
12) The accounting rate of return on stockholders’ investments is measured by: A. operating income return on investment. B. return on assets. C. realized rate of inflation. D. return on equity.
13) If you are an investor, which of the following would you prefer? A. Earnings on funds invested would compound daily. B. Earnings on funds invested would compound annually. C. Earnings on funds invested would compound monthly. D. Earnings on funds invested would compound quarterly.
14) When George Washington was president of the United States in 1797, his salary was $25,000. If you assume an
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Star Appliance Case Study
Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the projects that will add the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re-evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find the net present value, or by solving for the internal rate of return, we should be able to see which projects Star should
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Course Project Part II
You will assume that you still work as a financial analyst for AirJet Best Parts, Inc. The company is considering a capital investment in a new machine and you are in charge of making a recommendation on the purchase based on (1) a given rate of return of 15% (Task 4) and (2) the firm’s cost of capital (Task 5).
Task 4. Capital Budgeting for a New Machine
A few months have now passed and AirJet Best Parts, Inc. is considering the purchase on a new machine that will increase the production of a special component significantly. The anticipated cash flows for the project are as follows:
Year 1 $1,100,000
Year 2 $1,450,000
Year 3 $1,300,000
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relatively dangerous occupation. That is, the family income is uncertain and risky.
In addition to, the personal value of the family is favor of frugal and conservative type. The liability limits on their auto and homeowner's policies are $300,000. The couple only has $1,000 of stock and $2,000 in mutual funds. The mortgage is account little part of the total income, the investment method is stable and low return. However, this stage is the high earning capacity.
Evaluate strengths and weakness of financial condition.
The interest rate and discount rate is the main Marco factors influence the investment of this family. The saving is the chief method of the assets. The
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tax paid on a certain amount of taxable income
* Marginal tax rate: rate of tax paid on the highest dollar of income
Calculation of Tax:
= taxable income
X tax rates
= tax liability
- tax payments/credits
= tax refund or due with return
* For TI up to $100,000 use tax tables
* Use tax rate schedules for higher income
* Tax rate tables are calculated at midpoint of range; rate schedules are precise
* 1040EZ must be:
* Single or married filing jointly
* Taxable income less than $100,000
* Have no dependents
* May only have income from wages, unemployment and interest
* 1040A must be
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Required Rate of Return (CAPM) and Dividends: Based upon the previous three years’ dividend payments, AT&T appears to have a target payout ratio of 70%-80% of earnings. As earnings are cyclically depressed due to the economic downturn, the payout ratio is currently at the upper end of the payout range. With dividends projected to grow at 5% per year, the payout ratio will decline from 83% to 71% in five years and 69% at the terminal value, at which point dividends will grow at 5% in perpetuity. The company’s most recent dividend of $1.64 translates to a 6% dividend yield on the company’s shares. Thus the expected return on the company’s shares is approximately 11%. We have also estimated an
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calculated on the full amount
Double money return
Due to attractive profit, your investment becomes double at maturity.
Features of Term deposit products:
The term deposit cannot be en cashed before 1 year.
The profit is subject to deduction of AIT accordance to the prevailing govt. rules and regulations.
Senior citizens (individuals aged 57+) will get 0.25% higher profit rate under all the deposit schemes other than fixed term investment schemes (Double money, Sanchay and Millionaire schemes.)
Earn Ahead Term Deposit scheme is applicable for Individuals only.
Benefits of Deposit product :
Flexible and diversified
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From: Maureen Farrell-JacobsR
e: Lockheed L-1011 Tri-Star Case Study
Part 1: Recommendation
Proceed to obtain the $250 million in federal loan guarantees to complete the L-1011 Tri Star program. Seek military aircraft contracts in addition to the civilian aircraft contracts thereby spreading the risk into Lockheed’s well-established military market rather than exclusively into the commercial aircraft market. By making the above changes, Lockheed will potentially yield a NPV of $149.85 million using a 13% required rate of return at 500 units of production sold to both commercial and military markets versus the other
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$850 = 100/(1 + .10)1 + … +100/(1 + .10)12 + 1000/(1 + .10)12
$850 = $1000
6-6 Pg. 259
Suppose rRF = 5%, rM = 10%, and rA = 12%
a. Calculate Stock A’s beta
b. If Stock A’s beta were 2.0, then what would be A’s new required rate of return?
rA = Risk-free rate + (Market risk premium)(Beta of Stock A)
rA = rRF + (RPM)bA
12 = 5 + (rM – rRF)bA
12 – 5 = (10 – 5)bA
7 = 5bA
7/5 = bA
1.40 = bA
BA = 2.0
RA = 5 + (5)2.0
RA = 5 + 10
RA = 15%
6-10 Pg. 259
You have a $2 million portfolio consisting of a $100,000 investment in each of 20 different stocks. The portfolio has a beta of 1.1. You are considering selling $100,000 worth of one
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increased volatility. Apple (AAPL) is the only technology stock in this portfolio, and brings in a beta of 0.97, which is less than the industry standard of over 1. According to this information, Apple would be less of a financial risk than many of its technologocial peers. During this period, Apple has also had a very high rate of return as represented by the below chart.
Energy stocks typically carry a beta of less than 1. The only energy stock in this portfolio is Exxon Mobil (XOM), which carries a beta less than that of its industry standard. Exxon has also had a fairly solid return during this time period. General Electric (GE), which has the highest beta in this
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proxy for risk-free rate so, I have used the same rate in CAPM application. The market return is the avg. of daily AMZN returns and this has been annualized as shown below:
Avg. AMZN return | 0.059% |
No. Of working days | 252 |
Annualized RM | 15.93% |
CAPM= RF + B*(RM-RF),
KE= 0.561% + 1.38*(15.93%-0.561%),
If I kept the market risk premium to be 0.057% as instructed, the cost of equity derived was 0.64% which is lower than the cost of debt. Therefore, I rather calculated the market risk premium by the method shown above.
Market value of equity at the end of 2014 = Stock price*no. of shares outstanding
= $583.35 * 465 million
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Rf = risk-free rate
The Jensen index measures risk premiums in terms of beta (β); therefore, it is assumed that the portfolio being evaluated is well diversified. The Jensen index requires using a different risk-free rate for each time interval measured during the specified period. For instance, if you are measuring the fund managers over a five-year period using annual intervals, you must examine the fund's annual returns minus the risk-free assets' returns (i.e. U.S. Treasury bill or one-year risk-free asset) for each year, and relate this to the annual return of the market portfolio minus the same risk free rate.
This calculation method contrasts with both the Treynor and Sharpe
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viability for marketing and distribution of genetically engineered soya seeds developed by a biotechnology firm. The firm will supply seeds and permit ProGen to market and distribute them under a licence. The evaluation methods used for this proposal are net present value (NPV), internal rate of return (IRR), and Payback methods.
Assumptions used for this analysis are summarised below
• Marketing cost is assumed to be a sunk cost and therefore not included in the calculation
• Cash flow will be considered over 5 years as this is the lifecycle of the product
• An annual licence fee included at 1M per annum
• Capital investment for vehicles £650k is an upfront
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• The depositor is given a fixed deposit receipt, which depositor has to produce at the time of maturity. The deposit can be renewed for a further period.
Certificate of deposit: A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC. The term of a CD generally ranges from one month to five years.
Risk-reward trade-offs: a call deposit will pay a very low rate of interest but will be essentially risk free. On the other hand, a CD is a highly liquid form of investment that will pay a higher rate than the call deposit. A CD can easily be sold into the money market to obtain funds, whereas with a term deposit there is a loss of liquidity as the funds are locked-up for the fixed period. However, a term deposit may pay a higher rate of return.
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% performance hurdle this ensures that only viable proposals are implemented and this will obviously benefit the company and hence the shareholders.
The internal rate of return is the discount rate at which the present value of future cash flows just equalled the initial outlay. The Internal rate of return measures the average return over the life of an investment. It also indicates the sensitivity of the NPV to estimation error in cost of capital. The internal rate of return rule states that you should take any investment opportunity where the IRR exceeds the opportunity cost of capital. Present and future investors will be discouraged from staying with or investing into the company if takes