Question

How do set this up to use a financial calculator to solve this problem?

To solve I believe you need to calculate the present value (PV) of the payments for each year and combine, then add $1M and solve for PV. I'm having trouble calculating PV after year 1

Please advise using the buttons: N, I, PMT, PV

year 1 : n=1, I=11, PMT=1.2, solve for PV [PV = 2187847.87]

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A baseball player is offered a 5-year contract which pays him the following amounts:

Year 1: $1.2 million

Year 2: $1.6 million

Year 3: $2.0 million

Year 4: $2.4 million

Year 5: $2.8 million

Under the terms of the agreement all payments are made at the end of each year.

Instead of accepting the contract, the player asks his agent to negotiate a contract which has a present value of $1 million MORE than that which has been offered. Moreover, the player wants to receive his payments in the form of a 5-year annuity (payments at the end of the year). All cash flows are discounted at 10%. If the team were to agree to the player’s terms, what would be the player’s annual salary?

Answer 1

The PV of all the future cash flow is $7.29m discounted at 10%. Now player wants $1m more than the present value. So that would aa upto $8.29m dollars.

Now the player wants annuity of 5 years payable at year end. So N=5, I=10, PV= -8.29m and PMT=?

So, annuity turns out to be $2.186m payable at the end of each of 5 years. So annual salary is $2.186m.

Answer 2

Q No 4 Assume you are a portfolio manager at JS Global Capital Ltd. Recently you came across three attractive stocks and want to create a portfolio investment in these three stocks. The details of the stocks are given below:

Company name	Volatility (Standard deviation)	Weight in Portfolio	Correlation with the market portfolio
Meezan Bank Ltd	12%	0.25	0.40
Lucky Cement Ltd	25%	0.35	0.60
KE Ltd	13%	0.40	0.50

 

The expected return on the market portfolio is 8% and its volatility is 10%. The risk-free rate based on central bank’s discount rate is 3%. (1.5 marks each)

 

a. Calculate each of the stock’s expected return and risk (beta) as compared to the market.

b. What should be the expected return of the portfolio based on values calculated in part a.
c. Calculate the beta of the portfolio? what does it tells regarding the riskiness of the portfolio?

d. Using the values from part c, can you calculate the expected return of the portfolio? Is it similar to your answer in part b? Why or why not?