Tutorial Question Indongo Limited is considering investing N$100 000 in one of two projects. Both projects have a life of one year only, and potential return is dependent on the following economic states: State 1 State 2 State 3 Probability 0.4 0.3 0.3
Tutorial Question
Indongo Limited is considering investing N$100 000 in one of two projects. Both
projects have a life of one year only, and potential return is dependent on the following
economic states:
State 1 State 2 State 3
Probability 0.4 0.3 0.3
Net cash return: Project A N$35 000 N$20 000 N$0
Net cash return: Project B N$5 000 N$30 000 N$30 000
Net cash return: Existing activities -N$20 000 N$100 000 N$300 000
The company has a current market value of N$1 million. The Directors of Indongo
Limited believe that the risk return per N$1 of current market value of their existing
activities is virtually the same as those for the stock market as a whole, including
general economic risk. The current risk free rate on the short-dated government
investments is 10%
Required:
a) Determine the standard deviation of project A, project B and the existing
activities [15 marks]
b) Determine the correlation of project A to existing activities [4 marks]
c) Determine the correlation of project B to existing activities [4 marks]
d) Use the CAPM model to calculate the return for projects A and B [7 marks]
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Tutorial Question Indongo Limited is considering investing N$100 000 in one of two projects. Both projects have a life of one year only, and potential return is dependent on the following economic states: State 1 State 2 State 3 Probability 0.4 0.3 0.3
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the following from an accounting perspective, not a
marketing/management perspective:
You are required to:
1. Of all the risks (risks are listed at the bottom) that
Starbuck’s management discloses, which one do you think could most
adversely affect the Balance Sheet and Income Statement at the
store level and why? Demonstrate your understanding by showing an
effect one on at least one of...
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