Consider two $60,000 investments – call them Investment A and Investment B. Both investments will...
Consider two $60,000 investments – call them Investment A and Investment B. Both investments will earn $5,000 with a probability of 0.5 and $1,000 with a probability of 0.5. Investment A will use 100% equity financing (issuing stocks). Investment B will get $30,000 through issuing stocks and $30,000 through issuing bonds. Investment B must pay 4% interest on the bonds.
a. Calculate the expected returns on equity (returns after interest payments divided by the amount of equity) for Investment A and Investment B. Express the returns as a percentage.
b. If the investments earned the lower amount ($1,000), what is the rate of return on equity for Investment A and Investment B? If the investments earned the higher amount ($5,000), what is the return on equity for Investment A and Investment B?
c. Using your answers from ‘a’ and ‘b’, what is the standard deviation of the rate of return on equity in each case? Which investment has the highest expected returns on equity? Which has the lowest risk? What explains the difference in risk between the two investments?
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Consider two $60,000 investments – call them Investment A and Investment B. Both investments will...
SLIDII 2 Suppose that you are investigating two mutual exclusive investments (investment A and B) which...
SLIDII 2 Suppose that you are investigating two mutual exclusive investments (investment A and B) which correspond to two listed firms A and B, respectively. The Net Cash Flows of these investments are the following: 13 100 (10,000) (10,000) 11,500 0 ogs B 13,500 The risk free interest rate is 2% and the market portfolio return is 8%. The beta coefficient (systematic risk) for firm A and B is equal to 0.5 (i.e. ba=bg=0.5) Which investment would you proceed with...
Consider the following two investments. One is a risk-free investment with a $100 return. The oth...
Consider the following two investments. One is a risk-free investment with a $100 return. The other investment pays $2,000 20% of the time and a $375 loss the rest of the time. Based on this information, answer the following: (i) Compute the expected returns and standard deviations on these two investments individually. (ii) Compute the value at risk for each investment. (iii) Which investment will risk-averse investors prefer, if either? Which investment will risk- neutral investors prefer, if either?
Suppose that you investigate the case of two mutual exclusive investments, investment A and investment B,...
Suppose that you investigate the case of two mutual exclusive investments, investment A and investment B, the annual Net Cash Flows of which are given below: to ti tz tz A (10,000) 4,000 4,000 10,000 B (50,000) 15,000 15,000 40,000 The risk free interest rate is equal to 2% while the market portfolio yields 7% on an annual basis. 4.1 Suppose that these investments refer to a firm the systematic risk factor of which (i.e. beta coefficient) is equal to...
An investment amount of $10M has to be raised through equity financing and debt financing. The...
An investment amount of $10M has to be raised through equity
financing and debt financing. The required debt ratio is 0.40 and
the company tax rate is 35%.
a) The current market price of the company’s common stock is $50
and the current dividend is $5
and the dividend is expected to grow at 5% annual rate. The
floating cost of issuing a common stock is 10%. Preferred stocks of
$100 par value with 10% fixed annual dividend can also...
Investment PortfolioYou are an investment manager for Simple Asset Management, acompany that specializes in...
Investment PortfolioYou are an investment manager for Simple Asset Management, a company that specializes in developing simple investment portfolios consisting of no more than three assets such as stocks, bonds, etc., for investors who like to keep things simple. One of your more popular investments is called the All World Fund and is composed of global stocks with good dividend yields. A client is interested in constructing a portfolio that consists of the All World Fund and the Treasury Index...
1. Bond valuation Callaghan Motors' bonds have 10 years remaining to maturity. Interest is paid annually,...
1. Bond valuation Callaghan Motors' bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 5 percent. The bonds have a yield to maturity of 10 percent. What is the current market price of these bonds? 2. Expected returns Suppose you won the lottery and had two options: (1) receiving $1 million or (2) a gamble in which you would receive $2 million if a head...
Investment Portfolio You are an investment manager for Simple Asset Management, a company that specializes in...
Investment Portfolio You are an investment manager for Simple Asset Management, a company that specializes in developing simple investment portfolios consisting of no more than three assets such as stocks, bonds, etc., for investors who like to keep things simple. One of your more popular investments is called the All World Fund and is composed of global stocks with good dividend yields. A client is interested in constructing a portfolio that consists of the All World Fund and the Treasury...
How do you solve for B? 10.1 Consider the following probability distribution of returns estimated for a proposed pro...
How do you solve for B?
10.1 Consider the following probability distribution of returns estimated for a proposed project that involves a new ultrasound machine: State of the Economy Very poor Poor Average Good Very good Probability of Occurrence 0.10 0.20 0.40 0.20 0.10 Rate of Return -10.0% 0.0 10.0 20.0 30.0 a. What is the expected rate of return on the project? b. What is the project's standard deviation of returns? What is the project's coefficient of variation (CV)...
(b) Suppose a Spanish investor is considering the following investments: Investment A: This is the ordinary...
(b) Suppose a Spanish investor is considering the following investments: Investment A: This is the ordinary share of a matured company. The market price for this security is €40 per share. The company is expected to pay €4 dividend per share one year from now and its expected growth rate for foreseeable future is 4%. Investment B: This is the ordinary share of a fast-growing company. The market price for this security is €40 per share. The company expects to...
Consider the following returns for two investments, A and B, over the past four years: Investment...
Consider the following returns for two investments, A and B, over the past four years: Investment 1: 4% 9% –8% 13% Investment 2: 15% 12% –14% 10% a-1. Calculate the mean for each investment. (Round your answers to 2 decimal places.) Mean Investment 1 % Investment 2 % a-2. Which investment provides the higher return? Investment 1 Investment 2 b-1. Calculate the standard deviation for each investment. (Round your answers to 2 decimal places.) Standard Deviation Investment 1 Investment...
SLIDII 2 Suppose that you are investigating two mutual exclusive investments (investment A and B) which correspond to two listed firms A and B, respectively. The Net Cash Flows of these investments are the following: 13 100 (10,000) (10,000) 11,500 0 ogs B 13,500 The risk free interest rate is 2% and the market portfolio return is 8%. The beta coefficient (systematic risk) for firm A and B is equal to 0.5 (i.e. ba=bg=0.5) Which investment would you proceed with...
Suppose that you investigate the case of two mutual exclusive investments, investment A and investment B, the annual Net Cash Flows of which are given below: to ti tz tz A (10,000) 4,000 4,000 10,000 B (50,000) 15,000 15,000 40,000 The risk free interest rate is equal to 2% while the market portfolio yields 7% on an annual basis. 4.1 Suppose that these investments refer to a firm the systematic risk factor of which (i.e. beta coefficient) is equal to...
An investment amount of $10M has to be raised through equity
financing and debt financing. The required debt ratio is 0.40 and
the company tax rate is 35%.
a) The current market price of the company’s common stock is $50
and the current dividend is $5
and the dividend is expected to grow at 5% annual rate. The
floating cost of issuing a common stock is 10%. Preferred stocks of
$100 par value with 10% fixed annual dividend can also...
Investment PortfolioYou are an investment manager for Simple Asset Management, a company that specializes in developing simple investment portfolios consisting of no more than three assets such as stocks, bonds, etc., for investors who like to keep things simple. One of your more popular investments is called the All World Fund and is composed of global stocks with good dividend yields. A client is interested in constructing a portfolio that consists of the All World Fund and the Treasury Index...
1. Bond valuation Callaghan Motors' bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 5 percent. The bonds have a yield to maturity of 10 percent. What is the current market price of these bonds? 2. Expected returns Suppose you won the lottery and had two options: (1) receiving $1 million or (2) a gamble in which you would receive $2 million if a head...
How do you solve for B?
10.1 Consider the following probability distribution of returns estimated for a proposed project that involves a new ultrasound machine: State of the Economy Very poor Poor Average Good Very good Probability of Occurrence 0.10 0.20 0.40 0.20 0.10 Rate of Return -10.0% 0.0 10.0 20.0 30.0 a. What is the expected rate of return on the project? b. What is the project's standard deviation of returns? What is the project's coefficient of variation (CV)...
(b) Suppose a Spanish investor is considering the following investments: Investment A: This is the ordinary share of a matured company. The market price for this security is €40 per share. The company is expected to pay €4 dividend per share one year from now and its expected growth rate for foreseeable future is 4%. Investment B: This is the ordinary share of a fast-growing company. The market price for this security is €40 per share. The company expects to...
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