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In tab P8-14 my formulas are not working to calculate the Standard Deviation, hence CV are also incorrect.  Can you suggest a solution to what I am doing wrong?

LG 1. Rate of return pg 317
Market
Expected Rate
Investment
Value
Cash flowCurrent market values
of Return
1 year ago
X
$20,000
$1,500
$21,000
13%
Y
$55,000
$6,800
$55,000
0% A Calcuate the expected rate of return on investments X and Y usising the most recent years data. B Assuming that the two investments are equally risky, which one should Douglas recommend? Why?
Douglas should recommend investment X because the rate of return is higher. Although there was cash fl
options, investment Y did not change in value over the year, on the open market. Total Rate of
Ct+Pt-Pt-1/Pt-1
Return =
The total rate of return = the total gain or loss experienced on an invetment over a given period. ent years data. commend? Why?
hough there was cash flow in both investment ment over a given period. LG 2 Risk analysis
Expanded product line estimates Range = a measure of an assets risk. The
= Return of an associated optimistic Expansion A Expansion B
Initial investment
$12,000
$12,000
Annual rate of return
Pessimistic
16%
10%
Most likely
20%
20%
Optimistic
24%
30%
Range
8%
20%
A Determine the range of the rates of return for each of the 2 projects.
B Which project is less risky?
Expansion A because it has a lower range. C If you were making the investment decision, which one would you choose? What does this decision imp
I would choose expansion A for two reasons. The range is lower, and the most likely annual rate of retur
that I am more risk adverse than risk neutral or risk seeking. D Assume
that expansion
B's most
likely
outcome is
perfor
year
that all
other fact
remain
the indica
same
No. Because
I am risk adverse
and
accountable
to21%
others
theand
financial
decisions,
the
data still
many reasons pertaining to management, industry, market, economy… the scenario analysis still proves
and comparable annual rate of return to be expansion A. e of an assets risk. The greater the range, the greater the risk.
an associated optimistic investment outcome - pessimistic investment outcome t does this decision imply about your feelings toward risk?
kely annual rate of return is the same as expansion B. This reveals er
fact
remain
the indicates
same. Does
to part c This
nowcould
change?
ons,
the
data still
the your
rangeanswer
to be greater.
be for
nario analysis still proves the investment with the least amount of risk Coefficient of variation
Need for increased production capacity..
Alternative
A
B
C
D Expected
return
20%
22%
19%
16% Standard
deviation
of return
7%
10%
6%
5.5% Standard deviation = the most common stat
dispersion related to t
risk.
Coefficient of variatio greater
standardthe
deviation/exp
Coefficient
of variation
35.00%
43.18%
31.58%
34.38% A Calculate the coefficient of variation for each alternative. B If the firm wishes to minimize risk, which alternative do you recommend?
Upon a cursory look either option A or D have the lower coefficients which indicate that they are less volat
lowest coefficient variation, alternative A offers a 4% higher expected total return with a 1.5% greater stan
variation. With these considerably marginal variations, alternative A offers the greatest potential for return the most common statistical method to evaluate risk. Measure the
dispersion related to the expected value. The higher the value, the
greater
risk.
standardthe
deviation/expected
return. Useful when looking at risks of assets with differing returns. hat they are less volatile than C and D. Although alternative D is the
ith a 1.5% greater standard deviation and .62% higher coefficient
test potential for returns to finance the need for increased production. LG 3 Portfolio analysis
Expected return
Year
2016
2017
2018
2019 Asset F Asset G
16%
17%
17%
16%
18%
15%
19%
14% Alternativ
e
Asset H Investmen
t
14%
1
15%
2
16%
3
17% Investment
Blend
100% asset F
50% asset F and
50% asset F and
Total D On the basis of the findings, which of the three investment alternatives do I recommend? Why? Expected Return
Alternativ Alternativ Alternativ
e
e
e
1
2
3
16.00%
16.50%
15.00%
17.00%
16.50%
16.00%
18.00%
16.50%
17.00%
19.00%
16.50%
18.00%
70.00%
66.00%
66.00% ves do I recommend? Why? Expected
Standard
Coefficient
Portfolio
deviation
of Variation
Return
17.50% 0.00016667 0.000952381
16.50%
###
###
16.50% 0.00016667 0.001010101 Expected return = Ct + Pt-1 / Pt-1
the total gain or loss over a given period of time.
Standard deviation =the dispersion around the expected value.
the higher the SD the greater the risk.
the return x the probability of the occurrence of the outcome / the number of out
Coefficient of Variati standard deviation / return
the higher the CV the greater the volitiliy. tcome / the number of outcomes considered. LG 5 Interpreting Beta
10% market decrease
Asset
Beta10% market increase
A
0.5
B
1.6
C
-0.2
D
0.9
A What impact would a 10% increase in the market return be expected to have on each asset's ret B What impact would a 10% decrease in the market return be expected to have on each asset's re C If you believed that the market return would increase in the near future, which asset would you p D If you believed that the market return would decrease in the near future, which asset would you o have on each asset's return? o have on each asset's return? e, which asset would you prefer? Why? e, which asset would you prefer? Why? LG 5 Personal Finance Problem
Portfolio betas
Evaluate two possible portfolios.
Portfolio Weights
Beta
Asset Asset betaPortfolio APortfolio BPortfolio APortfolio B
1
1.3
10%
30%
2
0.7
30%
10%
3
1.25
10%
20%
4
1.1
10%
20%
5
0.9
40%
20%
Totals
100%
100%
B Compare the risks of these portfolios to the market as well as to each other. Which portfolios h other. Which portfolios is more risky? LG 6 Capital asset pricing model (CAPM) For each of the cases shown in the following table use the capital asset pricing model to find the re
Case
A
B
C
D
E Risk-free
rate,
Rf
5%
8%
9%
10%
6% Market return, Beta,
Required Return
rm
B
8%
1.3
13%
0.9
12%
-0.2
15%
1
10%
0.6 cing model to find the required return. LG 1, concept of cost of capital
Analyzing investment decision making procedures.
investment involves building new facilities in different regions, North and South.
Basic variables North
South
Cost
$6,000,000
$5,000,000
Life (years)
15
15
Expected return
8%
15%
Least-cost financing
Source
Debt
Equity
Cost (after-tax)
7%
16%
Decision
Action
Invest
Don't invest
Reason
8% > 7% cost 15% < 16% cost
A An analyst evaluating the North facility expects that the project will be financed by debt that B Another analyst assigned to study the South facility believes that funding for that project will C Explain why the decisions in parts a and b may not be in the best interests if the firm's invest D If the firm maintains a capital structure containing 40% debt and 60% equity find its weighte E If both analysts had used the weighted average cost calculated in part d, what recommendat F Compare and contrast the analysts initial recommendations with your findings in part e. Whi be financed by debt that costs the firm 7%. What recommendation do you think this analyst will make rega nding for that project will come form the firm's retained earnings at a cost of 16%. What recommendation d terests if the firm's investors. % equity find its weighted average cost using the data in the table. art d, what recommendations would they have made regarding the North and South facilities? ur findings in part e. Which decision method seems more appropriate? Why? his analyst will make regarding the investment opportunity? What recommendation do you expect the this analyst to make regarding the investments? h facilities? LG 3 Cost of debt using both methods.
Warren Industries can sell 15 - year $1,00 par value bonds paying annual interest at 12$ coupon ra
Warren Industries
Bond Value
$1,000
Maturity, years
15
Annual interest
12%
Market value
$1,010
Flotation
$30
Tax bracket
40%
A Find the net proceeds from sale of the bond, Nd. rest at 12$ coupon rate. As a result of current interest rates, the bonds can be sold for $1,010 each. Flotatio for $1,010 each. Flotation costs of $30.00 per bond will be incurred in this process. The firm is in the 40% s. The firm is in the 40% tax bracket. LG 5. Cost of common stock equity: CAPM
J&M Corporation
Comon stock
beta
1.2
Risk-free ra
6%
Market return
11%
A Determine the risk premium on J&M common stock. B Determine the required return that J&M common stock should provide. C Determine J&Ms cost of common stock equity using the CAPM. LG 6. WACC: Book wights and market weights.
Webster Company
Source of capital
Book valueMarket valueAfter-tax cost
Long-term debt
$4,000,000
$3,840,000
6%
Preferred stock
$40,000
$60,000
13%
Common stock equit $1,060,000
$3,000,000
17%
Totals $5,100,000
$6,900,000
A Calculate the weighted average cost of capital using book value weights. B Calculate the weighted average cost of capital using market value weights. C Compare the answers obtained in parts a and b. Explain the differences. LG 3, 4, 5, 6. Calculation of Individual costs and WACC
Measure the cost of each specific type of capital as well as the weighted average cost of capital.
Weighted average
Long-term debt
40%
Preferred stock
10%
Common stock equit
50%
Tax rate
40% verage cost of capital. Forecasted Returns, Expected Values, and Standard Deviations for
Assets A, B, and C and Portfolios AB, AC, and BC Year
2015
2016
2017
2018
2019
2020
2021 Statistics:
Expected valu
Standard devi A
10%
13%
15%
14%
16%
14%
12% Assets
B
10%
11%
8%
12%
10%
15%
15% C
12%
14%
10%
11%
9%
9%
10% AB
10.0%
12.0%
11.5%
13.0%
13.0%
14.5%
13.5% Portfolios
AC
11.0%
13.5%
12.5%
12.5%
12.5%
11.5%
11.0% 13%
2% 12%
3% 11%
2% 13%
1% 12%
1% Note: In each two stock portfolio, the weights of each s
50%
50%
50% eviations for
BC rtfolios
BC
11.0%
12.5%
9.0%
11.5%
9.5%
12.0%
12.5% 11%
1% Chapter 9 The Cost of Capit
Nova Corporation
Debt
Net Proceeds
maturity
coupon rate
par
$
coupon payme $ 10
6.50%
1,000
65 Required bond price
Flotation percent
Flotation cost
Net Proceeds
Trial and error YTM End of Year(s) Cash Flow
0
$
960
1 - 10
$
(65)
10
$
(1,000) $
$
7.0714% $ $ PV
960.00
(455.03)
(504.97)
0.00 (The YTM of 7.0714% equates the NPV to z Before-tax Cost of Debt
Tax rate
After-tax Cost of Debt Par value
$
Annual percen
Annual divide $ 100.00
6%
6.00 980
2.00%
20
960 Preferred Stock
Expected sale price
Flotation cost
Net Proceeds
Cost of Preferred Stock 7.0714%
40.00%
4.24% (a) $
$
$ 102.00
4.00
98.00
6.12% (b) Common Stock
Gordon Model
Expected divi $
Expected grow
Current price $
Flotation cost $
Adjusted Pric $ 3.25
5%
35.00
2.00
33.00 Cost of Common Stock 14.85% (c) Weighted Average Cost of Capital
Weight in debt
Weight in pref
Weight in com
Sum of weight 0.35
0.12
0.53
1.00 WACC 10.09% (d) 4% equates the NPV to zero)

 


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