Investments Homework Help

1. Capital budgeting. Calculate initial investment, appropriate cash flows, and use the net present value criteria to evaluate the following investment opportunity: a. Initial investment: b. Intermediate cash flows (or their PV) C. Net present value: d. Accept/reject? Why?

FIN 352 INVESTMENTS Written Assignment #3 Descriptions: In the exercise, students will perform stock valuation using the price relative approach and learn how to use stock screening tools to build a peer group to assist in the valuation analysis.

1. Select three different corporate bonds from three different companies. The bonds must have years to maturity at least 5 years apart from each other. One of the bonds should be issued by the company evaluated by your group in the first written assignment. a. A good bond data resource is: http://finra-markets.morningstar.com/ 2. Calculate the duration of each bond and the duration of a bond portfolio investing equally in the three bonds. 3. For reference purposes, select an additional two bonds issued by the companies from step 1 that match the longest maturity bond in your portfolio (i.e., you will analyze 5 bonds in total) a. Example: In step 1 you use a 2030 bond for Co. A, a 2040 bond for Co. B and a 2045 bond for Co. C. So, you choose a 2045 bond from Co. A and a 2045 bond from Co. B to be able to compare to the already selected 2045 bond from Co. C. b. Provide the key details for the additional bonds including spread to treasury. These two bonds are not included in your portfolio but will be useful in your overall analysis. 4. Your research indicates: a. Treasury bond rates will increase, and, b. The spread between corporate bonds and Treasury bonds will widen. 5. Forecast a change in yields for the three bonds in your portfolio. Discuss the properties of your three-bond portfolio with respect to returns and risk (interest rate risk and default risk). Including: What assumptions drive your change in treasury bond rates? What assumptions drive your change in spreads for each bond? How would you change the weights of the bonds in the portfolio (from equal) to take advantage of your research? How would you quantify the impact? What happens to the interest rate risk and default risk in your portfolio?

15 The "father" of modern portfolio theory is: (a) Markowitz. (b) Friedman. (c) Samuelson. (d) Sharpe. 16. To describe the random variable of the portfolio rate or return, the investor needs (a) mean and coefficient of correlation. (c) only the expected value. (b) median and standard deviation. (d) expected value and standard deviation. 17. Portfolio Á has an expected return of 16% with a standard deviation of 8%. Portfolio B has an expected return of 12% with a standard deviation of 7%. (a) Portfolio A has a lower risk/return. (b) Portfolio B has a larger expected terminal wealth. (c) The portfolios have the same risk/return. (d) Portfolio B has a more certain return. 18 For an investor's indifference curve (a) each portfolio on the curve has the same standard deviation. (b) all portfolios on the curve are equally desirable. (c) he will choose the portfolio where his set of curves intersect. (d) he will prefer a portfolio that lies to the "southeast" of the curve. 19. The development of an investor's indifference curves is based on (b) correlation theory. (c) economic theory. (a) cognitive psychology. (e) probability theory. (d) utility theory. 20. Modern Portfolio Theory assumes (a) risk averse. (c) not concerned with risk. investors are (c) is risk neutral. (d) is risk-seeking. (b) risk seekers. (d) risk neutral. 21. Assuming investor non-satiation, an investor (a) will choose the portfolio with the lowest risk. (b) will choose the portfolio with the highest return for a given level of risk.

5) Denise is considering taking one long trip where she will go from the USA to Mexico(MXP) and then to Italy and then to Britain (GBP). If she starts with $5,000 USD,how many MXP will she receive, without a currency exchange fee? While in Mexico Denise spends 30,000 MXP, how many Euros will she receive when she arrives in Italy? If she spends 1,000 Euros in Italy, then hos many GBP will she receive when she converts her money into GBP, without a currency exchange fee? If Denise spends 1000 GBP while in Britain, how many USD will she receive when she converts her money back into USD, without a currency exchange fee? (30 points)

3) Jake's Farm Park issued a 20 year, 5.8% quarterly bond 5 years ago. The bond currently sells for 95% of its face value. The company's tax rate is 21%. What is the pre-tax and after-tax cost of debt? (10 points)

The current price of the Exchange Traded Fund YHT, which does not pay dividends, is $11.75 per share. Your position, worth 9400 dollars,consists entirely of YHT shares. The effective 3-month interest rate is 0.75% and futures contracts on YHT with 3-month maturity are trading at fair value. To protect your position against potential losses, you decide to partially hedge by selling 720 YHT futures that expire in 3 months. You have built a proprietary model according to which the 3-month net return on YHT will be between -22% and 23%. What is the lowest possible value of your combined position in 3 months based on your model?

2) Courtney's car parts company common stock has a beta of 1.2. If the risk free rate's 3.3% and the expected return in the market is 12%. What is the company's cost of equity? (10 points)

O Bond Ratings and Flotations Costs. Why do non investment-grade bond shave much higher direct costs than investment-grade issues?

Debt versus Equity Flotation Costs. Why are the costs of selling equity so much larger than the costs of selling debt?

The current price of the HD stock is $47.5 and the 6-month spot rate is1.8% (expressed as APR). What is the fair price of a 6-month futures contract on 600 shares of HD if the HD stock pays a $0.48 dividend just before the futures' maturity?

Stock YMH is trading at $11.5 per share and is scheduled to pay a$0.115 dividend per share in six months. The effective 6-month interest rate is 1.5% and the YMH forward contract with 6-month maturity is-trading at $12.14 (the forward contract expires right after the dividend is paid). If you have $4600 now, but cannot borrow, what is the maximum riskless profit you can generate in six months (i.e., at maturity)?

a. Explain how the investor can use the above option(s) to construct a protective put strategy. b. If the stock price stays at $80 on the option maturity date, what would happen? In this case, what is the total portfolio value (or payoff) of the investor? What is the total profit/loss of the protective strategy? c. If the stock price goes down to $75 on the option maturity date, what would happen?In this case, what is the total portfolio value (or payoff) of the investor? What is the total profit/loss of the protective strategy?

Q1: (Covered Call and Protective Put) An investor buys 1 share of stock XYZ at $80 butnow has a short term bearish view on the stock. The investor sees that the followingoptions are traded with high liquidity and considers some option strategies. (In youranswers, assume that options are traded at the mid-point of bid and ask prices and thetransaction costs are zero.) a. Explain how the investor can use the above option(s) to construct a covered call strategy. b. If the stock price stays at $80 on the option maturity date, what would happen? In this case, what is the total portfolio value (or payoff) of the investor? What is the total profit/loss of the covered call strategy? c. If the stock price goes up to $85 on the option maturity date, what would happen? In this case, what is the total portfolio value (or payoff) of the investor? What is the total profit/loss of the covered call strategy?

Considering discount rate of 8%, calculate NPV,Benefit Cost Ratio, and Present Value Ratio for the following investment and explain if it is a good investment. C: Cost, I:Income, L: Salvage value \text { ó, calculate NPV, } Value Ratio for the n if it is a good

Consider a non-dividend paying stock with current price $300.11. The1-year spot rate is 2.5% and a futures contract on the stock with maturity 1 year is trading at $313.77. Suppose you borrow so that you can buy 680 shares of the stock. Moreover, you sell 680 futures contracts. The payoff of your position at maturity is

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1) The following two stocks are available for purchase. Utilize this information to answer questions A thru J. (40 points) A) What is the expected return on Stock A & Stock B? B) What is the standard deviation of Stock A & Stock B? C) With a mix of 60% Stock A and 40% Stock B what is the portfolio return? D) What would the mix of the two stocks be to have a portfolio return of 7.5%? E) If you were trying to minimize your portfolio risk what would be your mix of the two stocks? F) Which of the two stocks has higher total risk? G) Which of the two stocks has a higher Reward-to-Risk Ratio? H) What return would you expect on each stock based on the Capital Asset Pricing Model? 1) Are the two stocks under or over-valued based on the Capital asset Pricing Model? J) What mix of the two stocks would you choose?

) IPO Underpricing. In 1980, a certain assistant professor of finance bought12 initial public offerings of common stock. He held each of these for approximately one month and then sold. The investment rule he followed-was to submit a purchase order for every firm commitment initial public-offering of oil and gas exploration companies. There were 22 of these-offerings, and he submitted a purchase order for approximately $1,000 in-stock for each of these companies. With 10 of these, no shares were allocated to the assistant professor. With 5 of the 12 offerings that were purchased, fewer than the requested number of shares were allocated. The year 1980 was very good for oil and gas exploration company owners:On average, for the 22 companies that went public, the stocks were selling for 80 percent above the offering price a month after the initial offering date.The assistant professor looked at this performance record and found that the$8,400 invested in the 12 companies has grown to $10,000, representing a return of only about 20 percent (commissions were negligible). Did he have bad luck, or should he have expected to do worse than the average initial public offering investor? Explain

An investment project will require development costs of $120 million at time zero and $80 million at the end of second year from time zero with incomes of $25million per year at the end of years 1, 2 and 3 and incomes of $60 million per year at the end of years 4through 10 with zero salvage value predicted at the end of year 10. Calculate the rate of return for this project.