Cash Flow and Risk Free Asset Essay

625 Words Nov 22nd, 2014 3 Pages
1. A company needs to elect 10 directors. A shareholder owns 80 shares. What is the maximum number of votes that he or she can cast for a favorite candidate under (10 points)
a. Straight voting? 80
b. Cumulative voting? 80*10 = 800

2. “If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio by throwing darts at the Wall Street Journal.” Explain why this is not so. (10 points) This strategy does not consider risk.

3. The NuPress Valet Company has an improved version of its hotel stand. The investment cost is expected to be 72 million dollars and will return 13.50 million dollars for 5 years in net cash flows. The ratio of debt to equity is 1 to 1. The cost of equity is 13%, the
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Let PV = 2000, n=5, I=16%, PMT=? = 610.82=OCF; Substituting above find Q=2519.

6. Use the probability distribution to answer the following questions: (30 points) Return on Return on
State Prob Security A Security B Boom .6 15% 8% Bust .4 5% 20% Expected Return 11% 12.8% Standard Deviation 4.9% 5.88%
a. What is the expected return on Security B? 12.8%
b. What is the expected return on a portfolio that is 40% invested in A and 60% invested in B? 12.08%
c. What is the standard deviation of Security A? 4.9%
d. What is the expected return on a portfolio that is equally split among A, B and the risk free asset? The expected return on the risk free asset is 4%. 9.27%
(11+12.8+4)/3
e. What is the covariance between A and B? -28.8%%
Cov = .6(15-11)(8-12.8)+.4(5-11)(20-12.8)
f. What is the standard deviation of a portfolio with weights of .25 in security A and the remainder in security B? 3.2%
Portfolio Standard Deviation = .252(4.9)2+.752(5.88)2+2*.25*.75*(-28.8)
Or = .6(9.75-12.35)2+.4(16.25-12.35)2

7. You are evaluating a project for The Ultimate recreational tennis racket. You estimate the sales price of The Ultimate to be $400 and sales volume to be 1,000 units in year 1, 1,250 units in year 2, and 1,325 units in year 3. The project has a 3-year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000, which is depreciated
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