Investment and Net Asset Value

has an expected return of 16 percent and a standard deviation of 40 percent. Also assume the correlation

You recently purchased a stock that is expected to earn 12% in a booming economy, 8% in a normal economy and lose 5% in a recessionary economy. There is a 15% probability of a boom, a 75% chance of a normal economy, and a 10% chance of a recession. What is your expected rate of return on this stock?

Problem 1: Jonathon Barrs is a manager for Easy Manufacturing, LLC. He wishes to evaluate three possible investments. These investments are for the purchase of new machine tools from Germany, Japan, and a local US manufacturer. The firm earns 10% on its investments and they have a risk index of 5%. The chart below lays out the expected return and expected risks of the three projects.

investor should invest $369.35 in asset A and the remaining $630.65 in asset B. The

A firm has an expected dividend next year of $1.20 per share, a zero growth rate

2. St. Luke’s Convalescent Center has $200,000 in surplus funds that it wishes to invest in marketable securities. If transaction costs to buy and sell the securities are $2,200 and the securities will be held for three months, what required annual yield must be earned before the investment makes economic sense?

year 2 is $23.64 or $33.64. In each case the market expects the firm to earn 10%

b. What would Mrs. Beach have to deposit if she were to use common stock and earned an average rate of return of 11%.

2. What would have been Martin’s return for years 2000, 2001, and 2002 if his portfolio had remained with its initial holdings?

RE = [$1.30 × (1 + 0.060)] / $36.80 + 0.060 = 0.097446 = 9.74 percent (3)

Dividends were assumed to grow at the geometric average of the last 6 years, 20.28%. P0 = D2 Dn Pn D1 + + ··· + + 1 2 n (1 + Ke ) (1 + Ke ) (1 + Ke ) (1 + Ke )n $1.58 $2.28 $87.31 $1.31 + + ··· + + = 1 2 4 (1 + 7.0%) (1 + 7.0%) (1 + 7.0%) (1 + 7.0%)4 = $72.53

Why is T-bill’s return independent of the state of the economy? Do T-bill’s promise a completely risk-free return? Explain

stock price of $6.50, and a volatility of 40% (as indicated in the assignment question), yields values of

d) If Tyler is estimating a gross profit margin, or contribution margin, of 40 percent, how much of the receivables balance must actually

(10 points) Mango, Inc. has had debt with market value of $1 million that has paid a 6% coupon and has had an expiration date that is far, far away. The expected annual earnings before interest and taxes for the firm are $2 million and the firm has not grown, nor does it have plans for any growth. The firm however has just raised more equity to retire all its debt. If the required rate of return to equity-holders (after the capital structure change) is now 20%, what is the market value of the firm? Assume there are no taxes. (Enter just the number without the $ sign or a comma; round to the nearest whole dollar.)