Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 26, Problem 26PS
Hedging Price changes of two gold-mining stocks have shown strong positive correlation. Their historical relationship is
Average percentage change in A = .001 + .75 (percentage change in B)
Changes in 8 explain 60% of the variation of the changes in A (R2 = .6).
- a. Suppose you own $100,000 of A. How much of B should you sell to minimize the risk of your net position?
- b. What is the hedge ratio?
- c. Here is the historical relationship between stock A and gold prices:
Average percentage change in A = −.002 + 1.2 (percentage change in gold price) If R2 = .5, can you lower the risk of your net position by hedging with gold (or gold futures) rather than with stock B? Explain.
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(c)
Consider information given in the table below and answers the question asked thereafter:
iv. Calculate covariance and coefficient of correlation between the returns of the stocks A and B.v. Now suppose you have $100,000 to invest and you want to a hold a portfolio comprising of $35,000 invested in stock A and remaining amount in stock B. Calculate risk and return of your portfolio.
(d)
Firm A reports a Profit Margin of 6.5% and a Total Asset Turnover Ratio of 3.25. Their total asset level is $8,500,000. Assume there are 700,000 shares outstanding and the PE ratio is 11. Also, assume the Return on Equity is 16%. Based on this, calculate the MV/BV ratio.
If you pay K95 per share, what is the most money you could lose over the year? (3 marks)
(e) Stock Initial Price Final Price Shares (millions)
ABC K25 K30 20
XYZ K100 K90 1
(1) Determine the portfolio initial and final value and the percentage change in portfolio value
(2) Calculate the initial and final price-weighted index and the percentage change in the index. Explain the weaknesses of the measure above
(4) Calculate the market-value weighted index and the percentage change in the index. Compare that to the return of a portfolio that holds K500 of ABC stock for every K100 of XYZ stock(an index portfolio)
Suppose XYZ were to do a share split of two to one and the share price falls to K50.
(1) Calculate the new divisor that would leave the index unchanged. Explain why this is done.
What is a share split, and why is this done? Discuss
Suppose XYZ’s final price increases to K110, while ABC price, calculate the percentage change in the price weighted index of the two stocks. Compare that to the percentage return of a portfolio that holds one share in each company
(4) Assume that it is held to maturity and the company does not default on it.
Chapter 26 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 26 - Vocabulary check Define the following terms: a....Ch. 26 - Prob. 2PSCh. 26 - Prob. 3PSCh. 26 - Futures prices Calculate the value of a six-month...Ch. 26 - Prob. 5PSCh. 26 - Prob. 6PSCh. 26 - Prob. 7PSCh. 26 - Prob. 8PSCh. 26 - Prob. 9PSCh. 26 - Prob. 10PS
Ch. 26 - Hedging You own a 1 million portfolio of aerospace...Ch. 26 - Prob. 12PSCh. 26 - Prob. 13PSCh. 26 - Catastrophe bonds On some catastrophe bonds,...Ch. 26 - Futures contracts List some of the commodity...Ch. 26 - Prob. 16PSCh. 26 - Prob. 17PSCh. 26 - Prob. 18PSCh. 26 - Prob. 20PSCh. 26 - Prob. 21PSCh. 26 - Prob. 22PSCh. 26 - Hedging What is meant by delta () in the context...Ch. 26 - Futures and options A gold-mining firm is...Ch. 26 - Prob. 25PSCh. 26 - Hedging Price changes of two gold-mining stocks...Ch. 26 - Risk management Petrochemical Parfum (PP) is...Ch. 26 - Total return swaps Is a total return swap on a...Ch. 26 - Prob. 30PSCh. 26 - Prob. 31PSCh. 26 - Prob. 32PSCh. 26 - You are a vice president of Rensselaer Advisers...
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