PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 4, Problem 33PS
DCF valuation
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Stock A has expected return of 10 percent per year and stock B has expected return of 20 percent. If 40 percent of a portfolio funds are invested in stock A and the rest in stock B. What is the expected return on the portfolio of stock A and Stock B? (please state the formula and show your workings)
A fund manager has a well-diversified portfolio that mirrors the performance of the S&P 500and is worth $240 million. The value of the S&P 500 is 4,800, and the portfolio manager wouldlike to obtain insurance against a reduction of more than 3% in the value of the portfolio over thenext four months. The risk-free interest rate is 6% per annum. The dividend yield on both theportfolio and the S&P 500 is 4%, and the volatility of the index is 35% per annum. What amount(in dollars) of the portfolio should be sold and kept in risk-free securities for portfolio insurance?
Suppose that a portfolio management company manages an investment fund. The fund manager observes a bond in the market and intends to add it to the fund portfolio. The bond has a $100.000 par value, 10% coupon rate (coupon payments are annual) and a 2-years maturity. The business model is to “hold-until-maturity”. The company purchases the bond at the beginning of the year when the market yields are 12%. After exactly 1 year of investment, market yields increase to 14%. What would be the approximate profit or loss amount in the income statement for that 1-year period?
A) $ 1,594 loss
B) $ 1,723 lossC) $ 9,871 profit
D) $ 10,191 profitE) Other (please specify)
Chapter 4 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 4 - Stock markets True or false? a. The bid price is...Ch. 4 - Stock quotes a. I would like to sell 1000 shares...Ch. 4 - Stock quotes Here is a small part of the order...Ch. 4 - Stock quotes Go to finance.yahoo.com and get...Ch. 4 - Valuation by comparables Look up P/E and P/B...Ch. 4 - Dividend discount model True or false? a. All...Ch. 4 - Dividend discount model Respond briefly to the...Ch. 4 - Dividend discount model Company X is expected to...Ch. 4 - Dividend discount model Company Y does not plow...Ch. 4 - Constant-growth DCF model Company Zs earnings and...
Ch. 4 - Prob. 11PSCh. 4 - Constant-growth DCF model Pharmecology just paid...Ch. 4 - Prob. 13PSCh. 4 - Cost of equity capital Under what conditions does...Ch. 4 - Cost of equity capital Each of the following...Ch. 4 - Two-stage DCF model Company Z-prime is like Z in...Ch. 4 - Two-stage DCF model Consider the following three...Ch. 4 - Two-stage DCF model Company Qs current return on...Ch. 4 - Two-stage DCF model Compost Science Inc. (CSI) is...Ch. 4 - Growth opportunities If company Z (see Problem 10)...Ch. 4 - Growth opportunities Alpha Corps earnings and...Ch. 4 - Prob. 24PSCh. 4 - Prob. 25PSCh. 4 - Prob. 26PSCh. 4 - Horizon value Suppose the horizon date is set at a...Ch. 4 - Valuing a business Permian Partners (PP) produces...Ch. 4 - Valuing a business Construct a new version of...Ch. 4 - Valuing a business Mexican Motors market cap is...Ch. 4 - Valuing a business Phoenix Corp. faltered in the...Ch. 4 - Constant-growth DCF formula The constant-growth...Ch. 4 - DCF valuation Portfolio managers are frequently...Ch. 4 - Valuing a business Construct a new version of...
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- Your portfolio consists of Php100,000 invested in a stock that has a beta = 0.8, Php150,000 invested in a stock that has a beta = 1.2, and Php50,000 invested in a stock that has a beta = 1.8. The risk-free rate is 7 percent. Last year this portfolio had a required rate of return of 13 percent. This year nothing has changed except for the fact that the market risk premium has increased by 2 percent (two percentage points). What is the portfolio’s current required rate of return? Choices 16.25% 11.45% 16.33% 15.33%arrow_forwardA fund manager has a portfolio worth $100 million with a beta of 1.5. The manager is concerned about the performance of the market over the next two months and plans to use three-month futures contracts on the S&P 500 to hedge the risk. The current level of the index is 2250, one contract is on 250 times the index, the risk-free rate is 2%, and the dividend yield on the index is 1.7% per year. (Assume all the rates are continuously compounded.) What is the theoretical futures price for the three-month futures contract? What position should the fund manger take to eliminate all exposure to the market over the next two months? Calculate the effect of your strategy on the fund manager’s returns if the level of the market in two months is 2,000, 2,200, 2,500, 2,800, and 3,000.arrow_forwardA mutual fund with K100 million in assets at the start of the year and with 10 million shares outstanding invests in a portfolio of stocks that provides no income but increases in value by 10 %. What is the rate of return in the fund? If a fund has an initial NAV of K20 at the start of the month makes income distributions K0.15 and capital gain distributions of K0. 05 and ends the month with NAV of K20.10. Calculate the monthly rate of return. An equity fund has a front end load of 4 % and special fees of 0.5% annually as well as back-end fees that start at 5 % and fall by 1 % for each full year the investor holds the portfolio until the fifth year. Assuming the rate of return on the fund net of operating expenses is 10 % annually, what will be the value of a K10 000 investment in the equity fund shares if the shares are sold after 1 year, 4 years and 10 years?arrow_forward
- A fund manager has a portfolio worth $55 million with a beta of 1.37. The manager is concernedabout the performance of the market over the next five months and plans to use six-month futurescontracts on the S&P 500 to hedge the risk. The current level of the index is 3,000, one contract ison 250 times the index, the risk-free rate is 5% per annum, and the dividend yield on the index is3% per annum. The current 6-month futures price is 3,030. The fund manager takes a position inS&P 500 index futures to eliminate half of the exposure to the market over the next five months.Calculate the effect of your strategy on the fund manager’s returns if the level of the market in fivemonths is 2,950 and one-month futures price is 1% higher than the index level in five months.arrow_forwardYour portfolio consists of the following investment in stock with corresponding beta: · P200,000 in a 0.8 beta stock · P100,000 in a 1 beta stock · P100,000 in a 1.2 beta stock Last year, the required rate of return of this portfolio is 20%. The quoted risk-free rate on the short-term government issued security is 5%. This year the only change noted is the increased by 1% on the market risk premium. What is the current required rate of return of this portfolioarrow_forwardManagement has recently announced that expected dividends for the next four years will be as follows: Year Dividend 1 GH¢2.50 2 GH¢3.25 3 4 GH¢4.00 GH¢5.00 For the subsequent years, management expects the dividend to grow at 6 percent annually. If the risk-free rate is 7.5 percent, the return on the market is 13.5 percent, and the firm's beta is 1.6, what is the maximum price that you should pay for this stock?arrow_forward
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