Skyline University College MBA Program Financial Management –Fall 2017 Class Par
ID: 3309351 • Letter: S
Question
Skyline University College
MBA Program
Financial Management –Fall 2017 Class Participation- 10 marks
Name:
Note: write the formula for all your answers and show all the calculations.
Question 1: (5 marks)
Consider the following information about three stocks:
State of Economy Probability of State of Economy Rate of Return if State Occurs
Stock A Stock B Stock C
Boom 0.35 0.24 0.36 0.55
Normal 0.50 0.17 0.13 0.09
Bust 0.15 0.00 - 0.28 - 0.45
1. If your portfolio is invested 40 percent each in stock A and B and 20 percent in stock C, calculate the following:
a. The portfolio expected return?
b. The portfolio Standard Deviation.
2. If the expected T-bill (risk free) rate is 3.8 percent, what is the expected risk premium on the portfolio?
Question 2: (5 marks)
Given the following information for Even-flow Power Co:
Debt:
8,000 6.5 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 92 percent of par; the bonds make semiannual payments.
Common Stock:
250,000 shares outstanding, selling for $27 per share, the beta is 1.05.
Preferred Stock:
15,000 shares of 5 percent preferred stock outstanding, currently selling for $93 per share
Market:
8 percent market risk premium and 4.5 percent risk-free rate.
Calculate the Weighted Average Cost of Capital (WACC), assuming the company’s tax rate is 35 percent.
please help me find the correvt answers for my home work thank u
Explanation / Answer
Solution
Back-up Theory
Let X represent the return and p(x) represent the probability of the return x, then
Expected return, µ = xp(x), summed over all possible values of x………. (1)
Variance, 2 = (x - µ)2p(x) summed over all possible values of x………. (2)
Also equal to {x2p(x) - µ2summed over all possible values of x………. (3)
Q1 (a)
State of Economy
Boom
Normal
Bust
y = x.p(x)
Portfolio
Share w
yw
y2w
Probability of State of Economy
0.35
0.5
0.15
-
Rate of Return for
Stock
A
0.24
0.17
0
0.169
0.4
0.0676
0.0114244
B
0.36
0.13
- 0.28
0.149
0.4
0.0596
0.0088804
C
0.55
0.09
- 0.45
0.170
0.2
0.0340
0.00578
Total
-
-
-
-
0.1612
0.0260848
Portfolio Expected Return, µ = yw = 0.1612 ANSWER
Part (b)
Variance of Return, 2 = y2w - µ2 = 0.0260848 – 0.02598544 = 0.00009936
Standard Deviation, = sqrt(0.00009936) = 0.00997 ANSWER
State of Economy
Boom
Normal
Bust
y = x.p(x)
Portfolio
Share w
yw
y2w
Probability of State of Economy
0.35
0.5
0.15
-
Rate of Return for
Stock
A
0.24
0.17
0
0.169
0.4
0.0676
0.0114244
B
0.36
0.13
- 0.28
0.149
0.4
0.0596
0.0088804
C
0.55
0.09
- 0.45
0.170
0.2
0.0340
0.00578
Total
-
-
-
-
0.1612
0.0260848
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