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##### MBA570_Homework_5

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Instructions: Either type or write your answers directly on this document and submit the completed assignment to your ESO. Show your work for the calculations. If you use additional documents for the calculations, label them with your name and course number (MBA 570) and submit them as well. Each question is worth 10 points.;1. You have found three investment choices for a one-year deposit: 11% APR compounded monthly, 11% APR compounded annually, and 9% APR compounded daily. Assuming there are 365 days in the year;a. The EAR for the first investment choice is __________%. (Round to three decimal places.);b. The EAR for the second investment choice is __________%. (Round to three decimal places.);c. The EAR for the third investment choice is __________%. (Round to three decimal places.);2. Your son has been accepted into college. This college guarantees that your son?s tuition will not increase for the four years he attends college. The first $9,000 tuition payment is due in six months. After that, the same payment is due every six months until you have made a total of eight payments. The college offers a bank account that allows you to withdraw money every six months and has a fixed APR of 9% (semiannual) guaranteed to remain the same over the next four years.;If you intend to make no further deposits and would like to make all of the tuition payments from this account, leaving this account empty when the last payment is made, the amount you need to deposit today is $__________. (Round to the nearest cent.);3. Capital One is advertising a 60-month, 5.99% APR motorcycle loan. If you need to borrow $11,000 to purchase your dream Harley Davidson, your monthly payment would be $__________. (Round to two decimal places.);4. If the rate of inflation is 4.9%, the nominal rate necessary for you to earn a 3.4% real interest rate on your investment is __________%. (Round to one decimal place.);5. Consider a project that requires an initial investment of $96,000 and will produce a single cash flow of $147,000 in 5 years.;a. If the 5-year interest rate is 5.2% (EAR), the NPV in this case is $__________. (Round to the nearest dollar.);b. If the 5-year interest rate is 10.2% (EAR), the NPV in this case is $__________. (Round to the nearest dollar.);c. The highest 5-year interest rate (EAR) such that this project is still profitable is __________%. (Round to one decimal place.);6. Wal-Mart?s five-year borrowing rate is 3.23% and GE Capital?s is 9.81%. Which would you prefer? $500 from Wal-Mart paid today or a promise that the firm will pay you $700 in five years? Which would you choose if GE offered you the same alternative?;The PV of the loan from GE Capital is $__________. (Round to the nearest cent.);The PV of the loan from Wal-Mart is $__________. (Round to the nearest cent.);You would prefer;A. $700 from GE Capital in 5 years and $500 from Wal-Mart today.;B. $500 from GE Capital today and $500 from Wal-Mart today.;C. $500 from GE Capital today and $700 from Wal-Mart in 5 years.;D. $700 from GE Capital in 5 years and $700 from Wal-Mart in five years.;7. Your best taxable investment opportunity has an EAR of 5.8%. Your best tax-free investment opportunity has an EAR of 2.5%. If your tax rate is 32%, the taxable / tax-free (select one) investment opportunity has the higher interest rate with __________%. (Round to one decimal place.);8. Consider the price paths of the following two stocks over six time periods;1;2;3;4;5;6;Stock 1;13;15;17;15;16;19;Stock 2;13;9;6;14;13;16;Neither stock pays dividends. Assume you are an investor with the disposition effect and you bought at time 1 and right now, it is time 3. Assume throughout this question that you do no trading (other than what is specified) in these stocks.;a. Which stock(s) would you be inclined to sell? Which would you be inclined to buy? Which would you be inclined to hold onto? You would sell / buy/ hold stock 1 and sell / buy / hold stock 2. (Select one for each stock.);b. How would your answer change if right now is time 6? You would sell / buy/ hold stock 1 and sell / buy / hold stock 2. (Select one for each stock.);c. What if you bought at time 3 instead of time 1 and today is time 6? You would sell / buy/ hold stock 1 and sell / buy / hold stock 2. (Select one for each stock.);d. What if you bought at time 3 instead of time 1 and today is time 5? You would sell / buy/ hold stock 1 and sell / buy / hold stock 2. (Select one for each stock.);9. Each of the six firms in the table below is expected to pay the listed dividend payment every year in perpetuity.;Firm;Dividend ($ million);Cost of Capital (%/year);S1;9.8;8.4;S2;9.8;12.9;S3;9.8;14.8;B1;98.0;8.4;B2;98.0;12.9;B3;98.0;14.8;a. Using the cost of capital in the table;Firm S1 market value is $__________ million. (Round to one decimal place.);Firm S2 market value is $__________ million. (Round to one decimal place.);Firm S3 market value is $__________ million. (Round to one decimal place.);Firm B1 market value is $__________ million. (Round to one decimal place.);Firm B2 market value is $__________ million. (Round to one decimal place.);Firm B3 market value is $__________ million. (Round to one decimal place.);b. Rank the three S firms by their market values. For a self-financing portfolio that went long on the firm with the largest market value and shorted the firm with the lowest market value, the expected return of a self-financing portfolio is __________%. (Round to one decimal place.);Repeat with the B firms. The expected return of a self-financing portfolio is __________%. (Round to one decimal place.);c. Rank all six firms by their market values. For a self-financing portfolio that went long on the firm with the largest market value and shorted the firm with the lowest market value, the expected return of a self-financing portfolio is __________%. (Round to one decimal place.);d. Repeat part (c) but rank the firms by the dividend yield instead of the market value. The expected return of a self-financing portfolio is __________%. (Round to one decimal place.);10. Consider the following stocks, all of which will pay a liquidating dividend in a year and nothing in the interim.;Market Capitalization;($ million);Expected Liquidating Dividend;($ million);Beta;Stock A;908;1,000;0.74;Stock B;840;1,000;1.54;Stock C;841;1,000;1.37;Stock D;879;1,000;0.76;a. Calculate the expected return for each stock.;The expected return of Stock A is __________%. (Round to two decimal places.);The expected return of Stock B is __________%. (Round to two decimal places.);The expected return of Stock C is __________%. (Round to two decimal places.);The expected return of Stock D is __________%. (Round to two decimal places.);b. The correlation between the expected return and market capitalization of the stocks is __________. (Round to five decimal places.)

Paper#20166 | Written in 18-Jul-2015

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