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GM 4202 Financial Management Assignment




Question;Please show all necessary steps and formulas neatly in the space provided. Acorrect answer/decision with no workings shown may be penalized. Partial creditwill be given to incomplete solutions that make use of the right concepts.Your Score: ____________1.You are managing a portfolio of 8 different stocks (Stock A to H) that are held in equalamounts. The current beta of the portfolio is 1.6, and you want to create a new portfoliowith a beta of 1.5.a. If the required rate of return on the market is 12% and the risk free rate is 3%, whatis the required rate of return on this new portfolio? (4 points)b. If the covariance of the market portfolio and this new portfolio is 375, what isstandard deviation of the market portfolio? (5 points)c. You could create the new portfolio by keeping stocks B to H but replacing stock Awith another stock. The beta of Stock A is 2.0. What does the beta of thereplacement stock has to be to produce a beta of 1.5? (5 points)22.Consider the following data:EG&GReturn (%)Standard deviation (%)Correlation coefficientGF121816240.30a)What is the expected return of the portfolio with 40% wealth invested in EG&Gand 60% wealth invested in GF? (2 points)b)What is the standard deviation of the portfolio with 40% wealth invested in EG&Gand 60% wealth invested in GF? (4 points)c)What is the standard deviation of the portfolio with 40% of your wealth in T-billand 60% of your wealth in the portfolio in part (b)? (4 points)d)What is the standard deviation if the investment in the 2-stock portfolio in part (b)(no investment in T-bill) is financed at 50% margin, i.e., the investor puts up only50 percent of the total amount and borrows the balance from the broker? (4 points)33.The Heavenly Resort is unlevered and is valued at $2,400,000. It is currently decidingwhether including debt in their capital structure would increase their value. Theunlevered cost of equity is 16%. Under consideration is issuing $600,000 in newperpetual debt with a 12% interest rate. Heavenly Resort would repurchase $600,000 ofstock with the proceeds of the debt issue. Heavenly Resort?s effective marginal taxbracket is 40%.a.What will the value of the firm after the restructuring? How much of that willbe the value of debt and how much will be the value of equity? (5 points)b.What will be the cost of equity after the restructuring? (5 points)c.What will Heavenly Resort?s new WACC be? (5 points)44.The Wonderland Company, a privately held firm, hired you as a consultant to figure out itsowner?s risk and expected return. You identified Speedy-Track as a comparablecompetitor. Speedy-Track has an equity beta of 1.86 and a debt-to-equity ratio of 0.4.Assume that Wonderland Company and Speedy-Track both have a marginal tax rate of40%.a. What is the beta of asset for the Wonderland Company? (5 points)b. What is the beta of equity for Wonderland if Wonderland has a debt-to-equity ratio of0.5? (5 points)c. What is the expected rate of return for the owners (also known as the cost of equity forthe firm) if the risk free rate is 4% and market risk premium is 6%? (4 points)55.The Telescoping Tube Company is planning to put a manufacturing facility in place to buildobservatory quality but recreational scale telescopes. The initial investment cost is$5,800,000 and the expected cash flows before tax are $1,000,000 per year for the indefinitefuture. The firm?s tax rate is 40%. When it is all-equity financed, the project?s cost ofequity is equal to 12%.a)What is the adjusted present value (APV) of the investment if the project is 100%equity financed and the firm has to incur $200,000 of before tax issue cost to raisethe capital? (5 points)b)What is the economic value added (EVA) EACH YEAR if the project is 100%equity financed? (5 points)c)What is the cost of equity if the project?s capital structure based on market valuesis 50% debt and 50% equity, and the cost of debt before tax is 8%? (5 points)66.Please give your 1-2 sentences best assessment to the following. Please make it conciseand straight to the point.a)b)Firm A has no debt outstanding at the moment. What is likely to happen to itsstock price when it first acquires some debt (assuming the debt level is still farbelow the industry average)? Why? (7 points)For Diageo Plc, financial flexibility was critical in its capital structure decisionmaking. Why do you think that was the case? (7 points)77.Please give your 1-2 sentences best assessment to the following. Please make it conciseand straight to the point.a)b)Why do stock prices drop when firms announce an unexpected dividend cut? (7points)Dividends and share repurchase are both ways a firm can return cash to itsshareholders. Why do many technology firms prefer share repurchase todividends? (7 points)


Paper#48367 | Written in 18-Jul-2015

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