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##### MBA570_Homework_5

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Question;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#53138 | Written in 18-Jul-2015

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