UNIVERSITY OF TEXAS AT DALLAS SCHOOL OF MANAGEMENT FIN6310: INVESTMENT MANAGEMENT SOLUTIONS TO REVIEW QUIZ PROF. ARZU OZOGUZ SPRING 2013

Make, but state clearly, all the assumptions that you feel are necessary to answer any particular question. To obtain partial credit, make sure you show all your work. Please make sure you sign the Honor Pledge: I have neither given nor received any aid on this examination.________________

1. Given an interest rate of 7.3 percent per year, what is the value at date t = 7 of a perpetual stream of $2,100 annual payments that begins at date t = 15?

2100 0.073

1 1.073

17,567.03

2. You’ve just joined the investment banking firm of Dewey, Cheatum, Howe. They’ve offered you two different salary arrangements. You can have $90,000 per year for the next two years and or you can have $65,000 per year for the next two years, along with a $45,000 signing bonus today. The bonus is paid immediately, and the salary is paid at the end of each year. If the interest rate is 10%, compounded monthly, which do you prefer? 1 Option 1 90,000 1.1047 Option 2 45,000 65,000 1.1047 65,000 1.1047 157,102.4 90,000 1.1047 155,218.6 0.10 12 1 10.47%

3. Hughes Co. is growing quickly. Dividends are expected to grow at a 25 percent rate for the next three years, with the growth rate falling off to a constant 7 percent after that. If the required rate of return is 12%, and the company has just paid a $2.40 dividend, what is the current share price? 1 2 3 4 3 1.12 3.75 1.12 2.40 1.25 3 3 1.25 3.75 3.75 1.25 4.69 4.69 1.07 5.02 5.02 0.12 0.07 1 1.12 80.5

4.69 1.12

4. The Morgan Corporation has two different bonds currently outstanding. Bond M has a face value of $20,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $800 every six months over the...

...the government liability.
2. The average rate of return on investment in large stocks has outpaced that on investments in T-Bills by about 8% since 1926 in US. Why, then, does anyone invest in T-Bills?
Answer:
This is because T-bill is regarded as an almost risk free asset as it is backed by the government. Therefore, it has lowest volatility as compared to stocks. This is also a reason that people tend to invest in T-bills instead of stocks.
3. You see an advertisement for a book that claims to show how you can make RM1 million with no risk and with no money down. Will you buy the book? Why?
Answer:
No. It is impossible to make RM1million with no risk and with no money down. This is because only a person who takes risk would be compensated with return. Even T-bills which is backed by the government also has low risk and it is impossible to earn RM1million with no risk at all.
4. You are bullish on Telekom stock. The current market price is RM50 per share, and you have RM5,000 of your own to invest. You borrow an additional RM5,000 from your broker at an interest rate of 8% per year and invest RM10,000 in the stock.
a. what will be your rate of return if the price of Telekom stock goes up by 10% during the next year? (ignore dividend)
Answer:
Return: 10,000 x 10%= RM 1,000...

...9 months (or 270 days) for $910. You have $910 in a bank that pays a 5% nominal rate, with 365 daily compounding. You plan to leave the money in the bank if you don’t buy the risk-free T-note.
Which investment should you choose? Use the following all three solution methods to verify your answer.
Greatest future wealth: FV
Figure out FV of $910 left in a bank with 9 months, and then compare with T-note’s FV=$1,000
Inputs: N = 270, I/Y =5%/365=0.0137%, PV = -$910, PMT=0
Output: PV= $ 944.29
Cause $1.000 > $944.29, so, I will buy T-note.
Greatest wealth today: PV
Figure out PV of T-note, and then compare with its $910 cost
Inputs: N = 270, I/Y = 5%/365=0.0137%, PMT=0, FV=$ 1000
Output: PV= $-963.69
$963.69 > $910, so buy the note to raises my wealth.
Highest effective rate of return.
Figure out the EAR% on T-note, and then compare with 5%, which is your opportunity cost of capital:
Inputs: N = 270, PV=-$910, PMT=0, FV= $1000
Output: I/Y= 0.0349%
EAR = EAR%=〖 (1+0.000349)〗^365 – 1 = 0.1358 =13.58%
Cause 13.58% > 5%, so I will buy the T-note.
You want to purchase a house: your maximum monthly payment is $1,600, and you also have a saving of $35,000 as the down payment. You apply for a 30-year fixed mortgage loan with APR 4.49%. What is the maximum house price you can afford to buy?
Inputs: PMT=$1,600 FV=0 N=30*12=360 I/Y=4.49%/12=0.3742%
Output: PV=-$316,133.65
Maximum...

...security is called the:
A. geometric return.
B. average period return.
C. current yield.
D. total return.
2.
The expected return on a security in the market context is:
A. a negative function of execs security risk.
B. a positive function of the beta.
C. a negative function of the beta.
D. a positive function of the excess security risk.
E. independent of beta.
3.
A capital gain occurs when:
A. the selling price is less than the purchase price.
B. the purchase price is less than the selling price.
C. there is no dividend paid.
D. there is no income component of return.
4.
Which one of the following is a correct statement concerning risk premium?
A. The greater the volatility of returns, the greater the risk premium.
B. The lower the volatility of returns, the greater the risk premium.
C. The lower the average rate of return, the greater the risk premium.
D. The risk premium is not correlated to the average rate of return.
5.
You bought 100 shares of stock at $20 each. At the end of the year, you received a total of $400 in
dividends, and your stock was worth $2,500 total. What was your total return?
A. 45%.
B. 50%.
C. 90%.
D. 20%.
6.
You bought 100 shares of...

...Table of Contents
1. Introduction 2
2. Literature review 3
2.1. ROI Case Study: IBM- November 2012 (Nucleus Research) 3
3. Methodology 4
4. Analysis 5
4.1. Adani Power 5
4.2. Torrent Power 6
5. Conclusion 7
1. Introduction
An investment is an exposure of cash that has the objective of producing cash inflows in the future. The worthiness of an investment is measured by how much cash the investment is expected to generate.
The analysis of Return on Investment (ROI) is a financial forecasting tool that assists the business manager in evaluating whether a proposed investment opportunity is worthwhile within the context of the company’s business objectives and financial constraints.
The investments to be analysed have some of the following characteristics:
* A major amount of money is involved.
* The financial commitment is for more than one year.
* Cash flow benefits are expected to be achieved over many years.
* The strategic direction of the company may be affected.
* The company’s prosperity may be significantly affected if the investment is made or not made.
Every business should aim to earn a realistic rate of return on the total capital invested in that business.
The capital invested in a business is the total worth of the business, which includes the equity or owner’s capital plus the...

...
ROI Project: Phase #1
Return on Investment (ROI): An examination of ROI financial analysis and its historical roots with the DuPont Company
Return on Investment (ROI): An examination of ROI financial analysis and its historical roots with the DuPont Company
Like it or not, with the current state of the economy, as well as, enforced implications of the Affordable Care Act, a large number of hospitals and healthcare agencies will close their doors for good this year. Perhaps the most common cause of these closures will be the result of inadequate financial performance. Like any business entity, it is the lack of proper financing that ultimately kills any healthcare organization. There is a basic fundamental principle of finance that no healthcare organization can ignore; ultimately, the organization must generate a return from its investment that at least equals the cost of the financing supporting that investment. If the overall return on investment (ROI) is not equal to greater that the organization’s cost of funds, financial failure will occur (Cleverley, 1990). ROI has been an essential aspect of financial accounting ever since a group of financial experts at E.I. du Pont de Nemours and Co. (DuPont) invented the concept in the early part of the century (Southerst, 1993). DuPont’s concept...

...an investment actually rises in value. When you see that your investment account went up over any period of time, it's because one of three things happened. Those three things are: income was paid on the investment in the form of bond interest or a stock dividend, there was a realized gain (meaning investments were sold after they appreciated in value), or there was an unrealized gain (investments that you are still holding went up in value. In most instances, your investment account goes up because the investments within the account (stocks, mutual funds, bonds, etc) went up in value. This means that the demand for these exact securities was rising during the time frame. If your account went down in value, it's most likely because the individual securities were deemed to be less in demand (based on perceived value). In reality, the only reason that your investments are worth anything at all is because someone else is willing to buy them from you.
2. Your goal is to keep pace with "the market." This means that your long-term investment account should keep pace with what the standard stock market indexes do, in terms of performance. BTW, when people say the market, they usually mean the S&P 500 or the Dow Jones Industrial Average. An index is selection of stocks that are used to gauge the health and performance of the overall stock market. For...

...is there a difference between the interest rates on AAA corporate bonds and
U.S. Treasury notes?
3. Your father is about to retire. His firm has given him the option of retiring with a
lump sum of $50,000 in ten years or an annuity of $8,000 for ten years. Which is
worth more now, if the discount rate is (a) 6% (b) 19%?
4. Suppose you open a saving account with $1,800 earned in a summer job. The
account's stated interest rate is 11%. Calculate effective annual rate (EAR) if interest
is paid (a) semiannually, (b) quarterly, (c) monthly and (d) daily.
5. You can buy a security at a price of $10,250. If you buy the security, you will
receive five annual payments of $2,500, the first payment to be made one year from
today. What rate of return, or yield, does the security offer?
6. A bank agrees to lend you $1,000 today in return for your promise to pay the bank
$1,419 six years from today. What rate of interest is the bank charging you?
7. How long will it take to double your money with a growth rate of (a) 10 percent?
(b) 20 percent? (c) 40 percent? (d) What about tenfold increase in your money with
a growth rate of 50 percent?
8. Suppose you assume a mortgage of $300,000. The terms of the mortgage are the
following: thirty year mortgage with equal monthly installments, the first installment
to be paid one...

...1. Returns and Risk
Estimate and compare the returns and variability (i.e. annual standard deviation over the past five years) of Reynolds and Hasbro with that of the S&P 500 Index. Which stock appears to be riskiest? Reynolds appears to be the riskiest stock based on the returns and variability alone currently holding the highest average return out of two at 1.87%. With their higher returnrate over the three they also hold the highest standard deviation of 9.1%, which in turn infers that they may hold the highest beta out of the three.
2. Portfolio Risk
Suppose Sharpe’s position had been 99 percent of equity funds invested in the S&P 500 and either one per cent in Reynolds over one percent in Hasbro. Estimate the resulting portfolio position. How does each stock affect the variability of the equity investment? How does this relate to your answer in question 1 above?
Weight: .99 in S&P 500
Alternative: .01 in Reynolds or Hasbro
Average Returns:
S&P 500 = 0.57%
Reynolds= 1.87%
Hasbro = 1.18 %
Portfolio Return: Weight * Return + Weight2 * Return2
Choosing Reynolds
Portfolio Return = .99(.57)+ .01(1.87) = .583 or 58.3%
Choosing Hasbro
Portfolio Return = .99(.57)+ .01(1.18) = .5761 or 57.61%
Reynolds stock fluctuates more than Hasbro’s so the...

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