Note: Due time/date for this homework is 4:30pm on February 5. Please make online submission at T-square.

0. Today you bought 100 shares of ABC Inc. at $100 per share. A year from now ABC will pay a dividend of $2 per share for sure. The price of ABC a year from now is uncertain and depends on the state of the economy. A year from now the economy will either be in a recession, a state of “normal” growth, or a boom with probabilities of 30%, 40%, and 30% respectively. After analyzing ABC you determine that the price of ABC a year from now in these various states of the economy will be: State of the Economy Recession Normal Growth Boom Price of ABC $80 $110 $130

What is the expected return over the next year to your investment in ABC?

What is the standard deviation of that return?

1. You are considering buying equity in a firm. If you purchase the equity, in one year you will receive $1.5 million with 40% probability and $1.2 million with 60% probability. Currently the yield on one year T-bills is 4%. Suppose that you require a risk premium of 10% to invest in the equity of this firm. In other words, your minimum required return on this investment is 14%.

(a) What is the most you would be willing to pay for the equity?

(b) If you pay this, what is the expected rate of return on your investment?

(c) What is the standard deviation of the return to your investment in the firm?

2. Based on your examination of the historical record, you calculate that the expected return on the S&P500 over the next year is 6% over T-bills with a standard deviation of 15%. Currently a T-bill with one year to maturity and face value of $10,000 is selling for $9,615. You have $1 million to invest and you will put all of your money in some combination of the S&P500 and one-year T-bills. Calculate the expected return and standard deviation of that return for 3 different portfolios. (a) Portfolio #1 is invested 100% in the S&P500....

...Changing Trend of Investment Pattern in India and Emergence of Mutual Fund Industry
ABSTRACT:
This project is about how the Investor's Behavior is changing and they are now leaving behind the sacred investment options like the fixed deposits, company deposits, gold etc. Investors are now looking towards equity linked investment options.
Like most developed and developing countries the mutual fund cult has been catching on in India. There are various reasons for this. Mutual Fund makes it easy and less costly for investors to satisfy their need for capital growth, income preservation.
And in addition to this a mutual fund brings the benefit of diversification and money management to the individual investor, providing an opportunity for financial success that was once available only to a select few.
In this project I have given a brief about economy, inflation, and equity and debt market. Then it is explained how to cope with the inflation and how mutual fund is one of the best investment options today. A brief about mutual fund industry and the some information about HDFC Mutual Fund and its various products are given
INTRODUCTION:
Many individuals find investments to be fascinating because they can participate in the decision making process and see the results of their choices. Not all investments will be profitable, as investor wills not always make the correct...

...WISE INVESTMENT: BETTER FUTURE Introduction The most critical challenge faced by investors is investment decisions. Decision-making is defined as the process of choosing a particular alternative from a number of alternatives, Sevilla (1972). Knowing where to invest, how much money to put in as the proper timing are key ingredients in making sound and wise investment decisions. According to Miranda (2002), one of the most important finance functions is to intelligently allocate capital to long-term assets which is called capital budgeting. In order to get the maximum yield in the future, someone must allocate his capital into long-term assets. It is difficult to calculate future return because of future uncertainty. Along with this uncertainty comes the risk factors which to be taken into consideration. The key to a successful financial plan is to keep apart a larger amount of savings and invest it intelligently, by using a longer period of time. The turnover rate in investments should exceed the inflation rate and cover taxes as well as allow you to earn an amount that compensates the risks taken. Savings accounts, money at low interest rates and market accounts do not contribute significantly to future rate accumulation. While the highest rate come from stocks, bonds and other types of investments in assets such as real estate. Nevertheless, these investments are not totally safe from...

...Rm) -------- 0.0030 0.0276 -0.0144 Beta 1.0 0.30 1.86 -1.54
Required Rate 10.1% 5.84% 15.37% -5.41%
*See spreadsheet for calculations
3. How should Bill demonstrate the meaning and advantages of diversification to Mary?
Diversification refers to the strategy of investing in stocks, which are not highly correlated with each other, for example, high-tech firms and utility firms, or high-tech firms and counter-cyclical firms. Diversification reduces the portfolio’s variability and thereby enables investors to earn a more stable rate of return. To demonstrate the advantages of diversification, Bill should calculate the expected return and risk (standard deviation) of a portfolio composed of equal investment in the High-Tech Co. and the Counter-Cyclical Co. ---since these companies are negatively correlated with each other-- and compare the results with the return and risk levels of the High-Tech Co. by itself.
| | | | | | 50-50 Portfolio | |
|Scenario |Probability | High-Tech Co. |Counter-Cyclical Co. |50-50 Portfolio |Prob.*E(Portfolio Return) |[Rp-E(Rp)]^2 |
| | | | | | |*Ps...

...According to the Standards and Poor format the letters are upper case and lower-case in order to differentiate themselves, and also shows a company likelihood of default the grades are as follows:
AAA and AA: High credit-quality investment grade
AA and BBB: Medium credit-quality investment grade
BB, B, CCC, CC, C: Low credit-quality (non-investment grade), or “Junk Bonds”
D: Bonds in default for non-payment of principal and/or interest
Debt securities differ in the types of periodic payments they make, promising to pay a specified amount of interest, which is a payment of series made by the borrower to the investor in additional to repayment of the principal (Croushore, 2010. pg. 16). Interest rates are affected by the credit rating and maturity date. The longer length of time it takes for the bond to mature offers a higher interest rate. The lower the bond rating is the bond will have a higher interest rate.
Bond ratings are
Below are my rankings from lower to higher interest rates
• The first bond that I consider the highest would be bond Z: Since it has a shorter time to maturity and is more liquid than the others, it would have to the lowest interest rate over all the other bonds and you wouldn’t receive a greater return on your investment.
• The second bond that I consider next would be bond Y: It has a shorter time to maturity, and it’s considered to be prime.
• Bond W would be...

...the current yield?
(c) What would be your answer to the above problem, if the bond actually had an
infinite life and no maturity value?
10. The Winfield Company is using a machine whose original costs were $720,000. The
machine is two years old and has current market value of $160,000. The asset has
been depreciated over a twelve-year original life on a straight-line basis. The final
salvage value is estimated to be zero, and the tax rate is 46 percent. Management is
contemplating the purchase of a replacement which costs $750,000 and has an
estimated salvage value of $100,000. The new machine will have a greater capacity,
and annual sales are expected to increase from $10 million to $10.1 million, or by
$100,000. An immediate investment of $20,000 in net working capital is needed to
support this increase in sales. Operating efficiencies with the new machine will also
produce expected cost savings of $100,000 a year. Depreciation is on a straight line
basis over a ten-year life, and the cost of capital is 8 percent. The company's total
depreciation costs are currently $1,200,000 and total annual operating costs are
$8,000,000.
(a) Should the firm replace the machine?
(b) How would your decision be affected if a second new machine is available that
costs $1,400,000, has a $200,000 estimated salvage value, and is expected to
provide $250,000 in annual savings over its ten-year life? It also increases sales
by $100,000 a year. (There are...

...ExxonMobil Investment Analysis
Introduction
Exxon Mobil Corporation (NYSE: XOM), or ExxonMobil, is an American multinational oil and gas corporation. The company is a direct descendant of John. D. Rockefeller’s Standard Oil Company, which was founded in 1882. ExxonMobil is one of the largest publicly traded companies by market capitalization and is the largest oil refinery in the world. ExxonMobil is divided into three global operating divisions – upstream, downstream, and chemicals. The upstream segment explores, develops, produces, and markets gas and power. The downstream segment refines and markets petroleum products, and the chemicals segment manufactures and markets commodity petrochemicals. This case analysis will review ExxonMobil’s comparative financial statements published in the 2010 Annual Report and amended SEC 10-K to assess key factors in the areas of cash flow, equity, operations, profitability, and risk. The analysis will conclude with a recommendation on whether ExxonMobil is a secure long-term investment.
Cash Flow
The 2010 Annual Report notes “delivery of superior cash flow” as a financial highlight, driven by operating cash flow management and a disciplined approach to employed capital. Net cash flows generated from operating activities was the largest contributor of cash at $48.4B. This reflects a $20.0B increase from 2009, which is driven by increased net income from higher crude oil and natural gas realizations...

...Finance for managers
Chapter 7— Net Present Value and Other Investment
Question 1 : List the methods that a firm can use to evaluate a potential investment.
There are discounted and non-discounted cash-flow capital budgeting criteria to evaluate proposed investments. They are
1) Net present value: NPV is a discounted cash flow technique, which is the difference between an investment’s market value and its cost.
NPV = Present value of cash inflow- Present value of cash outflow
The investment should be accepted if the net present value is positive and rejected if it is negative.
2) Profitability index: PI is a discounted cash flow technique in which present value of an investment’s future cash inflows divided by its initial cash outflow. It is also called benefit/cost ratio.
PI = PV of cash inflows / PV of cash outflows
If PI is positive, it will be accepted otherwise reject.
3) Internal rate of return: IRR is the discount rate that equates the present values of cash inflows with the initial investment associated with the project thereby causing NPV = 0
If IRR ≥ required rate of return the project is accepted. If IRR < required rate of return the project is rejected.
4) Payback period: Payback period is the exact amount of time required for a firm to recover its initial investment in a project as calculated from inflows. It is a...

...Prepare a critical evaluation of three basic methods of evaluating an investment (IRR, Payback and NPV).
There are several basic methods of evaluating an investments that are commonly used by decision makers in both private corporations and public agencies. Each of these measures is intended to be an indicator of profit or net benefit for a project under consideration. Some of these measures indicate the size of the profit at a specific point in time; others give the rate of return per period when the capital is in use or when reinvestments of the early profits are also included. If a decision maker understands clearly the meaning of the various profit measures for a given project, there is no reason why one cannot use all of them for the restrictive purposes for which they are appropriate. With the availability of computer based analysis and commercial software, it takes only a few seconds to compute these profit measures. However, it is important to define these measures precisely.
The internal rate of return (IRR)
The internal rate of return (IRR) is the discount rate often used in capital budgeting that makes the net present value of all cash flows from a certain project equal to zero. This in essence means that IRR is the rate of return that makes the sum of present value of future cash flows and the final market value of a project (or investment) equals its current market value. The higher a project’s internal rate of...