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...

...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...

...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.
|...

...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...

...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...

...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...

...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...

...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...