LTA 1/04 • P. 9– 2 4 EVA LILJEBLOM AND MIKA VAIHEKOSKI* Investment Evaluation Methods and Required Rate of Return in Finnish Publicly Listed Companies ABSTRACT Financial literature advocates the use of the Net Present Value method for the evaluation of investments. Its key parameter is the required rate of return on equity‚ which is to be calculated using the Capital Asset Pricing Model or a similar model especially if the company is publicly listed. However‚ there is ample evidence
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Chapter 11 Exercises 11-5 Return on Investment (ROI) Provide the missing data in the following table for a distributor of Martial arts products: 11-9 Return on Investment (ROI) and Residual Income Relations A family friend has asked your help in analyzing the operations of three anonymous companies operating in the same service sector industry. Supply the missing information in the table below: 11-18 Return on Investment (ROI) and Residual Income “I know headquarters wants us to add that new product
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financial manager for Barnett Corporation‚ wishes to evaluate three prospective investments: X‚ Y‚ and Z. Currently‚ the firm earns 12% on its investments‚ which have a risk index of 6%. The expected return and expected risk of the investments are as follows: |Investment |Expected return |Expected risk | | | |index | |X |14% |7% | |y |12 |8 | |z
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Compounding Factor (6%‚8) = 3‚000‚000 C * 9.90= 3‚000‚000 C = $303‚107.83 2. You have just taken out a mortgage for $575‚000‚ at a fixed rate of 4.75% per year‚ compounded monthly‚ and a term of 30 years. a) Calculate the monthly payments The payments must discount to a value that is equivalent to $575‚000 today‚ assuming a monthly rate of (4.75%/12)‚ or 0.39583% per month‚ for 360 months. C * Annuity discount factor (0.39583%‚360) = 575‚000 C * 191.70 = 575‚000 C = $2
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of directors. The purchase was revealed yesterday in a filing with the Securities and Exchange Commission‚ and separately in a letter to Teletech’s CEO‚ Maxwell Harper. “The firm is misusing its resources and not earning an adequate return‚” the letter said‚ “The company should abandon its misguided entry into comput-ers‚ and sell the Product and Systems Segment. Management must focus on creating value for shareholders.” Teletech issued a brief statement
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Which one of the following statements is correct concerning annual percentages rates (APRs)? Answer: The APR is equal to the monthly interest rate multiplied by 12 Give an interest rate of zero percent‚ the future value of a lump sum invested today will always: Answer: remain constant Answer: II and IV A firm created as a separate and distinct legal entity that may be owned by one or more individuals or entities is called a: corporation The capital structure of a firm refers to the
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RISK-ADJUSTED DISCOUNT RATES and LIABILITY BETA RUSSELL E. BINGHAM T H E H A R T F O R D FINANCIAL SERVICES G R O U P Table of Contents Page 2 3 5 7 8 11 12 13 14 14 15 16 17 17 18 Subject Abstract 1. Summary 2. Total Return Model 3. After-Tax Discounting 4. Derivation of Risk-Adjusted Discount Rate and Liability Beta Figure l : Baseline Risk / Return Line vs Leverage 5. Liability Beta Figure 2: Equity vs Liability Beta Figure 3: Equity Beta vs Risk-Adjusted Discount Rate (After-Tax) 6. Underwriting
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$1000 today at an interest rate of 10% per year‚ how much will you have 20 years from now‚ assuming no withdrawals in interim? 2. a. If you invest $100 every year from the next 20 years starting one year from today and you earn interest of 10% per year‚ how much will you have at the end of the 20 years? b. How much must you invest each year if you want to have $50000 at the end of the 20 years? 3. What is the present value of the following cash flows at an interest rate of 10% per year? (Hints:
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Corporation 1. What is a hurdle rate? How do you use it in a project evaluation? Hurdle rate is the minimum amount of return on a project the company is willing to accept before starting a project. It is used in project evaluation to evaluate the amount of return on the project. A common method for evaluating the hurdle rate is apply the discounted cash flow method to the project‚ like net present value. 2. How does Teletech Corporation currently use the hurdle rate? They used it based on the
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Q1. Peirson: Chapter 5: Questions 2‚ 3‚ 4‚ 5‚ 6‚ 10 and 11. Chapter 5 2. What factors does the required rate of return of a project reflect? Soln: The required rate of a return for a project reflects the rate of return that could be generated by investing in the next best alternative investment. This discount rate reflects the return required by the firm as compensation for having funds tied up in the project. The compensation demanded increases as the uncertainty‚ or risk‚ associated
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