### Capmstock s has a volatility s 14 and the covariance of

Assignment Help Accounting Basics
##### Reference no: EM13346994

CAPM

Stock S has a volatility S = 14% and the covariance of its return with the return of the market portfolio is SM = 0:0150. The risk-free rate is rf = 3% and the market portfolio has an expected return E(rM) = 7%, and a volatility M = 12%.

1. Using the CAPM, compute the expected return, E(rpf ), and volatility, pf , of portfolio P which has 50% invested in S and 50% invested in the risk-free asset.

2. According to the CAPM, what is the portfolio P0 that has the same expected return as P and the lowest possible volatility? Check that P0 's volatility is indeed lower than P's volatility.

3. Suppose that you invest in P0 today, sell it in one year and realize a return of 4%. Does that imply that the CAPM does not work? (7 points)

Venture Capital

Horus Inc. has just issued a patent on a new solar panel technology. The company wants to take advantage of the boom in the development of renewable energies to raise money and develop a marketable product.

The key aspects of the business plan are summarized below

- Development cost: \$8 Millions (to be committed upfront).

- Estimated time to market (length of time until the product is available for sale): 3 years.

- Technological risk: the probability that Horus fails to develop a viable product is 40%.

- Current size of the solar panel market: \$1.3 Billion (total sales per year).

- Projected annual growth of the solar panel market: 25%.

- Expected market share of Horus (if the product is viable): 5%.

- Valuation: companies in the same industry are on average valued 1.5 times their total sales (i.e. if a company has a \$1 million turnover, its market value is \$1.5 million).

Financial information:

- Shareholder Composition: Mr Sun, CEO, 700,000 shares; other key employees, 300,000 shares.

- No debt.

Horus was speci cally created to develop this product and has no other lines of business.

1. You are a Senior Partner at the VC Fund Bcom Partners. Mr Sun approaches you on behalf of Horus and makes the following o er: Horus will issue 90,000 new shares that Bcom Partners will subscribe in exchange for a \$8 Millions cash injection. Given the characteristics of Solar, you think that Bcom needs an expected return of at least 10%. Will you accept Mr Sun's o er? (10 points)

2. You are Mr Sun, and you have on your desk a term sheet (contract) proposition from the VC fund MBA Partners, who agrees to provide \$8 Millions in exchange for 100,000 new shares. You are also considering an alternative o er from Energy Venture. Energy Venture is a VC fund dedicated to investments into the energy industry. On top of a \$8 millions investment, Energy Venture o ers its expertise and networks to fasten the commercial development of Horus. The estimated impact on sales would be +10%. This added value translates however into a higher cost of nancing: Energy Venture wants 150,000 new shares. Which o er do you choose?

3 IPOs

Horus has developped successfully and needs additional funding. An IPO seems to be a natural step forward.

After successive nancing rounds, Horus has 1.7 million shares outstanding. 400,000 of them are held by the VC Fund Greentech.

Greentech's fund is close to the end of its life would like to cash out. Horus goes public under rm commitment underwriting. At the end of the book building phase, Horus shareholders and the underwriter agree on an issue of 500,000 primary shares at a price of \$60 per share. Existing shareholders may also sell their own shares in the IPO.

At an issue price of \$60, Greentech's managers think that the stock is undervalued by 20% (i.e. post IPO, the price will adjust to 60  (1 + 20%) = \$72).

To mitigate the underpricing problem, Greentech decides to sell only part of its stocks in the IPO, and sell the rest of its stake once the price has adjusted. What is the maximal number of shares Greentech can sell in the IPO if it wants to limit its expected loss to 10% of the market value of its stake?

4 SEOs

Horus is now public and considers raising money through a SEO. It decides to proceed with rights o ering. There are 3.5 millions shares outstanding at that time. You have the following information on the rights issue:

- Number of rights needed to buy one share: 4.

- Total amount of money to be raised in the SEO: \$10.5 millions

- Cum-rights price: \$17

Just after the ex-right date, you observe that rights trade at \$0.8. What do you think about this price? Is there a way you can make an immediate pro t?

5 Debt

Horus is now a mature rm and wants to issue debt for the rst time. It needs to raise \$50 million and decides to issue 50,000 bonds with maturity 1 year, face value \$1,000 and coupon c. The table below provides information on the return of the market portfolio, rM, and the value of Horus' assets in one year depending on the state of the economy.

In case of bankruptcy, that is, if the value of Horus' assets in one year is too low to cover payments to bondholders (principal + interests), Horus' assets can be liquidated at their market value. The risk-free rate is 3%.

Compute the value of the coupon, c, such that bonds can be issued at par value (i.e., investors are willing to pay \$1,000 per newly issued bond).

#### Questions Cloud

 Problem 1 in a study relating college grade point average : problem 1 in a study relating college grade point average to time spent in various activities students are asked how Objectivesbullto exercise the analysis design and : objectivesbullto exercise the analysis design and implementation activities of software development.bullto learn Write on theory of reasoned action theory of planned : write on theory of reasoned action theory of planned behavior and integrated behaviors model- what phenomenon does the 1in november 2012 us based information technology hewlett : 1.in november 2012 us based information technology hewlett packard recorded a write-down of around 8.8 billion related Capmstock s has a volatility s 14 and the covariance of : capmstock s has a volatility s 14 and the covariance of its return with the return of the market portfolio is sm Telephone calls arrive at the information desk of a large : telephone calls arrive at the information desk of a large computer software company at a rate of 15 per hour.a what is Managing ashland multicomm services1 hint let pi 002 as : managing ashland multicomm services1. hint let pi 0.02 as shown in the table for no free premium channels.a. px lt 3 Adsorption and membrane processeszeolites are used to : adsorption and membrane processeszeolites are used to adsorb a wide range of solutes from vapour and gas streams. what Question 1part 1 conditional logicconditional logic is used : question 1part 1 conditional logicconditional logic is used within your application to make decisions during the

### Write a Review

#### How many units were in ending work in process inventory

Carter company uses a weighted average process costing system. Material is added at the start of production. Dixie company started 13,000 units into production and had 4500 units in process at the start of the period that were 60% complete as to c..

#### Journal entries for general fund of city of buffalo falls

The following transactions relate to the general fund of the City of Buffalo Falls for the year ended December 31, 2012: Prepare journal entries for transactions.

#### Calculating built-in gains tax liability

There are no earnings and profits from C corporationn years. Calculate Sonny's built-in gains tax liability.

#### Calculate the book value of the equipment

Calculate the book value of the equipment at December 31, 2011. Do not use decimals in your answer.

#### Determine the current ratio and quick ratio

Determine the (a) current ratio, and (b) quick ratio. Round your answer to one digit after the decimal.

#### How to write a persuasive essay

How to Write a Persuasive Essay[/url] - CanadaEssays.ca is designed to help Canadian university and college students across this country with the types of essay assignments that have haunted students since the late 1960s.

#### How many shares of common stock were issued during 2010?

a. How many shares of common stock were issued during 2010? What was their average issue price?  b. How many shares of preferred stock were issued during 2010? What was their average issue price?

#### Ending work in process inventory

The ending work in process is 60% complete with respect to conversion costs. What cost would be recorded for the ending work in process inventory?

#### Determining production costs

The Fancy Umbrella Company makes beach umbrellas. The production process requires 3 square meters of plastic sheeting and a metal pole. The plastic sheeting costs \$0.50 per square meter and each metal pole costs \$1.00.

#### Calculate the dividends per share

Calculate the dividends per share on each class of stock for each of the four years. Round all answers to nearest whole cent. If no dividends are paid in a given year, enter 0.