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1. Your client is concerned when you recommend two “risky” investments for his portfolio. “Look at the size of those standard deviations!”, he says. “One of those is risky enough, if I own them both, I’m taking on even more risk.” Explain why this may not be not the case. Under what circumstance would he be correct? Be sure to address the issue of covariance/correlation.
2. After your eloquent explanation, your client figured he’d read up on MPT. After learning about the Sharpe CAPM, he tells you he wants a high beta portfolio because that will get him more return. He says that Sharpe’s CAPM implies that more risk = more return. Is he right or wrong? Explain.
3. Discuss the advantages/disadvantages of relative valuation methods (Statistical metrics like price to book, sales and earnings) vs. using discounted intrinsic valuation methods like the dividend discount model or discounted cashflow model.
Conduct a Top Down analysis of the overall economic environment and consider how forecast changes in economic fundamentals will impact on the performances of companies in the industry your group has chosen.
Given the following, compute the cost of externally generated equity (new equity) using the DCF approach: The par value of the firms outstanding 20 year 8% annual coupon debt is 1,000 and the debt currently has a market value of 800. The firm's tax r..
Smith Energy has a beta of 1.14, a variance of 0.0224, a dividend growth rate of 2.6 percent, a stock price of $35 a share, and an expected annual dividend of $1.31 per share next year. The market rate of return is 11.7 percent and the risk-free rate..
The heuser company's currently outstanding bonds have a 10% coupon and a 12% yield to maturity. Heuser believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is heuser's after-ta..
What is the project net cash flow (OCF) for year 2 and what is the book value at the end of year 3 - What is the discounted payback for this project - Construct income statement and what best describes operating profit margin.
All equity business has 100 million shares outstanding selling for $20 a share. Management believes interest rates are unreasonably low and decides to execute a leverages recapitalization. It will raise $1 billion in debt and repurchase 50 million sh..
Nelson died in 1996 and Newman and Franz were appointed co-personal representatives of her estate. Newman and Franz hired McKenzie-Larson to appraise the estate’s personal property in preparation for an estate sale. After subtracting the buyer’s prem..
An asset manager has conducted an extensive econometric study and proposes a forecasting model. What type of forward transaction would you conduct to capitalize on your forecast? Explain. If everyone were using your model and following your strateg..
A 4.85 percent coupon municipal bond has 22 years left to maturity and has a price quote of 103.70. The bond can be called in eight years. The call premium is one year of coupon payments. Compute the bond’s current yield. Compute the Yield to Maturit..
You are considering investing in a start up company. The founder asked you for $300,000 today and you expect to get $910,000 in 12 years. Given the riskiness of the investment opportunity, your cost of capital is 30%. What is the NPV of the investmen..
Consider a 10-year, $1000 coupon bond, redeemable at par, and assume that the coupon is paid continuously with an annual coupon rate of 5%. The bond is said to be callable, if the borrower (the issuer) can redeem the bond at a time prior to the matur..
Dishwasher’s Delights plows back 68.50% of its earnings to take on projects that earn the firm a rate of return of 13.50%. What is the expected growth rate for Dishwasher’s common stock? What is the expected dividend next year?
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