A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.6%. The probability distributions of the risky funds are:

The correlation between the fund returns is 0.0600.

Required: What is the expected return and standard deviation for the minimum-variance portfolio of the two risky funds? (Do not round intermediate calculations. Round your answers to 2 decimal points).

P.S. If you do the problems in Excel, can you show what formulas you used? I'm not sure how to do the covariance that's required for the question.

1. What determines the value of an economic asset?

2. If we know the projected cash flows from loan notes and their current market value, what approach would we take to deducing the cost of the loan notes?

3. Why does it seem likely that businesses have a target gearing ratio?

4. What is wrong with using the cost of the specific capital used to finance a project as the discount rate in relation to that project?

5. When calculating the weighted average cost of capital (WACC) should we use market values or balance sheet values as the weights of debt and equity? Explain

Please comment on the following remark:

(a) ‘Leasing is a zero sum game between the lessee and lessor.’

(b) Briefly discuss the reasons for firms to lease even if NALs are negative.

Jane is the financial manager for Alpha Corporation. She has been asked to perform a lease-versus-purchase analysis on a new printing machine.

The machine costs $360,000 and will be depreciated using the straightline method with zero residual value over five years. Alternatively, the company

can lease the machine with year-end payments of $95,000 over five years. The company’s tax rate is 35% and its before-tax cost of borrowing is 10%.

Required:

a Given the above information, calculate the net advantage to leasing (NAL) for Alpha Corporation to obtain the new printing machine,

assuming the company will use its own reserves rather than borrowing from the bank. Which option would you recommend? Explain.

b Suppose only $300,000 purchase price of the machine is borrowed from ABC Bank. Should Alpha Corporation change its buy or lease decision

on the printing machine? Discuss.

Calculate the expected standard deviation on stock:

What is the Macaulay’s Duration of a portfolio of bonds that invests 40% in a 5-year zero coupon bond with a par of $100 and 60% in a 3 year, 5% coupon interest bond (p.a.), with a par of $100. Assume Yield to Maturity is 8% p.a.?

*Please assist with a worked answer

1. Nike has a project that will produce cash flows $200 next year if the economy is strong and $50 if the economy is weak. Suppose the corporate tax rate is 0. The economy will be strong with probability 50%. Nike issued both debt and equity to raise funds out of this project as much as possible. Specifically, Nike raised $60 by issuing debt with a face value $80. So, the creditors will receive $80 in total if the economy is strong but receive only $50 if the economy is bad because Nike defaults in this case. Nike also raised $50 by issuing equity as much as possible. The market risk premium is 7% and the risk-free rate is 5%. The entrepreneur of Nike has no equity shares in her firm. Now, suppose there is another shoes company, New Balance. This firm also has a project that will produce $200 next year if the economy is strong and $50 if the economy is weak. But the entrepreneur of New Balance wants to raise only $40 by issuing debt to avoid the chance of default. Assuming issued at risk-free rate and face value of $42 on the debt. She also plans to issue equity to raise funds as much as possible out of her project.

1. Suppose investor A is a single investor of Nike, who holds all the bonds and equities issued by Nike. Also, suppose investor B is a single investor of New Balance. The payoffs to these two investors will be the same?
2. If yes, how much can New Balance raise from equity holders? Does the total amount of funds that can be raised depend on the default risk of a firm?
3. What’s the expected return of equity for New Balance? What’s the equity beta?
4. What’s the cost of capital of New Balance?

Discussion, at least 150 words.

How Fair is “Check Into Cash?” In 1993, the first Check Into Cash location opened in Cleveland, Tennessee. Today there are 1,250 Check Into Cash centers among an estimated 22,000 payday advance lenders in the United States. There is no doubt about the demand for such organizations, but the debate continues on the “fairness” of payday-advance loans. A payday loan is a small, unsecured, short-term loan ranging from $100 to $1,000 (depending upon the state) offered by a payday lender such as Check Into Cash. A payday loan can solve temporary cash-flow problems without bouncing a check or incurring late-payment penalties. To receive a payday advance, borrowers simply write a personal post-dated check for the amount that they wish to borrow, plus the payday loan fee. Check Into Cash holds their checks until payday when the loans are either paid off in person or the check is presented to the borrowers’ banks for payment. Although payday-advance borrowers usually pay a flat fee in lieu of interest, it is the size of the fee in relation to the amount borrowed that is particularly aggravating to opponents of the pay-day advance industry. A typical fee is %15 for every $100 borrowed. Payday advance companies that belong to the Community Financial Services Association of America (CFSA), an organization dedicated to promoting responsible regulation of the industry, limit their member companies to a maximum of four rollovers of the original amount borrowed. Thus, a borrower who rolled over an initial $100 loan for the maximum of four times would accumulate a total of $75 in fees all within a 10-week period. On an annualized basis, the fees would amount to a whopping 391%. The 391% is an annual nominal rate {15% x (365/14 weeks). An annual rate of 391% is a huge cost in relation to interest charged on home equity loans, personal loans, and even credit cards. However, advocates of the payday-advance industry make the following arguments: Mot payday loan recipients do so either because funds are unavailable through conventional loans or because the payday loan averts a penalty or bank fee which is, in itself, onerous. According to Check Into Cash, the cost for $100 of overdraft protection is $26.90, a credit card late fee on $100 is $37, and the late/disconnect fee on a $100 utility bill is $46.16. Bankrate.com reports that non-sufficient funds (NSF) fees average $26.90 per occurrence. A payday advance could be useful, for example, if you have six outstanding checks at the time you are notified that the first check has been returned for insufficient funds and you have been charged an NSF fee of $26. A payday advance could potentially avert subsequent charges of $26 per check for each of the remaining five checks and allow you time to rearrange your finances. When used judiciously, a payday advance can be a viable option to meet a short-term cash flow problem despite its high cost. Used unwisely, or by someone who continuously relies on a payday loan to try to make ends meet, payday advances can seriously harm one’s personal finances. What is your opinion?

Discuss how your organization could use an operations management linear programming application to solve a problem or improve a business process.

Two competing commercial banks situated in the same region have comparable asset portfolios, but one operates with a total capital ratio of 10%, while the other operates with a ratio of 12%. Compare the opportunities and risk profiles of the two banks.

Discuss the differences between primary source and secondary source of repayment for commercial clients of commercial banks? (20 marks