Benefits of diversification.

Sally Rogers has decided to invest her wealth equally across the following three assets. What are her expected returns and the risk from her investment in the three​ assets? How do they compare with investing in asset M​ alone?  

Hint​: Find the standard deviations of asset M and of the portfolio equally invested in assets​ M, N, and O.

What is the expected return of investing equally in all three assets​ M, N, and​ O?

_____​% ​(Round to two decimal​ places.)

What is the expected return of investing in asset M​ alone?

_____% ​(Round to two decimal​ places.)

What is the standard deviation of the portfolio that invests equally in all three assets​ M, N, and​ O?

_____​% ​(Round to two decimal​ places.)

What is the standard deviation of asset​ M?

_______% ​(Round to two decimal​ places.)

By investing in the portfolio that invests equally in all three assets​ M, N, and O rather than asset M​ alone, Sally can benefit by increasing her return by

______% and decreasing her risk by _____​%. ​(Round to two decimal​ places.)

​Beryl's Iced Tea currently rents a bottling machine for $ -56,000 per​ year, including all maintenance expenses. It is considering purchasing a machine instead and is comparing two​ options: a. Purchase the machine it is currently renting for $ 163,000. This machine will require $ 22,500 per year in ongoing maintenance expenses. b. Purchase a​ new, more advanced machine for $ 258,000. This machine will require $ 18,750 per year in ongoing maintenance expenses and will lower bottling costs by $ 17,000 per year.​ Also, $ 34,000 will be spent up front to train the new operators of the machine. Suppose the appropriate discount rate is 7.5 % per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each​ year, as is the cost of the rental machine. Assume also that the machines will be depreciated via the​ straight-line method over seven years and that they have a​ 10-year life with a negligible salvage value. The marginal corporate tax rate is 38 %. Should​ Beryl's Iced Tea continue to​ rent, purchase its current​ machine, or purchase the advanced​ machine? To make this​ decision, calculate the NPV of the FCF associated with each alternative.

Suppose that a 1 year zero coupon bond with a face of $100 sells at $94.34. While a zero 2 year sells at $84.99. You are considering the purchase of a 2 year maturity bond making annual coupon payments. The face value of the bond is $100 and the coupon rate is 12% per year.

1. What is the yield to maturity of the 2 year zero?

2. What is the yield to maturity of the 2 year coupon bond?

3. What is the forward rate for the second year?

4. According to he expectations hypothesis what are (1) the expected price of the coupon bond at the end of the first year and (2) the expected holding period return on the coupon bond over the first year?

5. Will the expected rate of return be higher or lower if you accept the liquidity preference hypothesis?

Suppose a​ ten-year, $1,000 bond with an 8.5 % coupon rate and semiannual coupons is trading for $1,035.71.

a. What is the​ bond's yield to maturity​ (expressed as an APR with semiannual​ compounding)?

b. If the​ bond's yield to maturity changes to 9.1 % ​APR, what will be the​ bond's price?

Carla Vista, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the next two years, then a growth rate of 17 percent for the following two years. After that, a constant-growth rate of 8 percent is expected. The firm expects to pay its first dividend of $2.26 a year from now. If dividends will grow at the same rate as the firm and the required rate of return on stocks with similar risk is 22 percent, what is the current value of the stock? (Round all intermediate calculations and final answer to 2 decimal places, e.g. 15.20.)

1. What would be the yield to maturity for a bond with a $70 coupon, interest paid semiannually, $1000 maturity value, 12 years to maturity and a quoted price of 104.50 (Actual price of $1045)? Remember we are taking the view of the investor, so the price needs to be entered with a negative sign because if we buy the bond, that is cash out of our account

2. If the quoted price fell to 99 (actual price $990), what would be the pretax yield to maturity? How about if the quoted price instead rose to 110.5 (actual price $1105)? What do you conclude from this about the relationship between the bond price and the market rate of interest?

3. A further complication related to bonds is that interest is deductible for tax purposes, so to arrive at an after-tax cost of debt for the firm, rather than a return for investors, it is necessary to multiply the yield by (1- tax rate) to get the after-tax cost of debt. For the first example with a quoted price of 104.5 (actual price of $1045), assuming that the tax rate is 20%, what would be the after-tax cost of debt?

4. To sum up the cost of debt, we only really have three variables to work with - the market rate of interest, the bond price and the firm's tax rate. The coupon payment, time to maturity and the maturity value for a specific bond are effectively fixed. As those first three variables (market interest, bond price and firm's tax rate) change, up or down, how does that affect the firm's after-tax cost of debt?

Holly bought a 7-year bond, with a 3% coupon paid semi annually. It was priced to yield 3% when she bought it. What is the effective duration assuming a 100-basis point change in interest rates?

INTC current stock price is 23. You sold a 22 put and bought a 21 put. The premium on the 22

put is 0.6, and the premium on the 21 put is 0.3. Analyze your gain or loss if on the expiration

day the stock price is larger than 22, between 21 and 22, less than 21.

what would be the yield to maturity for a bond with a $70 coupon, interest paid semiannually, $1000 maturity value, 12 years to maturity and a quoted price of 104.50 (Actual price of $1045)?

The following is market information: Current spot rate of pound = $1.23 90-day forward rate of pound = $1.24 3-month deposit rate in U.S. = 1.1% 3-month deposit rate in Great Britain = 1.3% If you have $250,000 and use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?

There are two major approaches to corporate valuation: a) using comparable firms (via multiples, i.e. ratios) and b) discounted cash flows based methods (FCF models, capital budgeting metrics all fall into this category). Based on the case, which method (A or B above) do you find more useful? Briefly discuss relative strengths and weaknesses you can think of for both methods. Answer detailed.

A 4-year annuity of eight $9,800 semiannual payments will begin 7 years from now, with the first payment coming 7.5 years from now.

a. If the discount rate is 7 percent compounded monthly, what is the value of this annuity five years from now? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b. If the discount rate is 7 percent compounded monthly, what is the value three years from now? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

c. If the discount rate is 7 percent compounded monthly, what is the current value of the annuity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

SHOW HOW TO SOLVE WITH FINANCIAL CALCULATOR PLEASE

What is the duration of a 10-year bond with a coupon rate of 6%, paid annually, and a yield to maturity of 11%?

Luke and Amy are saving for the down payment on a house. The houses in the area they prefer have an average selling price of $450,000 and they need a 10% down payment to ensure their mortgage payments are not too high. They have $30,000 saved that they can invest today at 6.5% (annual compounding).

a) How long before they will have enough for the down payment saved?

b) They want to buy the house sooner.  In addition to the $30,000 saved to date, how much would they need to invest each month (into the same investment) in order to have enough for the down payment in 2 years?

c) What would their payments be for part (b) if they made them at the beginning of the month instead of the end?