You have just turned twenty-six years of age and feel it is necessary to upgrade your qualifications. After some consideration, you feel that undertaking full-time study for an MPA degree at the Fletcher School is one alternative. For the two years of full-time study, tuition and living expenses will be $55,000 per year. In addition, you will have to give up your current job with a salary of $75,000 per year. Assume all cash flows occur at the end of the year. Assume a real interest rate of 3% per year, ignoring taxes. Also assume that the salary increase is a fixed real amount that starts after you complete your degree (at the end of the year following graduation) and lasts until retirement at age sixty-five. In order to justify the investment, by how much does your salary have to increase as a result of getting the MPA degree?
In: Finance
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 rate of 5.5%. The probability distribution of the risky funds is as follows:
| Expected Return | Standard Deviation | |||
| Stock fund (S) | 15 | % | 32 | % |
| Bond fund (B) | 9 | % | 23 | % |
The correlation between the fund returns is 0.15.
Solve numerically for the proportions of each asset and for the
expected return and standard deviation of the optimal risky
portfolio.
Portfolio invested in stock? %
Portfolio invested in bond? %
Expected Return? %
Standard Deviation? %
In: Finance
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 5.5%. The probability distributions of
the risky funds are:
| Expected Return | Standard Deviation | |||
| Stock fund (S) | 15 | % | 32 | % |
| Bond fund (B) | 9 | % | 23 | % |
The correlation between the fund returns is 0.15.
Suppose now that your portfolio must yield an expected return of
12% and be efficient, that is, on the best feasible CAL.
a. What is the standard deviation of your
portfolio?
b-1. What is the proportion invested in the T-bill
fund?
b-2. What is the proportion invested in each of
the two risky funds?
In: Finance
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 5.2%. The probability distributions of
the risky funds are:
| Expected Return | Standard Deviation | |
| Stock fund (S) | 13% | 42% |
| Bond fund (B) | 6% | 36% |
The correlation between the fund returns is 0.0222.
What is the expected return and standard deviation for the
minimum-variance portfolio of the two risky funds?
Expected Return=?
Standard Deviation=?
In: Finance
What would be the net annual cost of the following checking accounts?
a. Monthly fee, $3.75; processing fee, .35 cents per check. Checks written, an average of 14 a month.
b. Interest earnings of 4 percent with a $550 minimum balance; average monthly balance, $650; monthly service charge of $12 for falling below the minimum balance, which occurs three times a year (no interest earned in these months)
In: Finance
Assume a machine costs $404,000 and lasts four years before it is replaced. The operating cost is $47,000 a year. Ignore taxes. What is the equivalent annual cost if the required rate of return is 12.5 percent? (Hint: the EAC should account for both initial investment and annual operating costs)
|
$163,297 |
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|
$174,825 |
||
|
$181,414 |
||
|
$195,637 |
||
|
$202,118 |
In: Finance
In: Finance
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 3.0%. The probability distributions of
the risky funds are:
| Expected Return | Standard Deviation | |||
| Stock fund (S) | 12 | % | 41 | % |
| Bond fund (B) | 5 | % | 30 | % |
The correlation between the fund returns is .0667.
Suppose now that your portfolio must yield an expected return of 9%
and be efficient, that is, on the best feasible CAL.
a. What is the standard deviation of your
portfolio? %
b-1. What is the proportion invested in the T-bill fund? %
b-2. What is the proportion invested in each of
the two risky funds?
stocks? %
bonds? %
In: Finance
In: Finance
Greta, an elderly investor, has a degree of risk aversion of A = 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 9% per year, with a SD of 24%. The hedge fund risk premium is estimated at 14% with a SD of 39%. The returns on both of these portfolios in any particular year are uncorrelated with its own returns in other years. They are also uncorrelated with the returns of the other portfolio in other years. The hedge fund claims the correlation coefficient between the annual returns on the S&P 500 and the hedge fund in the same year is zero, but Greta is not fully convinced by this claim.
| S&P | ?% |
| HEDGE | ?% |
| RISK FREE ASSET | ?% |
What should be Greta’s capital allocation? (Do not round your intermediate calculations. Round your answers to 2 decimal places.)
In: Finance
|
The most recent financial statements for Crosby, Inc., follow. Sales for 2018 are projected to grow by 30 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales. |
| CROSBY, INC. 2017 Income Statement |
||||||
| Sales | $ | 765,000 | ||||
| Costs | 621,000 | |||||
| Other expenses | 30,000 | |||||
| Earnings before interest and taxes | $ | 114,000 | ||||
| Interest paid | 14,800 | |||||
| Taxable income | $ | 99,200 | ||||
| Taxes (22%) | 21,824 | |||||
| Net income | $ | 77,376 | ||||
| Dividends | $ | 24,840 | ||||
| Addition to retained earnings | 52,536 | |||||
| CROSBY, INC. Balance Sheet as of December 31, 2017 |
|||||||
| Assets | Liabilities and Owners’ Equity | ||||||
| Current assets | Current liabilities | ||||||
| Cash | $ | 25,440 | Accounts payable | $ | 62,200 | ||
| Accounts receivable | 34,880 | Notes payable | 18,200 | ||||
| Inventory | 71,600 | Total | $ | 80,400 | |||
| Total | $ | 131,920 | Long-term debt | $ | 113,000 | ||
| Owners’ equity | |||||||
| Fixed assets | Common stock and paid-in surplus | $ | 112,000 | ||||
| Net plant and equipment | $ | 222,000 | Retained earnings | 48,520 | |||
| Total | $ | 160,520 | |||||
| Total assets | $ | 353,920 | Total liabilities and owners’ equity | $ | 353,920 | ||
|
What is the EFN if the firm wishes to keep its debt-equity ratio constant? (Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.) |
In: Finance
|
Titan Mining Corporation has 9 million shares of common stock outstanding and 340,000 5.7 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $38 per share and has a beta of 1.2; the bonds have 20 years to maturity and sell for 119 percent of par. The market risk premium is 7.8 percent, T-bills are yielding 3 percent, and the company’s tax rate is 25 percent. |
| a. |
What is the firm's market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .3216.) Debt=? Equity=? |
| b. | If the company is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
In: Finance
An antique automobile is depreciating, i.e. losing value i.e. going down in price at a rate of 7% per annum compounded annually. Betty and Bob have an account, which earns interest at a rate of 12% per annum continuously compounded. They originally had $8,000 in the account and withdrew $2000 after the second year and $2,500 after the third year. They had enough money (exactly) to buy the automobile after 5 years. Algebraically find the original value of the automobile. Your final answer should be correct to 2 places after the decimal point.
In: Finance
In: Finance
In: Finance