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4.    Suppose we have one risky asset Stock I and a risk-free asset. Stock I has an expected return of 25% and a beta of 2. The risk-free asset’s return is 6%.   

a. Calculate the expected returns and betas on portfolios with x% invested in Stock I and the rest invested in the risk-free asset, where x% = 0%, 25%, 75%, 100%, 125%, and 150%.

b. What reward-to-risk ratio does Stock I offer? How do you interpret this ratio?

c.   Suppose we have a second risky asset, Stock J. Stock J has an expected return of 20% and a beta of 1.7. Calculate the expected returns and betas on portfolios with x% invested in Stock J and the rest invested in the risk-free asset, where x% = 0%, 25%, 75%, 100%, 125%, and 150%.   

d. What reward-to-risk ratio does Stock J offer? How do you interpret this ratio?

e. Plot the portfolio betas against the portfolio expected returns for Stock I on a graph, and link all the points together with a line. Then plot the portfolio betas against the portfolio expected returns for Stock J on the same graph, and link all these points together with another line. (This can be done easily with the charting function in Microsoft Excel.)   

f.   Use the graph in part (e) above, together with your answers to parts (b) and (d) above to explain why Stock J is an inferior investment to Stock I.                

g. Can a situation in which one stock is inferior to another stock persist in a well-organized, active market? Why or why not?                                        

Broussard Skateboard's sales are expected to increase by 25% from $8.6 million in 2016 to $10.75 million in 2017. Its assets totaled $4 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 6%, and the forecasted payout ratio is 55%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar.

Broussard Skateboard's sales are expected to increase by 20% from $8.4 million in 2016 to $10.08 million in 2017. Its assets totaled $5 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 3%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Do not round intermediate calculations. Round your answer to the nearest dollar.

Identify one bond that is issued by any company you might have heard of. Write down the type of bond, coupon, par value of that bond. see if you can also find the rating of that bond

An analysis of company performance using DuPont analysis

Walking down the hall of your office building with a sheaf of papers in his hand, your friend and colleague, Akira, stepped into your office and asked the following.

AKIRA: Do you have 10 or 15 minutes that you can spare?

YOU: Sure, I’ve got a meeting in an hour, but I don’t want to start something new and then be interrupted by the meeting, so how can I help?

AKIRA: I’ve been reviewing the company’s financial statements and looking for general ways to improve our performance, in general, and the company’s return on equity, or ROE, in particular. Emma, my new team leader, suggested that I start by using a DuPont analysis, and I’d like to run my numbers and conclusions by you, to see if I’ve missed anything.

Here are the balance sheet and income statement data that Emma gave me, and here are my notes with my calculations. Could you start by making sure that my numbers are correct?

YOU: Give me a minute to look at these financial statements and to remember what I know about the DuPont analysis.

If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the ???????????? , the total asset turnover ratio, and the ????????????????? .

And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratios provide insights into the company’s ?????????????? , effectiveness in using the company’s assets, and ???????????????? .

Now, let’s see your notes with your ratios, and then we can talk about possible strategies that will improve the ratios. In the dropdown lists next to your values I’m going to select correct if your calculation is correct and incorrect if your calculation is incorrect.

AKIRA: OK, it looks like I’ve got a couple of incorrect values, so show me your calculations, and then we can talk strategies for improvement.

YOU: I’ve just made rough calculations, so let me complete this table by inputting the components of each ratio and its value:

Note: Do not round intermediate calculations. Round final answers to the nearest whole number.

AKIRA: I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassment! Emma would have been very disappointed in me if I had showed her my original work.

So, now let’s switch topics and identify general strategies that could be used to positively affect Canis Major’s ROE.

YOU: OK, so given your knowledge of the component ratios used in the DuPont equation, which of the following strategies should improve the company’s ROE?

Check all that apply.

A) Increase the interest rate on its notes payable or long-term debt obligations because it will reduce the company’s net profit margin.

B) Increase the efficiency of its assets so that it generates more sales with each dollar of asset investment and increases the company’s total asset turnover.

C) Increase the firm’s bottom-line profitability for the same volume of sales, which will increase the company’s net profit margin.

D) Use more debt financing in its capital structure and increase the equity multiplier.

AKIRA: I think I understand now. Thanks for taking the time to go over this with me, and let me know when I can return the favor.

Citibank gives you the following information:

Spot exchange rate (AUD/EUR) = 1.42

One-month forward exchange rate (AUD/EUR) = 1.45

One-month domestic interest rate (in Australia) = 6.5% p.a.

One-month foreign interest rate (in Germany) = 4.5% p.a.

(a) Is there any violation of the CIP? Why or why not?

(b) Is the AUD selling at a premium or discount against the EUR? By how much?

(c) Suggest a value for the forward rate which is consistent with CIP.

(d) Based on the given information, due to expect the EUR to appreciate or depreciate against the AUD over the next month? Why?

2. ANZ bank is quoting the following exchange rates against the New Zealand dollar (NZD) for the Danish Krone (DKK) and the South African Rand (ZAR):

DKK/NZD = 4.23 - 42

ZAR/NZD = 9.60 - 95

A South African firm asks the ANZ bank for a ZAR/DKK quote. What rates (bid and ask) would the bank quote? Explain how you arrive at your answer.

3. Suppose that the Reserve Bank of India suddenly increases the domestic money supply. This policy change is expected to be permanent by the market. Assume the Indian rupee (INR) to be the home currency and the USD to be the foreign currency.

(a) Explain with the help of the money market and FOREX market diagrams, what happens to the interest rate and exchange rate in the short-run? In your graphs, clearly label the axes, curves and equilibrium points.

(b) Explain what happens to the interest rate and exchange rate in the long-run. In your graphs, clearly label the axes, curves and equilibrium points.

(c) Explain how the economy transitions from the short-run equilibrium to the long-run equilibrium.

4. As of November 1, 2017, the nominal exchange rate between the Brazilian real and the U.S. dollar is BRL1.95/USD. The consensus forecast for the U.S. and Brazil inflation rates for the next 1-year period is 2.6% and 20.0%, respectively. Assume UIP and relative PPP holds.

(a) What would you forecast the nominal exchange rate to be at around November 1, 2018?

(b) If the U.S. interest rate on bonds with one-year to maturity is 4%, what would you expect the interest rate for a Brazilian bond with one-year to maturity to be?

rev: 09_18_2012, 04_09_2016_QC_CS-48481

Stora Enso is a Finnish pulp and paper manufacturing company. It discloses in its 1999 consolidated Annual Report, the following items:

Excerpted from the Consolidated balance sheet

In the notes to its financial statements, the Stora Enso provides explanations relating to these two items:

Excerpts from the notes

In addition, the company explains in the notes that “associated companies (voting rights between 20% and 50%) are consolidated using the equity method” and “the income statements of foreign subsidiaries are translated into Euros using the average rate for the accounting period. The balance sheets of foreign subsidiaries are translated using the rate prevailing on the balance sheet day.”

Pechiney, a French group operating worldwide in aluminum and packaging materials, discloses in its 1999 Annual Report the following note:

Required

1. A) Using the Stora Enso data

1. Associated companies: explain the computation of the historical cost at year-end and the meaning of each component of this computation.
2. Where will be found, other than in the notes, the carrying value of associated companies at year-end?
3. Other companies: explain the computation of carrying amount at year-end and the meaning of each component of this computation.
4. Double-check the carrying value of other companies at year-end. What is the usefulness to an investor or shareholder of the 1999 figure of €280.4 millions shown both in the balance sheet and in the notes?

1. B) Comparison: notes 12 and 14 in Stora Enso’s annual report and note 7 in Pechiney’s annual report have the same purpose. Compare and contrast the computations and reporting choices made by each company.

explain relationship between credit risk and interest risk of corporate bonds( discuss in detail)

The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of R600,000 and a remaining useful life of 5 years. The company does not expect to realise any return from scrapping the old machine in 5 years, but it can sell it now to another company in the industry for R265,000. The old machine is being depreciated by R120,000 per year, using the straight-line method. The new machine has a purchase price of R1,175,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of R145,000. The applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. It is expected to economise on electric power usage, labour, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of R255,000 will be realised if the new machine is installed. The company’s marginal tax rate is 35% and it has a 12% WACC.
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Required:
4.1 What initial cash outlay is required for the new machine? (3)
4.2 Calculate the annual depreciation allowances for both machines and compute the change in the annual depreciation expense if the replacement is made. (5)
4.3 What are the incremental cash flows in Years 1 through 5? (5)
4.4 Should the company purchase the new machine? Support your answer. (3)
4.5 In general, how would each of the following factors affect the investment decision, and how should each be treated?
4.5.1 The expected life of the existing machine decreases. (2)
4.5.2 The WACC is not constant, but is increasing as Bigbee adds more projects into its capital budget for the year. (2)

A bond with exactly five years until maturity paying 3% p.a. coupons semi-annually and with a face value of $100 was purchased at a yield of 3.5% p.a. The bond was sold exactly two years later for a yield of 2% p.a. All coupons were reinvested at 3% p.a. Calculate the realised yield-to-maturity on this bond.

3. Appen Limited (APX) is an Australian company that operates in the machine learning and artificial intelligence space; specifically, they provide data used to train models. The share price (at the time of writing) is $28.85. You decide to construct a portfolio that is short in a European call for APX stock with strike price $35, and long in a European call (for APX stock) with strike price $30. Both calls have the same maturity date, and are for the same number of shares.

(a) Evaluate your total payoff per share if the value of APX at maturity is: (a) $40; (b) $32; and (c) $28.

(b) Consider, more generally, any portfolio which is short in a European call with strike K1 and long in a European call with strike K2, where these two calls have the same maturity and underlying asset, but K1 > K2. Write an equation for the payoff of this portfolio at maturity, in terms of S(T), K1, and K2.

(c) Plot the payoff at maturity in terms of the asset price, S(T). Label the key points on your figure.

(d) The above portfolio is called a bull spread. Explain when, and why, a bull spread is superior to just holding a European call at strike K2.

(e) A bear spread is a portfolio consisting of a short put with strike K1 and a long put with strike K2 with the same maturities and underlying asset but K1 < K2. Write an equation for its payoff at maturity (depending on the asset price S(T)), and plot this payoff, labelling all key points.

An investor in Treasury securities expects inflation to be 2.5% in Year 1, 3.4% in Year 2, and 4.35% each year thereafter. Assume that the real risk-free rate is 2.15% and that this rate will remain constant. Three-year Treasury securities yield 6.25%, while 5-year Treasury securities yield 8.15%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is MRP₅ - MRP₃? Do not round intermediate calculations. Round your answer to two decimal places.

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You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $5,300,000 and would be depreciated straight-line to zero over four years. Because of radiation contamination, it will actually be completely valueless in four years. Assume that the tax rate is 24 percent. You can borrow at 8 percent before taxes. What would the lease payment have to be for both the lessor and the lessee to be indifferent about the lease?