The table below is the Monthly return Correlation Coefficients between two stocks:

Required:

a. Which pair of two stocks have the highest and lowest correlations?

b. Suggest some economic reasons to explain the high and low correlation between these stocks. If you were to form a portfolio of two stocks, which ones would you choose to maximise the benefits of diversification? Give reasons for your answer.

The Adams Construction Company is bidding on a project to install alarge flood drainage culvert from Dandridge to a distantlake. The cost and benefits

are shown below. Use the Present Worth conventional and modified Benefit-Cost ration method to make a recommendation.Draw Cash Flow Diagram

Initial investment = $2 million

Right of way maintenance cost = $30,000 per year

Major upkeep every six years = $50,000

Annual benefits to the taxpayers = $135,000 per year

Life of the project = 12 years

MARR = 6%

On 3 May 2019, a speculator buys five July 2019 US Soybeans futures contracts at a price of 842 cents per bushel. The speculator closes out her futures position on 30 May 2019 at a price of 888.88 cent per bushel. The US Soybeans futures contract is written on 5,000 bushels of soybeans and, for a speculator, the initial and maintenance margins are $3,375 and $2,500 per contract respectively. Assume that the speculator does not withdraw any excess out of their margin account.

1. At the time the futures position is established, what is the minimum price movement that will generate a margin call? Report your answer in cents with 2 decimal places (2 dps).
   
2. Construct a table as below to illustrate the daily marking-to-market (and final settlement) of the speculator’s overall futures position.

Table Q2

c. What is the overall profit/loss of the speculator? Decompose the overall profit/loss into two components: (i) total margin calls, and (ii) the change in the margin account balance.

NPVs and IRRs for Mutually Exclusive Projects

Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $22,000, whereas the gas-powered truck will cost $17,500. The cost of capital that applies to both investments is 12%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,290 per year and those for the gas-powered truck will be $5,000 per year. Annual net cash flows include depreciation expenses.

1. Calculate the NPV for each type of truck. Do not round intermediate calculations. Round your answers to the nearest dollar.

   Electric-powered truck	$
   Gas-powered truck	$

2. Calculate the IRR for each type of truck. Do not round intermediate calculations. Round your answers to two decimal places.

   Electric-powered truck	%
   Gas-powered truck	%

   Which type of the truck should the firm purchase?
   -Select-Electric-poweredGas-powered

Bill Clinton reportedly was paid 10 million to write his book My Life. The book took three years to write. In the time he spent writing, Clinton could have been paid to make speeches. Given his popularity, assume that he could earn 8 million per year (paid at the end of the year) speaking instead of writing. Assume his cost of capital is 10% per year.

What is the IRR of agreeing to write the book (ignoring any royalty payments)? Should Clinton agree to write the book (ignoring any royalty payments)? Why?

1) You are US company, 500,000 BP (British Pound) payable to UK in one year. Answer in terms of US$.

Information for Forward Contract:

Forward exchange rate (one yr): 1.54 $/BP

Information for Money Market Instruments (MMI):

Current exchange rate: 1.50 $/BP

Investment return at Aerion Fund Management (in UK): 4% annual

Interest rate of borrowing from Bank of America (in USA): 2% annual

Information you need for Currency Options Contract:

Options premium: 0.015 $/BP

Interest rate of borrowing from Bank of America (USA): 2% annual

Allowed to exercise options at 1.54 $/BP

What are the costs of MMI? (Answer in US$ of course. You are US company!)

2) You are US company, 500,000 BP (British Pound) payable to UK in one year. Answer in terms of US$.

Information for Forward Contract:

Forward exchange rate (one yr): 1.54 $/BP

Information for Money Market Instruments (MMI):

Current exchange rate: 1.50 $/BP

Investment return at Aerion Fund Management (in UK): 4% annual

Interest rate of borrowing from Bank of America (in USA): 2% annual

Information you need for Currency Options Contract:

Options premium: 0.015 $/BP

Interest rate of borrowing from Bank of America (USA): 2% annual

Allowed to exercise options at 1.54 $/BP

If the break-even exchange rate for the Currency Options Contract is 1.46 $/BP, and you believe the exchange rate at the time of the payment would be 1.43 $/BP, should you sign the contract?

The following three stocks are available in the market: E(R) β Stock A 10.5 % 1.27 Stock B 13.7 1.07 Stock C 16.2 1.47 Market 14.1 1.00 Assume the market model is valid. The return on the market is 14.9 percent and there are no unsystematic surprises in the returns. What is the return on each stock? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Return Stock A % Stock B % Stock C % Assume a portfolio has weights of 20 percent Stock A, 35 percent Stock B, and 45 percent Stock C. The return on the market is 14.9 percent and there are no unsystematic surprises in the returns. What is the return on the portfolio? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Return on the portfolio %

Robbins Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected.

Reed Enterprises is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

Spence Company is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital or negative, in both cases it will be rejected.

Module 20: Long-Term Financing 1. Why do public organizations use municipal bonds to finance long-term capital projects?

2. A major urban center is planning to issue a $100 million, 20-year, semiannual-interest-paying municipal bond for the construction of a stadium.

a. The interest rate is 5.875%, based on the economic and financial conditions of the city and city government.

b. The design and issuance costs are estimated to be $10 million and 1%, respectively.

c. What is the total interest paid if the city decides to adopt a level debt service structure?

d. How much will the city still owe on this bond at the end of each year?

2. The city administration is considering refurbishing the lighting system of its administration building. After an initial investigation, the city procurement office has narrowed down the choices to the following two options: a. Option 1 is an Ergolight system that costs $500,000 to purchase and install. The energy cost for option 1 is $20,000, and its maintenance cost is $2,000. b. Option 2 is a conventional system that costs $100,000 to purchase and install. The energy cost for option 2 is $50,000, and its maintenance cost is $10,000. Both systems are expected to last for 20 years. Assume that the discount rate is 4% and all future costs are paid at the end of the year. 3. Which lighting system should the city select based on LCC considerations?

"Bond Risk Management" Please respond to the following:

• Given the Federal Reserve Board’s current and forward-looking position on interest rates, predict the level of risk associated with investing in bonds and recommend a portfolio percentage for investment in bonds for a financial institution. Provide support for your recommendation.
• Assess how an increase in the interest rate would change your recommendation provided above. Indicate the basis for your rationale.

Problem 12-01
AFN equation

Broussard Skateboard's sales are expected to increase by 15% from $7.4 million in 2016 to $8.51 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 4%, and the forecasted payout ratio is 70%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year. Round your answer to the nearest dollar. Do not round intermediate calculations.

Create an excel spreadsheet with the following information

Mary Fernandez is a student in the Spring Quarter class of Enterprise Finance. It is now 7:30 AM and she is attending the October meeting of the San Diego Venture Group. There are approximately 300 people attending the meeting: bankers, accountants, lawyers, headhunters and entrepreneurs. Mary is a bit lost and wanders to the back of the room to get a cup of coffee. Looking for the cream for her coffee she stumbles into John Thompson.

John is the son of a doctor who majored in Computer Science while at UCLA. He has relocated back to San Diego and for the last four years he has been a software engineer.

John is an avid waterman. He surfs, swims, paddles and stand up paddles every day and hopes to do so the remainder of his life. John has found that FitBit, the Apple Watch and other devices do not work for him. John needs something that is waterproof, can track his efforts if he is running or biking and calculate his calorie and level of exercise if he is swimming, surfing, paddling, etc. There are devices that handle part of what he is looking for but nothing seems to have it all. John decides to write the programing that will be the basis for the “Iron Fit” that keep track off John’s exercise activities no matter what he is doing.

After a year plus of effort John has written the necessary software and through friends has come up with a product design. After going through a number of prototypes John has finally come up with a product and is looking to roll it out. Friends have told him that the surf and action sport market is where he should first launch the product. John wants to immediately roll out to bicycle shops, running shops and others. The ultimate goal is to sell the product through the major sporting goods retailers and big box stores. The initial reactions to the Iron Fit have been overwhelmingly positive. The next step is for John to raise some money and build a company but he is at a loss as to how to build the financial statements required for presentations to Angel Investors and Venture Capitalists.

Mary tells John that she would be happy to build the model. John mentions that he will need to hire 3 additional engineers to continue to refine and expand the product. Each engineer makes approximately $120,000 per year. In addition, he will need two VPs of marketing. One to sell the product to the action sports industry and one to sell the product to traditional bicycle, running and fitness shops. Each VP will command a salary of $150,000 per year. In addition, they will manage 3 sales people each, six total within the Company, at approximately $80,000 per annum. The marketing budget, for advertising and other materials, will be $350,000 for each marketing group per year or $700,000 for the Company as a whole. Marketing expenses are expected to be spent in an equal amount per month. The initial back office will contain an accountant @ $80,000 and two receptionists/secretaries @ $40,000. Additional salary expenses, including payroll taxes, health insurance and other benefits, are budgeted at 30% of total salaries. John hopes to make a salary of $175,000. Annual office expenses including occupancy are expected to be $25,000. John expects his salary expenses to increase by 5% in the second year and the other expenses to increase by 10%.

Capital expenses include a computer for each individual, $1,000, two network printers, $1,000, telephone, $1,000, two servers, $5,000 each, software, $10,000, and networking, $1,000.

John expects his gross margin as a % of sales to be 50%. The sales price of the Iron Fit will be $125.00 to stores with the retail price being approximately $160.00.   John is planning to keep the sale price constant in the second year in order to grab more market share.

Please complete an initial model for John’s company for the first two years. (This will require a month by month analysis.) What is the amount of capital needed? Assuming a required rate of return by investors of 20% per annum and the sale of the company at the end of the second year at seven times Year 2 EBITDA what is the company worth? (Please note that when discounting monthly cash flows you will need to divide the interest rate by 12.) What do you think about this deal? What questions do you need to ask if you were an investor?

Estimated Number of Units Sold

Month       Month         Month       Month         Month       Month      

1                2                3                4                5                6

0                250            500            1,000         5,000         6,000

Month       Month         Month       Month         Month       Month      

7                8                9                10              11              12

7,000         8,000         8,000         8,000         9,000         9,000

Month       Month         Month       Month         Month       Month      

13              14              15              16              17              18

10,000       10,000         12,000       12,000         15,000       15,000

Month       Month         Month       Month         Month       Month      

19              20              21              22              23              24

17,000       17,000         20,000       20,000         20,000       20,000