Question

Jack holds a portfolio with the following securities:

Security Investment Return

Stock A 723,653 -9.7%

Stock B 911,527 11.3%

Stock C 219,146 9.1%

Calculate the expected return of portfolio. Round the answers to two decimal places in percentage form.

Genetic Insights Co. purchases an asset for $19,779. This asset qualifies as a seven-year recovery asset under MACRS. The seven-year fixed depreciation percentages for years 1,2,3,4,5, and 6 are 14.29%, 24.49%, 17.49%, 12.49%, 8.93% and 8.93%, respectively. Genetic Insights has a tax rate of 30%. The asset is sold at the end of six years for $4,546.

Calculate after-tax cash flow at disposal. Round the answer to two decimals.

Answer 1

1) Jack holds a portfolio :

Given;

Security Investment Return

Stock A 723,653 -9.7%

Stock B 911,527 11.3%

Stock C 219,146 9.1%

Expected Return of Portfolio: The expected return for an investment portfolio is the weighted average of the expected return of each of its components.

Formula=

E ( R ) = R₁ * W₁ + R₂ * W₂ + R₃ * W₃

[where , R1 is Return of security 1 and W1 is weight of security 1]

Now, calculation of Weights of investment;

Total amount of investment in all securities = 723,653 + 911,527  + 219,146  

= 1854326

Now, Weights of security 1 will be =  

= 0.39

Weights of security 2 will be =

= 0.49

Weights of security 3 will be =

= 0.118 or 0.12

( Note: I'm taking at 0.12 by rounding off intermediate calculation because weights of all securities when added up together should be 100 or 1. So, I've taken it as 0.12. You can also check it )

Now,

E(R) = ( -0.097) * (0.39) + (0.113 ) * (0.49) + (0.091) * (0.12 )

= ( - 0.03783 ) + 0.05537 + 0.01092

= 10.412 %

the expected return of portfolio is 10.41 %

____________________________________________________

2) After-tax cash flow at disposal;

Given:

asset for $19,779

tax rate of 30%

asset is sold at the end of six years for $4,546

Now,

after- tax cash flow

Book Value on Purchase	19,779
- ( Accumulated Depreciation ) (19,779) * (0.1429 + 0.2449 + 0.1749 + 0.1249 + 0.0893 + 0.0893) 19779 * 0.8662 17132.56	( 17132.56)
Book Value on Sale	2646.44

Salvage Value of Asset	4,546
- (Book value on the date of sale)	(2646.44)
Gain after disposing off the asset	1899.56
Tax on gain ( 1899.56 * 30%)	569.86
After tax salvage value ( 4546 - 569.86 )	3976.14

after-tax cash flow at disposal is 3976.14