Question

1. If you invest a lump sum of $100,000 with an annual return of 7% (compounded annually) with a final maturity of 15 years, how much should you receive at maturity?  Solve by building an excel spreadsheet.
2. Using a minimum of technical language, react to the following statement:  Because of the beneficial impact of diversification, prudent investors should evaluate a prospective investment or liquidation of an existing investment based on the contribution of the transaction to portfolio risk. (In other words, prudent investors build portfolios). As a consequence, markets will only reward investors (consistently) based on their assumption of systematic risk.
3. Explain when one would use Present Value to make a financial decision and when one would use Future Value.
4. Distinguish between the intrinsic value of a company’s equity versus the current market value of the company’s equity.  Which should management focus most strongly on in order to achieve its financial mission of maximizing long term shareholder value? Why?

Answer 1

A)

Lumpsum

100000

Annual return

7%

Maturity

15

years

Maturity value

275903.15

B)

Diversification and rebalancing of portfolio is crucial to manage the portfolio risk.

As a result, to get superior risk adjusted returns, it is essential to continue to maintain

a diversified portfolio and any investment or liquidation should be evalauted from the point of

whether it is adding or reducing portfolio risk

C)

A present value is used when we are evaluating whether a project should be undertaken or not

A future value is used when we are doing retirement planning and evaluating various options which can be used to do the planning

D)

An intrinsic value is determined by doing fundamental analaysis and by using discounted cash flow techniques.

The current market value is the price multiplied by outstanding share. And the management should ultimately care about

increasing intrinsic value which would lead to a rise in market value also and lead to gain for shareholder