Question

In: Economics

Consider two $60,000 investments – call them Investment A and Investment B. Both investments will earn...

Consider two $60,000 investments – call them Investment A and Investment B. Both investments will earn $5,000 with a probability of 0.5 and $1,000 with a probability of 0.5. Investment A will use 100% equity financing (issuing stocks). Investment B will get $30,000 through issuing stocks and $30,000 through issuing bonds. Investment B must pay 4% interest on the bonds.

a. Calculate the expected returns on equity (returns after interest payments divided by the amount of equity) for Investment A and Investment B. Express the returns as a percentage.

b. If the investments earned the lower amount ($1,000), what is the rate of return on equity for Investment A and Investment B? If the investments earned the higher amount ($5,000), what is the return on equity for Investment A and Investment B?

c. Using your answers from ‘a’ and ‘b’, what is the standard deviation of the rate of return on equity in each case? Which investment has the highest expected returns on equity? Which has the lowest risk? What explains the difference in risk between the two investments?

Solutions

Expert Solution


Related Solutions

5. Comparing equity financing with debt financing. Consider two $60,000 investments – call them Investment A...
5. Comparing equity financing with debt financing. Consider two $60,000 investments – call them Investment A and Investment B. Both investments will earn $5,000 with a probability of 0.5 and $1,000 with a probability of 0.5. Investment A will use 100% equity financing (issuing stocks). Investment B will get $30,000 through issuing stocks and $30,000 through issuing bonds. Investment B must pay 4% interest on the bonds. a. Calculate the expected returns on equity (returns after interest payments divided by...
Consider the following returns for two investments, A and B, over the past four years: Investment...
Consider the following returns for two investments, A and B, over the past four years: Investment 1: 9% 10% -7% 15% Investment 2: 7% 9% -16% 14% b-1. Calculate the standard deviation for each investment. (Round your answers to 2 decimal places.) Investment 1: Investment 2: c-1. Given a risk-free rate of 1.2%, calculate the Sharpe ratio for each investment. (Round your answers to 2 decimal places.) Investment 1: Investment 2:
Imagine that a financial buyer is deciding between two separate investments (investment A and Investment B)...
Imagine that a financial buyer is deciding between two separate investments (investment A and Investment B) that coincidentally have the same current year EBITDA of $100.0 million. In both cases, the maximum amount of leverage allowed is 5.5x debt/current year EBITDA and the equity contribution is 30%. Investment A has an exit potential in projected year 3 with a 7.9x EBITDA exit multiple, $125.0 million in EBITDA and Net Debt of $500.0 million. Investment B has an exit potential in...
1. Consider two individuals. Both earn the same amount and choose to save the same amount....
1. Consider two individuals. Both earn the same amount and choose to save the same amount. However, the first agent is more risk averse than the second. i) Do you expect the saving portfolios to be different for the two agents? Which of the two is more likely to hold stocks? Now, assume that the second individual is actually much wealthier than the first. ii) Do you expect the two agents to rely on the same type of financial intermediaries?...
You’ve been examining two enzymes (let’s call them Enzyme A and Enzyme B) . For enzyme...
You’ve been examining two enzymes (let’s call them Enzyme A and Enzyme B) . For enzyme A the Km=1000mM and Vmax = 1000 mmol/min. For Enzyme B, Km= 10mM and Vmax= 100 mmol/min. Showing your work, and explain your reasoning, determine which enzyme works faster at substrate concentrations of 5mM, 100mM, and 2000mM.
Consider the following mutually exclusive investments T=0, 1, 2 Investment A: -200, 40, 210 Investment B:...
Consider the following mutually exclusive investments T=0, 1, 2 Investment A: -200, 40, 210 Investment B: -200, 170, 70 a. Find IRRs for both projects b. “Draw” a graph of NPV schedules using Excel, in which you will show the NPV of each project as a function of its discount rate (i.e NPV on the vertical axis and r on the horizontal axis). Both NPV schedules should be on the same graph. c. Solve for the crossover rate d. Please...
Consider the following mutually exclusive investments T=0 1 2 Investment A: -200 40 210 Investment B:...
Consider the following mutually exclusive investments T=0 1 2 Investment A: -200 40 210 Investment B: -200 170 70 Find IRRs for both projects “Draw” a graph of NPV schedules using Excel, in which you will show the NPV of each project as a function of its discount rate (i.e NPV on the vertical axis and r on the horizontal axis). Both NPV schedules should be on the same graph. Solve for the crossover rate Please describe as fully as...
Consider the following mutually exclusive investments T=0 1 2 Investment A: -200 40 210 Investment B:...
Consider the following mutually exclusive investments T=0 1 2 Investment A: -200 40 210 Investment B: -200 170 70 Find IRRs for both projects “Draw” a graph of NPV schedules using Excel, in which you will show the NPV of each project as a function of its discount rate (i.e NPV on the vertical axis and r on the horizontal axis). Both NPV schedules should be on the same graph. Solve for the crossover rate Please describe as fully as...
XYZ owns two investments, A and B that have a combined total value of $54,000. Investment...
XYZ owns two investments, A and B that have a combined total value of $54,000. Investment A is expected to pay $31,000 in 2 years from today and has an expected turn of 7.60 percent per year. Investment B is expected to pay $44,000 in 5 years from today and has an expected turn of R per year. What is R, the expected annual return for investment B? A. 12.32% B. 13.85% C. 11.80% D. 10.08% E. None of the...
Two investments (A and B, below) have been proposed to the Capital Investment committee of your...
Two investments (A and B, below) have been proposed to the Capital Investment committee of your organization; The required rate of return for your company is 15%. What is the NPV for each investment? Assume the initial investments ($150k and $50k) occur at the beginning of the year and all other costs and benefits occur at the end of the year indicated. Ignore inflation. What is the payback period for each investment? Which investment would you recommend and why? Why...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT