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
Rahul Sunny answered 1 year agoRelated 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.
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...
Consider the following two investments. One is a risk-free investment with a $100 return. The other...
Consider the
following two investments. One is a risk-free investment with a
$100 return. The other investment pays $2,000 20% of the time and a
$375 loss the rest of the time. Based on this information, answer
the following:
(i) Compute the
expected returns and standard deviations on these two investments
individually. (ii) Compute the value at risk for each
investment.
(iii) Which
investment will risk-averse investors prefer, if either? Which
investment will risk- neutral investors prefer, if either?
Consider the following two investments. One is a risk-free investment with a $100 return. The other...
Consider the
following two investments. One is a risk-free investment with a
$100 return. The other investment pays $2,000 20% of the time and a
$375 loss the rest of the time. Based on this information, answer
the following:
(i) Compute the
expected returns and standard deviations on these two investments
individually. (ii) Compute the value at risk for each
investment.
(iii) Which
investment will risk-averse investors prefer, if either? Which
investment will risk- neutral investors prefer, if either?
Consider an MNC has two choices on investment. One of them is to invest the project...
Consider an MNC has two choices on investment. One of them is to
invest the project in Taiwan only. The other is to invest 75% funds
in Taiwan and 25% in Singapore. Both investments give the same
return. The standard deviation of exchange movements is 7% for
Taiwan dollars and 5% for Singapore dollars. The correlation
coefficient between movements in the value of the Taiwan dollar and
the Singapore dollar is .7. Based on this information, which
investment should the...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Can you explain to me the differnces in how we paid for the health care (access...
- Discuss proactive and defensive marketing in context to the company position in the hypothetical market structure...
- Write a java code that could be used to show the simulation of a tornado. use...
- A Canadian company issues an 8-year term bond with face value of $1,000 and 6% coupon...
- 1. Consider the following nuclides: &
- In general, teams can be described three ways. Name and define each.
- JAVASCRIPT: Please create an array of student names and another array of student grades. - Create...
ADVERTISEMENT