In: Finance

Neon Corporation’s stock returns have a covariance with the market portfolio of .0455. The standard deviation of the returns on the market portfolio is 20 percent, and the expected market risk premium is 7.9 percent. The company has bonds outstanding with a total market value of $55.04 million and a yield to maturity of 6.9 percent. The company also has 4.54 million shares of common stock outstanding, each selling for $24. The company’s CEO considers the current debt–equity ratio optimal. The corporate tax rate is 40 percent, and Treasury bills currently yield 3.8 percent. The company is considering the purchase of additional equipment that would cost $42.04 million. The expected unlevered cash flows from the equipment are $11.84 million per year for five years. Purchasing the equipment will not change the risk level of the company. |

Calculate the NPV of the project. |

Beta of company | covariance between stock return and market return/ variance of market | .0455/.04 | 1.14 |

Variance of market return | square of standard deviation | 20%^2 | 0.04 |

covariance between stock return & market return | 0.0455 | ||

Required rate of return on equity Using CAPM | risk free rate+(market risk premium)*beta | 3.8+(7.9)*1.14 | 12.81 |

after tax cost of bonds | YTM*(1-tax rate) | 6.9*(1-.4) | 4.14 |

WACC | |||

source | Value | Weight = Individual value/total | |

Bonds | 55.04 | 0.3356098 | |

common stock | 4.54*24 | 108.96 | 0.6643902 |

total | 164 | WACC = sum of weight* cost of source | |

Year | cash flow | present value of cash flow = cash flow/(1+WACC)^n WACC = 10.22% | |

0 | -42.04 | -42.04 | |

1 | 11.84 | 10.74215 | |

2 | 11.84 | 9.746101 | |

3 | 11.84 | 8.842407 | |

4 | 11.84 | 8.022506 | |

5 | 11.84 | 7.27863 | |

NPV = sum of present value of cash flow | 2.59 | ||

NPV is positive so it should be purchased |

Neon Corporation’s stock returns have a covariance with the
market portfolio of .0345. The standard deviation of the returns on
the market portfolio is 25 percent, and the expected market risk
premium is 8.8 percent. The company has bonds outstanding with a
total market value of $55.13 million and a yield to maturity of 7.8
percent. The company also has 4.63 million shares of common stock
outstanding, each selling for $23. The company’s CEO considers the
current debt–equity ratio optimal....

Neon Corporation’s stock returns have a covariance with the
market portfolio of .0345. The standard deviation of the returns on
the market portfolio is 25 percent, and the expected market risk
premium is 8.8 percent. The company has bonds outstanding with a
total market value of $55.13 million and a yield to maturity of 7.8
percent. The company also has 4.63 million shares of common stock
outstanding, each selling for $23. The company’s CEO considers the
current debt–equity ratio optimal....

Neon Corporation’s stock returns have a covariance with the
market portfolio of .0385. The standard deviation of the returns on
the market portfolio is 20 percent, and the expected market risk
premium is 9.5 percent. The company has bonds outstanding with a
total market value of $55.2 million and a yield to maturity of 8.5
percent. The company also has 4.70 million shares of common stock
outstanding, each selling for $25. The company’s CEO considers the
current debt–equity ratio optimal....

First and Ten Corporation’s stock returns have a covariance with
the market portfolio of .0456. The standard deviation of the
returns on the market portfolio is 19 percent and the expected
market risk premium is 7.1 percent. The company has bonds
outstanding with a total market value of $55.8 million and a yield
to maturity of 6 percent. The company also has 5 million shares of
common stock outstanding, each selling for $43. The company’s CEO
considers the firm’s current...

First and Ten Corporation’s stock returns have a covariance with
the market portfolio of .0493. The standard deviation of the
returns on the market portfolio is 22 percent and the expected
market risk premium is 6.8 percent. The company has bonds
outstanding with a total market value of $55.5 million and a yield
to maturity of 5.7 percent. The company also has 4.7 million shares
of common stock outstanding, each selling for $46. The company’s
CEO considers the firm’s current...

Task 1: Compute the respective average, standard deviation, and
covariance of monthly or daily stock returns. You can pick any two
companies to download stock data for (daily or monthly
Covariance table will be in the form:
Var(stock1, stock1)
Cov(stock1, stock2)
Cov(stock1, stock2)
Var(stock2, stock2)
Note: Use STDEV.P in Excel for the standard deviation
Task 2: Using the obtained statistics fromQ1, calculate an equal
weighted portfolio return and portfolio variance for the first
portfolio using the below equations:
Equal weighted...

Returns on stocks X and Y are listed below: Period 1 2 3 4 5 6 7 Stock X 6% 5% -2% 10% 3% 8% -4% Stock Y 11% 7% 10% -2% 3% 5% -1% Consider a portfolio of 70% stock X and 30% stock Y. What is the (population) standard deviation of portfolio returns? Please specify your answer in decimal terms and round your answer to the nearest thousandth (e.g., enter 12.3 percent as 0.123). Note that the correct answer will be evaluated based on...

The standard deviation of the market index portfolio is 10%.
Stock A has a beta of 2 and a residual standard deviation of
20%.
A) calculate the total variance for an increase of .10 in its
beta.
B) calculate the total variance for an increase of 1% in its
residual standard deviation.

Q7: Show the Portfolio Standard Deviation (equation).
Say for total returns on assets in a stock portfolio. Show
equations!
-What are the Dependent and Independent Variables (give
a few examples)?
Dependent Variable:
Independent Variable(s):
--How would you select and determine these variables in
a model? Important!
--What are tests of variable/model statistical
significance? See regression tests!

What is the standard deviation of the returns on a portfolio
that is invested in stocks A, B, and C? 20 percent of the portfolio
is invested in stock A and 45 percent is invested in stock C.
State of Economy
Boom Normal Bust
Probability of Returns if State Occurs
State of Economy Stock A Stock B Stock C 20% 9% 3% 11%
55%4%5%8% 25% -2% 10% -13%

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