Question
In: Finance
Douglas Keel, a financial analyst for Orange Industries, wishes to estimate the rate of return for...
Douglas Keel, a financial analyst for Orange Industries, wishes to estimate the rate of return for two similar-risk investments, X and Y. Douglas's research indicates that the immediate past returns will serve as reasonable estimates of future returns. A year earlier, investment X had a market value of $27,000; and investment Y had a market value of \$64,000. During the year, investment X generated cash flow of $2,025 and investment Y generated cash flow of $ 7,327. The current market values of investments X and Y are $27,781 and $64,000, respectively. a. Calculate the expected rate of return on investments X and Y using the most recent year's data. b. Assuming that the two investments are equally risky, which one should Douglas recommend?
Solutions
Expert Solution
Rate of return = cash flow generated during the year +(Current price of investment - Previous years market value of investment) / Previous years market value of investment
Investment X:
= $2,025 + ($27,781 - $27,000) / $27,000
= $2,025 + $781 / $27,000
= $2,806 / $27,000
= 10.39%
Investment Y:
= $7,327 + ($64,000 - $64,000) / $64,000
= $7,327 + 0 / $64,000
= 11.44%
b. The expected rate of return on investment Y is higher than the investment X and the amount of risk on both the investment are equall.
jeff jeffy answered 2 years agoRelated Solutions
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