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You are the manager of a stock portfolio worth $10,500,000. It has a beta of 1.15. During the next three months, you expect a correction in the market that will take the market down about 5 percent; thus, your portfolio is expected to fall about 5.75 percent (5 percent times a beta of 1.15). You wish to lower the beta to 1. A particular stock index futures contract with the appropriate expiration is priced at 425.75 with a multiplier of $500.
a. Should you buy or sell futures? How many contracts should you use?
b. In three months, the portfolio has fallen in value to $9,870,000. The futures has fallen to 402.35. Determine the profit and portfolio return over the quarter. How close did you come to the desired result?
Sloan Transmissions, Inc., has the following estimates for its new gear assembly project: price = $1,700 per unit; variable costs = $480 per unit; fixed costs = $4.1 million; quantity = 95,000 units. Suppose the company believes all of its estimates ..
Asset A has an expected return of 10% and standard deviation of 20%. Asset B has an expected return of 16% and a standard deviation of 40%. The correlation between A and B is 0.35. Portfolio C is composed of 30% asset A and 70% asset B. Now add an il..
Your employer, a mid-sized human resources management company, is considering expansion into related fields, including the acquisition of Temp Force Co. an employment agency that supplies word processor operators and computer programmers to business ..
Bayou Okra Farms just paid a dividend of $3.35 on its stock. The growth rate in dividends is expected to be a constant 4 percent per year indefinitely. Investors require a return of 16 percent for the first three years, a return of 14 percent for the..
Consider an economy with two people, Victoria and Albert, and two commodities, tea and 2 crumpets. Currently Victoria and Albert would both be willing to substitute two cups of tea for one crumpet. Further, if the economy were to produce one less cup..
Harry Davis is interested in establishing a new division that will focus primarily on developing new Internet-based projects. their capital structure is 10% debt and 90% common equity; their cost of debt is typically 12%; and they have a beta of 1.7...
Shadow Corp. has no debt but can borrow at 7.4 percent. The firm’s WACC is currently 9.2 percent, and the tax rate is 35 percent. What is Shadow’s cost of equity? what will its cost of equity be? If the firm converts to 60 percent debt, what will the..
Johnson Siding has a gross profit of $1,200,000 and $400,000 in depreciation expense. Selling and administrative expense is $250,000. Given that the tax rate is 40 percent, compute the cash flow for Johnson Siding
Calculate the implied dividend yield and find the price range such that you make money under each of the cases
The price of gold is currently $1,000 per ounce. The forward price for delivery in 1 year is $1,200. An arbitrageur can borrow money at 10% per annum. What should the arbitrageur do? Assume that the cost of storing gold is zero and that gold provides..
For each of the algebra problems below, round your answer to 2 decimal places and record your answer on D2L without (if applicable) a comma. Thus, enter 3.24765 as 3.25 or .18763 as 0.19 or 3,214.842876 as 3214.85.
A project has an initial requirement of $205,484 for new equipment and $9,421 for net working capital. The installation costs to get the new equipment in working condition are 11,833. The annual operating cash flow is $80,574 and the cost of capital ..
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