Reference no: EM13660811
Discussion 1: Risk and Return
A. Assume that you own a sizeable investment portfolio that is invested exclusively in a broad-based stock market index fund. Assume also that you contemplate adding a sizeable investment in the stock of the company that you have elected to use for Assignment 1 (which is due at the end of Week 10). What will happen to the overall riskiness of the portfolio, and why, with the addition of the new investment? What specific indicators support your conclusion? Should you make the additional investment - why or why not?
.B. Using the company that you have selected for Assignment No. 1 Financial Research Project (due at the end of Week 9), value a share of the company's stock using both the (1) constant growth dividend discount model, and (2) a discounted free cash flow model, and compare those values to the current trading price of a share of the stock? Is the stock undervalued or overvalued? Carefully explain the assumptions used in the valuations and the rationale for your response? (You may use https://www.valuepro.net for the discounted free cash flow valuation model.)
Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. This homework assignment is worth 100 points.
Use the following information for Questions 1 through 5:
Assume that you are nearing graduation and have applied for a job with a local bank. The bank's evaluation process requires you to take an examination that covers several financial analysis techniques. The first section of the test asks you to address these discounted cash flow analysis problems:
1. What is the present value of the following uneven cash flow stream -$50, $100, $75, and $50 at the end of Years 0 through 3? The appropriate interest rate is 10%, compounded annually.
2. We sometimes need to find out how long it will take a sum of money (or something else, such as earnings, population, or prices) to grow to some specified amount. For example, if a company's sales are growing at a rate of 20% per year, how long will it take sales to double?
3. Will the future value be larger or smaller if we compound an initial amount more often than annually-for example, every 6 months, or semiannually-holding the stated interest rate constant? Why?
4. What is the effective annual rate (EAR or EFF%) for a nominal rate of 12%, compounded semiannually? Compounded quarterly? Compounded monthly? Compounded daily?
5. Suppose that on January 1 you deposit $100 in an account that pays a nominal (or quoted) interest rate of 11.33463%, with interest added (compounded) daily. How much will you have in your account on October 1, or 9 months later?
Use the following information for Questions 6 and 7:
A firm issues a 10-year, $1,000 par value bond with a 10% annual coupon and a required rate of return is 10%.
6. What would be the value of the bond described above if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13% return? Would we now have a discount or a premium bond?
7. What would happen to the bond's value if inflation fell and rd declined to 7%? Would we now have a premium or a discount bond?
8. What is the yield to maturity on a 10-year, 9% annual coupon, $1,000 par value bond that sells for $887.00? That sells for $1,134.20? What does a bond selling at a discount or at a premium tell you about the relationship between rd and the bond's coupon rate?
9. What are the total return, the current yield, and the capital gains yield for the discount bond in Question #8 at $887.00? At $1,134.20? (Assume the bond is held to maturity and the company does not default on the bond.