Straight-line depreciation to a zero balance

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Calculate the expected return and standard deviation of for single stocks and portfolio

You have estimated the following probability distributions of expected future returns from stocks X and Y:

a) What is the expected return for stock X and Y?

Expected return of X = ??

Expected return of Y = ??

b) What is the standard deviation of expected returns for stock X and Y?

Standard deviation of X = ??

Standard deviation of Y = ??

c) Calculate the expected return and standard deviation of the mix of 50% X and 50% Y.

Expected return of the mix of 50% X + 50% Y = ??

d) Which stock would you consider to be riskier, X, Y, or 50% X + 50% Y? Why? (hint: calculate the coefficient of variation (COV) = standard deviation / expected return and compare.) Hints: please study the slides for the explanation of calculations.

Cov of X = ??

Cov of Y = ??

Cov of ( 50% X + 50% Y) = ??

Which do you pick? ---- ??

2) Capital budgeting decision on new branch

Initial cost of building and equipment is $1 million

Expected to have a useful life of 20 years

At the end of the project the building and its equipment are expected to be sold for a $200,000 salvage value

The building and its equipment will be depreciated over their 20-year life using straight-line depreciation to a zero balance

The building is to be constructed on land leased for $23,000 per year

Net working capital must be increased by $110,000

Annual revenues from the new branch will be $400,000

Of this $400,000 in revenues, $50,000 will be drawn away from the bank's main office

The new branch will incur about $130,000 per year in other expenses

Both expenses and revenues are expected to remain approximately constant over the branch's 20-year life

Marginal tax rate is 40%

Cost of capital 9%

Answer the following questions:

1. What is the cash flow for the branch's 20-year life

2. Calculate the NPV, Profitability index, and Internal rate of return (IRR).

3. Should the project be accepted? Why?

Reference no: EM131318367

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