What will be expected return of your portfolio

Assignment Help Financial Management

Reference no: EM131934199

Ex 1

A 4- year project has the following annual sales:

Year 1 2 3 4

Sales ($) 100,000 120,000 150,000 60,000

If NWC amounts to 10% of the current year’s (same year) sales, calculate:

a) NWC in every year

b) Delta NWC or the resulting cash flow in every year (be careful with sign of cash flow)

Ex 2

P&G stock has a Beta of 0.8 and IBM stock has a Beta of 1.4.

a) If you want to create a portfolio (P) by investing in both stocks, what should be the proportion or the weight ?

b) If the expected return for the coming year is 10% for P&G and 15% for IBM, what will be the expected return of your portfolio?

Ex 3

GM stock has a Beta of 1.2 and an expected return of 15%. Ford Stock has a Beta of 1.5 and an expected return of 17%.

a) If the risk-free rate is 5%, which stock would you buy?

b) What would the risk-free rate have to be for the 2 stocks to be correctly priced?

c) Draw the Security Market Line (Graph should show GM, Ford Stocks as well as the Market and the new Risk-free rate found in part b)

Ex 4

Given the following information related to every year of a 4-year project:

Sales volume = 100 units ;

Unit Selling Price = $9,000 ;

Unit variable cost = $5,000 ;

Cash fixed cost = $100,000 ;

Additional information:

Cost of investment (Capital Spending) = $5,000,000; Depreciation rates are 40% in year 1, 30% in year 2 , 20% in year 3 & 10% in year 4.

a) Calculate the net income in year 3 (Tax rate = 20%)

b) Calculate the OCF in year 3

Ex 5

A Co. is looking at a new system with an installed cost (Capital spending) of $312,000 that can save the firm $96,000 per year during 3 years. This investment will be subject to a 3-year straight line depreciation. At the end of this period, the system can be scrapped (sold) for $48,000. Finally, the system requires an initial investment in net working capital of $22,400. If the tax rate is 30 % and the RRR is 13 %:

a) What is the after-tax salvage value of this system at the end of year 3?

b) What is the annual OCF?

c) Using NPV rule, should the Co. install this new system?

Reference no: EM131934199

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