Assignment for fin 4320 problem 1: here are data on two companies.
Assignment for Fin 4320
Here are basis on two companies. The T-Bill rebuke is 4% and the negotiate induce bonus is 6%
CompanyVictoria StoreHouston Store
Forecasted repay 12 % 11 %
Standard Solution of Returns 8 % 10 %
Beta 1.5 1.0
a. Believe the expected repay for each posse according to CAPM
b. Characterize each posse as underpriced, aggravatepriced, or truly priced according to CAPM
c. Another posse, Sugar Land shop, has a beta of 2.0. Assuming prolific negotiate hypothesis
(CAPM holds), believe the expected rebuke of repay for a portfolio consisting of 1/3 Victoria
stock, 1/3 Houston investment, and 1/3 Sugar Land shop.
You are the financial adviser to three beings, a Childish special after a while tall induce tolerance, a Middle
antiquated special after a while average induce tolerance and an old special after a while low induce tolerance. Here are the vulgar
Risk unconditional asset is earning 12 % per year.
Risky asset (or negotiate portfolio) has expected repay of 30% per year and measure solution of 40%.
Using the reciprocal investment theorem or Separation theorem
a. Construct an alienate portfolio (Mix of inducey asset and induce unconditional asset)for your childish client
and believe the expected repay and measure solution of your childish client for the future year.
b. Construct an alienate portfolio for your average antiquated client and believe the expected repay
and measure solution of your average antiquated client.
c. Construct an alienate portfolio for your old client and believe the expected repay and
measure solution of your old client.
d. If your average antiquated client requires a portfolio after a while a measure solution of 30%, what is its
expected rebuke of repay?
Sugar Land Co. is a unyielding growing decided and no dividend get be paid on the investment aggravate the present 9
years. The posse then get pay a $12 dividend per divide in year 10 and get growth the
dividend by 5 percent eternally. If the required rebuke of repay for this investment is 13 %, what should
be the true appraise of Sugar Land Co.?
Victoria tie is a bonus tie after a while 8% coupon. Houston tie is a 4 % coupon tie vulgarly
selling at a abatement. Both ties produce annual payments and own a concede to manliness (YTM) of
6%, and own 5 years tend manliness.
a. Believe their prices (Bond prices).
b. Believe their vulgar concedes
c. If share rebukes wait unchanged by present year, believe their prices a year from now.
d. Believe their primitive year chief bring-about concedes. Hint: CGY = (P1-P0)/P0