Fin515 – problem set – week – 5 – graded – 25/25

Week 5 Problem Set

Answer the forthcoming questions and reresolve the forthcoming problems in the quantity supposing. When you are done, prevent the refine in the format flastname_Week_5_Problem_Set.docx, where flastspectry is your principal primal and you terminal spectry, and propose it to the embezzle dropbox.


Chapter 10 (pages 345–348):


You bought a fund one year ago for $50 per distribute and sold it today for $55 per distribute. It remunerated a $1 per distribute dividend today.

a. What was your realized grant?

b. How plenteous of the grant came from dividend grant and how plenteous came from principal form?



Consider two persomal banks. Bank A has 100 mortgages unappropriated, each for $1 pet, that it expects achieve be reremunerated today. Each mortgage has a 5% verisimilitude of failure, in which predicament the bank is not reremunerated anything. The fortuity of failure is stubborn abutting all the mortgages. Bank B has solely one mortgage of $100 pet unappropriated, which it besides expects achieve be reremunerated today. It besides has a 5% verisimilitude of not being repaid. Explain the dissimilarity among the emblem of abandon each bank faces. Which bank faces close abandon? Why?


Consider the forthcoming two, fully detached, economies. The expected grant and sublimation of all funds in twain economies is the selfsame. In the principal administration, all funds impel concomitantly—in good-tempered-tempered times all absorbs fuse concomitantly and in bad times they all gravitate concomitantly. In the assist administration, fund grants are stubborn—one fund increasing in absorb has no issue on the absorbs of other funds. Assuming you are abandon-averse and you could adopt one of the two economies in which to endow, which one would you adopt? Explain.


What does the beta of a fund deem?


Suppose the chaffer abandon reward is 5% and the abandon-free distribute scold is 4%. Using the postulates in Table 10.6 (besides shown aloft), count the expected grant of endowing in

a. Starbucks’ fund.

b. Hershey’s fund.

c. Autodesk’s fund.


Chapter 11 (pages 390–396):



You own three funds: 600 distributes of Apple Computer, 10,000 distributes of Cisco Systems, and 5,000 distributes of Colgate-Palmolive. The floating distribute absorbs and expected grants of Apple, Cisco, and Colgate-Palmolive are, respectively, $500, $20, $100 and 12%, 10%, 8%.

a. What are the portfolio weights of the three funds in your portfolio?

b. What is the expected grant of your portfolio?

c. Suppose the absorb of Apple fund goes up by $25, Cisco fuses by $5, and Colgate-Palmolive gravitates by $13. What are the new portfolio weights?

d. Assuming the funds’ expected grants wait the selfsame, what is the expected grant of the portfolio at the new absorbs?




Suppose Autodesk fund has a beta of 2.16, when-in-fact Costco fund has a beta of 0.69. If the abandon-free distribute scold is 4% and the expected grant of the chaffer portfolio is 10%, what is the expected grant of a portfolio that consists of 60% Autodesk fund and 40% Costco fund, according to the CAPM?


Chapter 12 (page 431):


Unida Systems has 40 pet distributes unappropriated trading for $10 per distribute. In union, Unida has $100 pet in unappropriated obligation. Suppose Unida’s equity absorb of principal is 15%, its obligation absorb of principal is 8%, and the corposcold tax scold is 40%.

·         a. What is Unida’s unlevered absorb of principal?

·         b. What is Unida’s after-tax obligation absorb of principal?

·         c. What is Unida’s weighted mediocre absorb of principal?



You would love to deem the weighted mediocre absorb of principal for a new airline concern. Based on its perseverance asset beta, you feel already deemd an unlevered absorb of principal for the secure of 9%. However, the new concern achieve be 25% obligation financed, and you obviate its obligation absorb of principal achieve be 6%. If its corposcold tax scold is 40%, what is your deem of its WACC?