Homeworks of financial management (MBA - OUM)

Task (1-1)r* = 3%I1 = 2%I2 = 4%I3 = 4%IP2 – Y = (2% + 4%)/ 2 = 3%IP3 – Y = (2% + 4% + 4%) = 3.3%-The yield on 2 – year Treasury securities:r2 – Y = r* + IP2 – Y + DRP + LP + MRP = 3% + 3% + 0 + 0 + 0 = 6%-The yield on 3 – year Treasury securities:r3 – Y = r* + IP3 – Y + DRP + LP + MRP = 3% + 3% + 0 + 0 + 0 = 6.3%Task (4-3)rRF = 5%RPM = 6%Expected return for the overall stock marketRM = rFR + RPM = 5% + 6% = 11%-With b = 1.2, the required rate of return on a stock r = 5% + 6% x 1.2 = 12.2%(r = rRF + RPM x b¬)

FINANCIAL MANAGEMENT MBAOUM -2013 HOMEWORKS Page 1 Homeworks for Financial Management Task (1-1) r * = 3% I 1 = 2% I 2 = 4% I 3 = 4%  IP 2 – Y = (2% + 4%)/ 2 = 3%  IP 3 – Y = (2% + 4% + 4%) = 3.3% - The yield on 2 – year Treasury securities: r 2 – Y = r * + IP 2 – Y + DRP + LP + MRP = 3% + 3% + 0 + 0 + 0 = 6% - The yield on 3 – year Treasury securities: r 3 – Y = r * + IP 3 – Y + DRP + LP + MRP = 3% + 3% + 0 + 0 + 0 = 6.3% Task (1-2) r RF = r * + IP = 6% r = 8% LP = 0.5% DRP = ? r = r * + IP + DRP + LP + MRP  DRP = r – (r * + IP + LP + MRP) Where r * + IP = 6%  DRP = 8% - (6% + 0.5% + 0) = 1.5% FINANCIAL MANAGEMENT MBAOUM -2013 HOMEWORKS Page 2 Task (1-3) r * = 3% IP 2 – Y = 3 MRP = ? r = r * + IP + DRP + LP + MRP MRP = r – (r * + IP + DRP + LP) = 6.2% - (3% + 3% + 0 + 0) = 0.2% Task (1-4) r * = 3% I 1 = 3% I 2 = 4% I 3 = 3.5% = I 4 = I 5 = I 6 = I 7 MRP = 0.00005 x (t – 1) R 7– Y =? IP 7 – Y = (3% + 4% + 3.5% + 3.5% + 3.5% + 3.5% + 3.5%)/7 = 3.5% MRP 7– Y = 0.0005 x (7-1) = 0.003 = 0.3%  r 7– Y = r * + IP + DRP + LP + MRP = 3% + 3.5% + 0.3% + 0 + 0 = 6.8% FINANCIAL MANAGEMENT MBAOUM -2013 HOMEWORKS Page 3 Task (1-5) r * = 3% I 1 = 8% I 2 = 5% I 3 = 4% = I 4 = I 5 = … r 2 – Y = r 3 – Y = 10% MRP 2 – Y =? MRP 5 – Y = ? IP 2 = (8% + 5%)/2 = 6.5% IP 5 = (8% + 5% + 4% + 4% + 4%)/5 = 5% MRP 2 – Y = r – (r * + IP 2 + LP + DRP) = 10% - (3% + 6.5%) = 0.5% MRP 5 – Y = r – (r * + IP 5 + LP + DRP) = 10% - (3% + 5%) = 2%  MRP 5 – Y - MRP 2 – Y = 2% - 0.5% = 1.5% Task (1-6) r * = 2% I 1 = 3% I 2 = I 3 = … = I fater on > 3 % MRP = 0 r 3 – Y - r 3 – Y = 2%  r * + IP 3 – (r * + IP 1 ) = 2%  IP 3 – IP 1 = 2% FINANCIAL MANAGEMENT MBAOUM -2013 HOMEWORKS Page 4  (I 1 + I 2 + I 3 )/ 3 – I 1 = 6  (I 1 + 2I 2 – 3I 1 = 6  2I 2 - 2I 1 = 6  I 2 – I 1 = 3 => I 2 = 3 + I 1 = 3 + 3 =6  I 2 = 6% Task (1-7) I 1 = 7% I 2 = 5% I 3 = … = I fater on = 3 % r * = 2% MRP = 0 MRP 1 = 0.2% MRP t = MRP t -1 (1+0.2) increase up to 1% a. r for 1-year, 2-year, 3-year, 5-year, 10-year and 20- year Treasury securities, as the following table: Year r * (%) Inflation (%) IP (%) MRP (%) r (%) 1 2 7 7 0.20 9.20 2 2 5 6 0.24 8.24 3 2 3 5 0.29 7.29 4 2 3 5 0.35 6.85 5 2 3 4 0.41 6.61 6 2 3 4 0.50 6.50 7 2 3 4 0.60 6.45 8 2 3 4 0.72 6.47 9 2 3 4 0.86 6.53 10 2 3 4 1.03 7.03 11 2 3 3 1.03 6.03 12 2 3 3 1.03 6.03 13 2 3 3 1.03 6.03 FINANCIAL MANAGEMENT MBAOUM -2013 HOMEWORKS Page 5 14 2 3 3 1.03 6.03 15 2 3 3 1.03 6.03 16 2 3 3 1.03 6.03 17 2 3 3 1.03 6.03 18 2 3 3 1.03 6.03 19 2 3 3 1.03 6.03 20 2 3 3 1.03 6.03 FINANCIAL MANAGEMENT MBAOUM -2013 HOMEWORKS Page 6 CHAPTER 4: RISK AND RETURN Task (4-1): - Expected return: = [0.1 x (-0.5)] + [0.2 x (-0.05)] + [0.4 X 0.16] + [0.2 x 0.25] + [0.1 x 0.6] = 0.114 = 11.4% - Standard Deviation: = 0.2669 - Coefficient of variation: Task (4-2) Stock b Probability (*) A: $35,000 0.8 0.47 B: $40,000 1.4 0.53 (*) Probability A = [35,000/ (35,000 + 40,000)] = 0.47 FINANCIAL MANAGEMENT MBAOUM -2013 HOMEWORKS Page 7 Probability B = 1 – 0.47 = 0.53  The portfolio’s beta is b p = 0.8 x 0.47 x 0.53 = 1.118 Task (4-3) r RF = 5% RP M = 6%  Expected return for the overall stock market R M = r FR + RP M = 5% + 6% = 11% - With b = 1.2, the required rate of return on a stock r = 5% + 6% x 1.2 = 12.2% (r = r RF + RP M x b) Task (4-4) r RF = 6% RP M = 13% B = 0.7 - Market risk premium: RP M = r M - r RF = 13% - 6% = 7% - Required rat eof return of a stock r r = r RF + RP M x B = 6% +7% x 0.7 = 10.9% Task 4-5: Profitability r M (%) r j (%) 0.3 15 20 0.4 9 5 0.3 18 12 a. Expected rate of return for the market and stock j: b. Standard deviation for market and stock j: FINANCIAL MANAGEMENT MBAOUM -2013 HOMEWORKS Page 8 c. The coefficient of variation for the market and stock j: T ask (4-6) r RF = 5% r M = 10% r A = 12% a. Beta of stock A: r A = r R + RP M x B A = r RF + (r M - r RF ) x B A  (r M - r RF ) x B A = r A - r RF  B A = [(r A - r RF )/ (r M - r RF )] = [(12% - 5%)/ (10% - 5%)] = 1.4 FINANCIAL MANAGEMENT MBAOUM -2013 HOMEWORKS Page 9 b. B new = 2.0 We have r A = r RF + (r M - r RF ) x B new = 5% + (10% - 5%) x 2 = 15% Task (4-7) r RF = 9% r M = 14% B i = 1.3 a. Required rate of return: b. r A = r RF + (r M - r RF ) x B i = 9% + (14% - 9%) x 1.3 = 15.5% SML = r RF + (r M - r RF ) x B i = r RF + RP M x B i r RF1 = 10% r RF2 = 8% r N1 = r RF + (r M - r RF1 ) x B = 10% + (14% -10%) x 1.3 = 15.2% RP M = r M - r RF1 = 14% - 10% = 4% SML 1 = 14% - 10% = 4% With r RF = 10%  r M = RP P + r RF = 5% + 10% = 15% r A = r RF + MR P x B i = 10% + 5% x 1.3 = 16.5% r N1 = r RF + (r M - r RF2 ) x B = 8% + (14% - 8%) x 1.3 = 15.8% RP M = r M - r RF2 = 14% - 8% = 6% SML 2 = 14% - 8% = 6% With r RF = 8% r M = RP P + r RF = 5% + 8% = 13% r A = 5% + 5% x 1.3 = 14.5% c. r RF = 9% (constant) r M1 = 16% r M2 = 13% r 1 = 9% + (16% - 9%) x 1.3 = 18.1% r 1 = 9% + (14% - 9%) x 1.3 = 14.2% Stock Investment ($) Beta Probability (%) A 400,000 1.50 10 B 600,000 (0.50) 15 C 1,000,000 1.25 25 D 2,000,000 0.75 50 r M = 14% r RF = 6% - Beta of the investment: FINANCIAL MANAGEMENT MBAOUM -2013 HOMEWORKS Page 10 B = 1.5 x 0.1 + (-0.5) x 0.15 + 1.25 x 0.25 + 0.75 x 0.5 = 0.7625 - Require rate of retun of the dund: r = r RF + (r M - r RF ) x B = 6% + (14% - 6%) x 0.7625 = 12.1% Task (4-11) B R = 1.5 B 3 = 0.75 r RF = 7% rˆ = 13% = r M r RF = r M – r FR = 13% - 7% = 6% Required rate of return: r R = r RF + RM P x B R = 7% + 6% x 1.5 = 16% r S = r RF + RM P x B S = 7% + 6% x 0.75 = 11.5%  The required rate of return on the risker srock exceed the required return on the less risky stock: = 16% - 11.5% = 4.5% . FINANCIAL MANAGEMENT MBAOUM -2013 HOMEWORKS Page 1 Homeworks for Financial Management Task (1-1) r * = 3% I 1 = 2% I 2 = 4% I 3 = 4% . 14% r RF = 6% - Beta of the investment: FINANCIAL MANAGEMENT MBAOUM -2013 HOMEWORKS Page 10 B = 1.5 x 0.1 + (-0.5) x 0.15 + 1.25 x 0.25 + 0.75 x 0.5 = 0.7625 - Require rate of retun of the dund: r. market and stock j: FINANCIAL MANAGEMENT MBAOUM -2013 HOMEWORKS Page 8 c. The coefficient of variation for the market and stock j: T ask (4-6) r RF = 5% r M = 10% r A = 12% a. Beta of stock A: r A =