Homework Assignment # 2

docx

School

Washington State University *

*We aren’t endorsed by this school

Course

479

Subject

Finance

Date

Jan 9, 2024

Type

docx

Pages

Uploaded by ConstableJellyfish18213

HOMEWORK ASSIGNMENT # 2 (60 points) Key Financial Principles for Decision-Making Purposes Due by Monday, October 30 th , 11:59 pm (PT) Overview Financial managers estimate risk and return to evaluate investments. They also understand that time affects the value of money and other investments. The purpose of this homework assignment is for you to evaluate different investment options based on risk and return and use the present and future value concepts to make sound and optimal financial decisions. Learning Objectives By the end of this homework, you will be able to: ● Calculate the risk and return of stand-alone and portfolio investments. ● Interpret risk and rate of return calculations to evaluate investment opportunities. ● Explain how time influences the value of money ● Calculate the future value and present value of single payments and annuities ● Calculate the time value of money on Microsoft Excel Homework Instructions Submit TWO FILES for this homework assignment. In this Word document , enter your final answers. In addition to this Word document, upload an Excel spreadsheet to support all the final answers you typed for this assignment. I will not accept assignments that are hand written. You have to show all your working by using an Excel spreadsheet to support your answer in the document file. I will not accept submissions that did not upload an Excel spreadsheet that demonstrates how you found your final answers in this document. When in doubt, providing more details of your working is safer than less. Be sure to use a different tab for each problem and use headings within the spreadsheet to present your work with clarity. You will also lose points for poor formatting. SPMGT 374 1

Problem # 1 : (20 points) You have the opportunity to purchase the Daytona Tortugas or the USSSA Pride. The franchises will cost the same to buy. The probability distributions of your expected returns for the franchises are as follows: Daytona Tortugas Probability Projected Return ($) 0.1 -200,000 0.2 0 0.4 70,000 0.2 150,000 0.1 250,000 a) What is the expected return for the Tortugas? (3 points) = $63,000 b) What is the standard deviation of the Tortugas? (3 points) 129,267.1652 c) What is the coefficient of variation for Tortugas? (3 points) 2.051859765 USSSA Pride Probability Projected Return ($) 0.1 -100,000 0.3 20,000 0.3 50,000 0.2 100,000 0.1 200,000 d) What is the expected return for the Pride? (3 points) $51,000 e) What is the standard deviation of the Pride? (3 points) 88,713.02046 f) What is the coefficient of variation for Pride? (3 points) 1.73947099 g) Which franchise would you invest in? Explain your answer. (2 points) SPMGT 374 2

Problem # 2 : (14 points) Jackson Sports Holdings has a total investment of $500 million in four companies: Company Investment ($) Rate of Return Beta Nike Inc. 230,000,000 10.0% 1.2 Callaway Golf Co. 80,000,000 3.0% 0.1 Dick’s Sporting Goods 160,000,000 7.5% 1.0 Under Armour 30,000,000 5.5% 0.6 Total 500,000,000 a) What is the expected rate of return for the portfolio? (4 points) 0.0781 b) The company is considering investing $200 million in Manchester United at a rate of return of 7.0%. Considering only the rate of return, would you advise them to invest in the company? Explain and show your working on Excel. Remember that the total investment increases as Manchester is now added to the portfolio. (4 points) c) What is the overall (weighted average) beta of this portfolio (without Manchester United)? (4 points) d) Would you expect a rate of return above or below the average market return with this portfolio? Explain. (2 points) SPMGT 374 3

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Problem # 3 : (16 points) Remember to enter your final answers in this Word document and to upload an Excel spreadsheet to demonstrate the working of your final answers. Be sure to use a different tab for each problem and to use headings within the spreadsheet to present your work with clarity. DO NOT USE THE TIME VALUE OF MONEY TABLES (APPENDIX A) TO CALCULATE THE FUTURE VALUES AND PRESENT VALUES IN THIS PROBLEM. Using Microsoft Excel , calculate the following Future Values and note the relationships between Future Value and interest rates and the length of time of the investment. Future Value: amount to which an investment will grow after earning interest. Case 1: Years invested remains at 5 years; the interest rate changes. (2 points) a) FV of $100 invested at 3% for 5 years: $115.93 b) FV of $100 invested at 5% for 5 years: $127.63 c) FV of $100 invested at 7% for 5 years: $140.26 d) As interest rate increases, the FV ____increases____________ . Case 2: The interest rate remains at 3%; the years invested changes. (2 points) a) FV of $100 invested at 3% for 5 years: $115.93 b) FV of $100 invested at 3% for 10 years: $134.39 c) FV of $100 invested at 3% for 15 years: $155.80 d) As the length of time the money is invested increases, the FV ___ _increase__ . Using Microsoft Excel , calculate the following Future Value of an Annuity and note the relationships between Future Value of an Annuity and interest rates and the length of time of the investment. Future Value of an Annuity: amount by which a series of equal payments (definition of annuity) will grow when invested at an interest rate for a specified amount of time. Examples of annuities: car/house payments when the interest rate does not change; apartment rent; paychecks when you get paid a fixed salary (can be weekly, biweekly, monthly, etc). Future Value of Annuity (FVA): Case 3: Years invested remains at 5 years; the interest rate changes. (2 points) SPMGT 374 4

a) FVA of $100 invested each year at 3% for 5 years: $530.91 b) FVA of $100 invested each year at 5% for 5 years: $552.56 c) FVA of $100 invested each year at 7% for 5 years: $575.07 d) As interest rate increases, the FVA _____increases_________ . Case 4: The interest rate remains at 3%; the years invested changes. (2 points) a) FVA of $100 invested each year at 3% for 5 years: $530.91 b) FVA of $100 invested each year at 3% for 10 years: $1,146.39 c) FVA of $100 invested each year at 3% for 15 years: $1859.89 d) As the length of time the money is invested increases, the FVA ___increases__. Using Microsoft Excel , calculate the following Present Value and note the relationships between the Present Value and discount rates and the length of time the payment is received. Present Value: today’s value of a future cash flow. Case 5: Years invested remains at 5 years; the discount rate changes. (2 points) a) PV of $100 received in 5 years with a discount rate of 3%: $86.26 b) PV of $100 received in 5 years with a discount rate of 5%: $78.35 c) PV of $100 received in 5 years with a discount rate of 7%: $71.30 d) As discount rate increases, the PV ____ _decreases__________ . Case 6: The discount rate remains at 3%; the years invested changes. (2 points) a) PV of $100 received in 5 years with a discount rate of 3%: $86.26 b) PV of $100 received in 10 years with a discount rate of 3%: $74.41 c) PV of $100 received in 15 years with a discount rate of 3%: $64.19 d) As the length of time the money is received increases, the PV ____Decreases ______________ . SPMGT 374 5

Using Microsoft Excel , calculate the following Present Value and note the relationships between the Present Value and discount rates and the length of time the payment is received. Present Value of an Annuity (PVA): today’s value of a series of equal future cash flows. Case 7: Years invested remains at 5 years; the discount rate changes. (2 points) a) PVA of $100 received each year at 3% for 5 years: $457.97 b) PVA of $100 received each year at 5% for 5 years: $432.95 c) PVA of $100 received each year at 7% for 5 years: $410.02 d) As the discount rate increases, the PVA _____decreases____________. Case 8: The discount rate remains at 3%; the years invested changes. (2 points) a) PVA of $100 received each year at 3% for 5 years: $457.97 b) PVA of $100 received each year at 3% for 10 years: $853.02 c) PVA of $100 received each year at 3% for 15 years: $1,193.79 d) As the length of time the money is received increases, the PVA ____increases _____________ . Problem # 4 : (5 points) Jenny received two endorsement offers – Under Armour offers $50,000 to be paid, in a single payment, in 5 years and Nike negotiated a long-term deal that called for yearly payments to Jenny of $8,500 for 3 years. The risk of default with the Under Armour is higher, so a discount rate of 9% is applied as opposed to the 5% rate used for Nike. Which is the better endorsement offer? Explain. Use an Excel spreadsheet to demonstrate the working of your final answer. DO NOT USE THE TIME VALUE OF MONEY TABLES (APPENDIX A) TO CALCULATE YOUR ANSWER. Explain your answer below in this word document. Under Armour $32,496.57 Nike $23,147.61 Under Armor is the better offer because they have a higher present value than Nike which means Under Armor deal is worth more money in today’s money when accounting for time, risk, and inflation. SPMGT 374 6

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Problem # 5 : (5 points) Jill is about to sign with the WNBA, and her team is offering to defer some of her salary. You are her agent: assuming that Jill does not need money desperately, which would be the best decision for Jill (in terms of present value of future money)? (at 8% discount rate). Explain . Option 1) $100,000 now -> $100,000 Option 2) $148,000 in 5 years -> $100,726.31 Option 3) $172,000 in 7 years -> $100,360.35 Use an Excel spreadsheet to demonstrate the working of your final answer. DO NOT USE THE TIME VALUE OF MONEY TABLES (APPENDIX A) TO CALCULATE YOUR ANSWER. Explain your answer below in this word document. Out of the three options and based on the present value of money, option two would be her best option because it is the highest of the three in present value of money. SPMGT 374 7