5. Assume that the Treasury bill rate is 6 percent and the expected return on the market portfolio is 14 percent. Your firm is considering the following investment projects. Actual Expected Return .08 .05 .24 Project Beta 0.5 -0.25 C 2.0 In a top-level meeting of the firm's capital budgeting department, a financial analyst named Quart Low states that "the firm should undertake only those projects having an actual expected return (i.e., predicted internal rate of return) that exceeds the expected market portfolio rate of return of 14 percent. Therefore, the firm should accept project C and reject projects A and B." The Chief Executive Officer then turns to you and asks whether you agree or disagree with Mr. Low. What is your response? Explain your reasoning. If you disagree, recommend a better investment strategy and explain.

5. Assume that the Treasury bill rate is 6 percent and the expected return on the market portfolio is 14 percent. Your firm is considering the following investment projects. Actual Expected Return .08 .05 .24 Project Beta 0.5 -0.25 C 2.0 In a top-level meeting of the firm's capital budgeting department, a financial analyst named Quart Low states that "the firm should undertake only those projects having an actual expected return (i.e., predicted internal rate of return) that exceeds the expected market portfolio rate of return of 14 percent. Therefore, the firm should accept project C and reject projects A and B." The Chief Executive Officer then turns to you and asks whether you agree or disagree with Mr. Low. What is your response? Explain your reasoning. If you disagree, recommend a better investment strategy and explain.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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You became a fund manager in UAlbany Bank. After research, you pulled up two potential assets to invest. The assets' anticipated gains per share next year are: Asset 1, 324 Asset 2,324 Asset 1, 14 Probability Which asset is riskier and what is its variance per share? Asset 2, 14 0.40 0.40 0.20 Asset 1 -$10 $20 $35 Asset 2 $10 $15 $5
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8. Conclusions about capital budgeting The decision process Before making capital budgeting decisions, finance professionals often generate, review, analyze, select, and implement long-term investment proposals that meet firm-specific criteria and are consistent with the firm's strategic goals. Companies often use several methods to evaluate the project's cash flows and each of them has its benefits and disadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply. The NPV shows how much value the company is creating for its shareholders. For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR. Managers have been slow to adopt the IRR, because percentage returns are a harder concept for them to grasp. is the single best method to use when making capital budgeting decisions.
The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions. Consider the case of Green Caterpillar Garden Supplies Inc.: Green Caterpillar Garden Supplies Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Alpha’s expected future cash flows. To answer this question, Green Caterpillar’s CFO has asked that you compute the project’s payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year. Complete the following table and compute the project’s conventional payback period. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.) Year 0 Year 1 Year 2 Year 3 Expected cash flow -$4,500,000…
A project under consideration has an internal rate of return of 18% and a beta of 0.5. The risk-free rate is 6%, and the expected rate of return on the market portfolio is 18%. a. What is the required rate of return on the project? (Do not round intermediate calculations. Enter your answer as a whole percent.) b. Should the project be accepted? c. What is the required rate of return on the project if its beta is 1.50? (Do not round intermediate calculations. Enter your answer as a whole percent.) d. If project's beta is 1.50, should the project be accepted?
You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows: Years Cash Flow 100 1-10 14 On the basis of the behavior of the firm's stock, you believe that the beta of the firm is 1.41. Assuming that the rate of return available on risk-free investments is 5% and that the expected rate of return on the market portfolio is 13%, what is the net present value of the project? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions of dollars rounded to 2 decimal places.) Net present value million
Answer the following lettered questions on the basis of the information in this table: a. If the interest-rate cost of funds is 8 percent, what will be the optimal amount of R&D spending for this firm?b. Explain why $20 million of R&D spending will not be optimal.c. Why won’t $60 million be optimal either?
(Capital Asset Pricing Model) Johnson Manufacturing, Inc., is considering several investments. The rate on Treasury bills is currently 7.5 percent, and the expected return for the market is 10.5 percent. What should be the expected rate of return for each investment (using the CAPM)? Security A B C D Beta 1.62 1.02 0.71 1.34 a. The expected rate of return for security A, which has a beta of 1.62, is%. (Round to two decimal places.)
The Curry Company is analyzing two capital investments. The financial vice president insists on examining the risk of the projects in terms of their effect on the risk of a diversified portfolio. The standard deviation of Projects X and Y are 10.2% and 8.4%, respectively. The expected return for a diversified portfolio is 15% with a standard deviation of 4.5%. The correlation coefficient between Project X and the portfolio is 0.65. Between Project Y and the portfolio, the correlation coefficient is 0.81. The expected returns are 18.1% for Project X and 18.8% for Project Y. The risk-free rate is 8%. Which investment(s) should the company ассept?
You are considering investing in a project with the following possible outcomes: Probability of Investment States Occurrence Returns State 1: Economic boom 18% 20% State 2: Economic growth 42% 16% State 3: Economic decline 30% 3% State 4: Depression 10% -25% Calculate the expected rate of return and standard deviation of returns for this investment, respectively. O 7.35%, 12.99% O2.18%, 1.69% O 8.72%, 12.99% O3.50%, 1.69%
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