CORPORATE FINANCE
CORPORATE FINANCE
12th Edition
ISBN: 9781307702804
Author: Ross
Publisher: MCG/CREATE
Question
Book Icon
Chapter 11, Problem 35QAP

a.

Summary Introduction

Adequate information:

    StateProbability of OutcomeReturn on Security 1Return on Security 2Return on Security 3
    10.150.200.200.05
    20.350.150.100.10
    30.350.100.150.15
    40.150.050.050.20

To compute: The expected return and standard deviation of Security 1, Security 2, and Security 3.

Introduction: Expected return simply refers to the return that is anticipated on the investment.

b.

Summary Introduction

Adequate information:

    StateProbability of OutcomeReturn on Security 1Return on Security 2Return on Security 3
    10.15 0.200.200.05
    20.350.150.100.10
    30.350.100.150.15
    40.150.050.050.20

To compute: The covariance and correlations between the securities.

Introduction: The relationship between two securities is referred to as covariance.

c.

Summary Introduction

Adequate information:

    StateProbability of OutcomeReturn on Security 1Return on Security 2Return on Security 3
    10.150.200.200.05
    20.350.150.100.10
    30.350.100.150.15
    40.150.050.050.20

Weight of security 1 (W1) = 50% or 0.50

Weight of security 2 (W2) = 50% or 0.50

Expected return of Security 1 [E(R1)] = 0.1250 or 12.50%

Expected return of Security 2 [E(R2)] = 0.1250 or 12.50%

Standard deviation of Security 1 (σ1) = 0.0461 or 4.61%

Standard deviation of Security 2 (σ2) = 0.0461 or 4.61%

Correlation between Security 1 and Security 2 (?1,2) = 0.59

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 1 and a half in Security 2.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

d.

Summary Introduction

Adequate information:

    StateProbability of OutcomeReturn on Security 1Return on Security 2Return on Security 3
    10.150.200.200.05
    20.350.150.100.10
    30.350.100.150.15
    40.150.050.050.20

Weight of security 1 (W1) = 50% or 0.50

Weight of security 3 (W3) = 50% or 0.50

Expected return of Security 1 [E(R1)] = 0.1250 or 12.50%

Expected return of Security 2 [E(R3)] = 0.1250 or 12.50%

Standard deviation of Security 1 (σ1) = 0.0461 or 4.61%

Standard deviation of Security 2 (σ3) = 0.0461 or 4.61%

Correlation between Security 1 and Security 3 (?1,3) = -1

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 1 and half in Security 3.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

e.

Summary Introduction

Adequate information:

    StateProbability of OutcomeReturn on Security 1Return on Security 2Return on Security 3
    10.150.200.200.05
    20.350.150.100.10
    30.350.100.150.15
    40.150.050.050.20

Weight of security 2 (W2) = 50% or 0.50

Weight of security 3 (W3) = 50% or 0.50

Expected return of Security 2 [E(R2)] = 0.1250 or 12.50%

Expected return of Security 3 [E(R3)] = 0.1250 or 12.50%

Standard deviation of Security 2 (σ2) = 0.0461 or 4.61%

Standard deviation of Security 3 (σ3) = 0.0461 or 4.61%

Correlation between Security 2 and Security 3 (?2,3) = -0.59

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 2 and a half in Security 3.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

f.

Summary Introduction

Adequate information:

    StateProbability of OutcomeReturn on Security 1Return on Security 2Return on Security 3
    10.150.200.200.05
    20.350.150.100.10
    30.350.100.150.15
    40.150.050.050.20

To compute: About diversification by considering Parts (a), (c), (d), (e).

Introduction: Correlation defines how two or more securities in the portfolio are related to each other.

Blurred answer
Students have asked these similar questions
QUESTION #1: ABC Inc. is debating the purchase of a new digital printer that will replace an older printer. The printer they acquired 2 years ago for $500,000 is worth $220,000 today and will have a salvage value of $80,000 after 5 more years. The printer generates revenues of $750,000 per year. The costs of operating the printer are $480,000 per year. The company currently has $110,000 invested in net operating working capital. The investment in net operating working capital will remain at this level for the remaining 5 years of the project.   The new printer will cost $830,000. It will cost $60,000 to install the new printer. The new printer will generate revenues of $1,120,000 per year. In addition, the costs of operating the new printer will be $550,000 per year. The company will have to increase its investment in net operating working capital to $175,000 at time zero. The investment in operating new working capital will remain at this level for the remaining 5 years of the…
QUESTION #1: ABC Inc. is debating the purchase of a new digital printer that will replace an older printer. The printer they acquired 2 years ago for $500,000 is worth $220,000 today and will have a salvage value of $80,000 after 5 more years. The printer generates revenues of $750,000 per year. The costs of operating the printer are $480,000 per year. The company currently has $110,000 invested in net operating working capital. The investment in net operating working capital will remain at this level for the remaining 5 years of the project.   The new printer will cost $830,000. It will cost $60,000 to install the new printer. The new printer will generate revenues of $1,120,000 per year. In addition, the costs of operating the new printer will be $550,000 per year. The company will have to increase its investment in net operating working capital to $175,000 at time zero. The investment in operating new working capital will remain at this level for the remaining 5 years of the…
QUESTION #1: A) What is the Net Operating Profit After Tax (NOPAT) for 2024?B) What is the Operating Cash Flow for 2024?  C) What is the Free Cash Flow for 2024?  Note: Marketable securities are non-operating current assets, and short-term debt (bank loan) is a non-operating current liability. Both of these items are excluded from the calculation of net operating working capital. D) If the stock trades for $85 per share at the end of 2024, and there are 315,000 shares outstanding, what is the MVA in 2024?  E) Given that the firm’s WACC is 14%, what is the EVA during 2024?  F) Create common size income statement and balance sheet for 2024, 2023 and 2022.  G) Using 2022 as the base year, create income statement and balance sheet percentage change analysis for 2024 and 2023.   QUESTION #2: In addition to the AAA Ltd. financial statements in Problem One, you are given more information as follows.   Sales are forecast to increase by 80% in 2025.   Short-term Debt, Long-term Debt, and Common…

Chapter 11 Solutions

CORPORATE FINANCE

Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT