(a) To calculate: The number of contracts that should be entered, if he holds a $ 6 million portfolio of waterworks stock, for hedging purpose using the one-month maturity future contacts of S&P 500 index. Introduction: Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Question

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…

Answer 1

Question

Features Features Normal distribution is characterized by two parameters, mean (µ) and standard deviation (σ). When graphed, the mean represents the center of the bell curve and the graph is perfectly symmetric about the center. The mean, median, and mode are all equal for a normal distribution. The standard deviation measures the data's spread from the center. The higher the standard deviation, the more the data is spread out and the flatter the bell curve looks. Variance is another commonly used measure of the spread of the distribution and is equal to the square of the standard deviation.

Chapter 26, Problem 14PS

Summary Introduction

(a)

To calculate:

The number of contracts that should be entered, if he holds a $6 million portfolio of waterworks stock, for hedging purpose using the one-month maturity future contacts of S&P 500 index.

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Summary Introduction

(b)

To calculate:

The standard deviation of the monthly return of the hedged portfolio

Introduction:

Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.

Summary Introduction

(c)

To calculate:

The probability of getting negative return taking an assumption that there is a normal distribution of monthly returns and the risk free rate is 0.5% .

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

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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…

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Answer 2

Question

Features Features Normal distribution is characterized by two parameters, mean (µ) and standard deviation (σ). When graphed, the mean represents the center of the bell curve and the graph is perfectly symmetric about the center. The mean, median, and mode are all equal for a normal distribution. The standard deviation measures the data's spread from the center. The higher the standard deviation, the more the data is spread out and the flatter the bell curve looks. Variance is another commonly used measure of the spread of the distribution and is equal to the square of the standard deviation.

Chapter 26, Problem 14PS

Summary Introduction

(a)

To calculate:

The number of contracts that should be entered, if he holds a $6 million portfolio of waterworks stock, for hedging purpose using the one-month maturity future contacts of S&P 500 index.

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Summary Introduction

(b)

To calculate:

The standard deviation of the monthly return of the hedged portfolio

Introduction:

Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.

Summary Introduction

(c)

To calculate:

The probability of getting negative return taking an assumption that there is a normal distribution of monthly returns and the risk free rate is 0.5% .

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

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Answer 3

Question

Features Features Normal distribution is characterized by two parameters, mean (µ) and standard deviation (σ). When graphed, the mean represents the center of the bell curve and the graph is perfectly symmetric about the center. The mean, median, and mode are all equal for a normal distribution. The standard deviation measures the data's spread from the center. The higher the standard deviation, the more the data is spread out and the flatter the bell curve looks. Variance is another commonly used measure of the spread of the distribution and is equal to the square of the standard deviation.

Chapter 26, Problem 14PS

Summary Introduction

(a)

To calculate:

The number of contracts that should be entered, if he holds a $6 million portfolio of waterworks stock, for hedging purpose using the one-month maturity future contacts of S&P 500 index.

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Summary Introduction

(b)

To calculate:

The standard deviation of the monthly return of the hedged portfolio

Introduction:

Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.

Summary Introduction

(c)

To calculate:

The probability of getting negative return taking an assumption that there is a normal distribution of monthly returns and the risk free rate is 0.5% .

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

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Answer 4

Question

Features Features Normal distribution is characterized by two parameters, mean (µ) and standard deviation (σ). When graphed, the mean represents the center of the bell curve and the graph is perfectly symmetric about the center. The mean, median, and mode are all equal for a normal distribution. The standard deviation measures the data's spread from the center. The higher the standard deviation, the more the data is spread out and the flatter the bell curve looks. Variance is another commonly used measure of the spread of the distribution and is equal to the square of the standard deviation.

Chapter 26, Problem 14PS

Summary Introduction

(a)

To calculate:

The number of contracts that should be entered, if he holds a $6 million portfolio of waterworks stock, for hedging purpose using the one-month maturity future contacts of S&P 500 index.

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Summary Introduction

(b)

To calculate:

The standard deviation of the monthly return of the hedged portfolio

Introduction:

Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.

Summary Introduction

(c)

To calculate:

The probability of getting negative return taking an assumption that there is a normal distribution of monthly returns and the risk free rate is 0.5% .

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Expert Solution & Answer

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Answer 5

Chapter 26, Problem 14PS

Summary Introduction

(a)

To calculate:

The number of contracts that should be entered, if he holds a $6 million portfolio of waterworks stock, for hedging purpose using the one-month maturity future contacts of S&P 500 index.

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Summary Introduction

(b)

To calculate:

The standard deviation of the monthly return of the hedged portfolio

Introduction:

Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.

Summary Introduction

(c)

To calculate:

The probability of getting negative return taking an assumption that there is a normal distribution of monthly returns and the risk free rate is 0.5% .

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Answer 6

Chapter 26, Problem 14PS

Summary Introduction

(a)

To calculate:

The number of contracts that should be entered, if he holds a $6 million portfolio of waterworks stock, for hedging purpose using the one-month maturity future contacts of S&P 500 index.

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Answer 7

Chapter 26, Problem 14PS

Summary Introduction

(a)

To calculate:

The number of contracts that should be entered, if he holds a $6 million portfolio of waterworks stock, for hedging purpose using the one-month maturity future contacts of S&P 500 index.

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Answer 8

Summary Introduction

(b)

To calculate:

The standard deviation of the monthly return of the hedged portfolio

Introduction:

Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.

Answer 9

Summary Introduction

(b)

To calculate:

The standard deviation of the monthly return of the hedged portfolio

Introduction:

Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.

Answer 10

Summary Introduction

(c)

To calculate:

The probability of getting negative return taking an assumption that there is a normal distribution of monthly returns and the risk free rate is 0.5% .

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Answer 11

Summary Introduction

(c)

To calculate:

The probability of getting negative return taking an assumption that there is a normal distribution of monthly returns and the risk free rate is 0.5% .

Introduction:

Hedging is referred as the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments. It can be more understood by saying that if we go long in the market then it can involve protection against downside fluctuations and if we go short in position in the market then it can involve protection against upsides fluctuations.

Answer 12

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Answer 23

Ch. 26 - Prob. 1PS Ch. 26 - Prob. 2PS Ch. 26 - Prob. 3PS Ch. 26 - Prob. 4PS Ch. 26 - Prob. 5PS Ch. 26 - Prob. 6PS Ch. 26 - Prob. 7PS Ch. 26 - Prob. 8PS Ch. 26 - Prob. 9PS Ch. 26 - Prob. 10PS

Solution Summary: The author explains that hedging is the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments.

(b)

To calculate:

The standard deviation of the monthly return of the hedged portfolio

Introduction:

Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.

Chapter 26 Solutions

Solution Summary: The author explains that hedging is the protection from the fluctuations in the price of stocks which can cause losses to the investor on investments.

(b) To calculate: The standard deviation of the monthly return of the hedged portfolio Introduction: Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.

Chapter 26 Solutions

(b)

To calculate:

The standard deviation of the monthly return of the hedged portfolio

Introduction:

Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.