Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 4, Problem 30PS
DCF valuation
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You are a provider of portfolio insurance and are establishing a four-year program. The portfolio you manage is currently worth $70 million, and you promise to provide a minimum return of 0%. The equity portfolio has a standard deviation of 25% per year, and T-bills pay 6.2% per year. Assume that the portfolio pays no dividends.
Required:
a-1. How much of the portfolio should be sold and placed in bills? (Input the value as a positive value. Do not round intermediate calculations and round your final percentage answer to 2 decimal places.)
a-2. How much of the portfolio should be sold and placed in equity? (Input the value as a positive value. Do not round intermediate calculations and round your final percentage answer to 2 decimal places.)
b-1. Calculate the put delta and the amount held in bills if the stock portfolio falls by 3% on the first day of trading, before the hedge is in place? (Input the value as a positive value. Do not round intermediate calculations. Round your…
You are a provider of portfolio insurance and are establishing a four-year program. The portfolio you manage is currently worth $60
million, and you promise to provide a minimum return of 0%. The equity portfolio has a standard deviation of 25% per year, and T-bills
pay 5.2% per year. Assume that the portfolio pays no dividends.
Required:
a-1. How much of the portfolio should be sold and placed in bills? (Input the value as a positive value. Do not round intermediate
calculations and round your final percentage answer to 2 decimal places.)
Portfolio in bills
a-2. How much of the portfolio should be sold and placed in equity? (Input the value as a positive value. Do not round intermediate
calculations and round your final percentage answer to 2 decimal places.)
Portfolio in equity
Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $70,000 or $200,000 with equal probabilities of .5. The alternative risk-free investment in T-bills pays 6% per year.a. If you require a risk premium of 8%, how much will you be willing to pay for the portfolio?b. Suppose that the portfolio can be purchased for the amount you found in (a). What will be the expected rate of return on the portfolio?c. Now suppose that you require a risk premium of 12%. What is the price that you will be willing to pay?d. Comparing your answers to (a) and (c), what do you conclude about the relationship between the required risk premium on a portfolio and the price at which the portfolio will sell?
Chapter 4 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 4 - True/false True or false? a. All stocks in an...Ch. 4 - Dividend discount model Respond briefly to the...Ch. 4 - Dividend discount model Company X is expected to...Ch. 4 - Dividend discount model Company Y does not plow...Ch. 4 - Constant-growth DCF model Company Zs earnings and...Ch. 4 - Dividend discount model Company Z-prime is like Z...Ch. 4 - Dividend discount model If company Z (see Problem...Ch. 4 - Prob. 8PSCh. 4 - Prob. 9PSCh. 4 - Free cash flow Under what conditions does r, a...
Ch. 4 - Prob. 11PSCh. 4 - Prob. 12PSCh. 4 - Horizon value Suppose the horizon date is set at a...Ch. 4 - Stock quotes Go to finance.yahoo.com and get...Ch. 4 - Two-stage DCF model Consider the following three...Ch. 4 - Constant-growth DCF model Pharmecology just paid...Ch. 4 - Two-stage DCF model Company Qs current return on...Ch. 4 - Cost of equity capital Each of the following...Ch. 4 - Growth opportunities Alpha Corps earnings and...Ch. 4 - Prob. 23PSCh. 4 - Two-stage DCF model Compost Science Inc. (CSI) is...Ch. 4 - DCF and free cash flow Permian Partners (PP)...Ch. 4 - DCF and free cash flow Construct a new version of...Ch. 4 - Valuing a business Mexican Motors market cap is...Ch. 4 - Valuing Tree cash flow Phoenix Corp. faltered in...Ch. 4 - Constant-growth DCF formula The constant-growth...Ch. 4 - DCF valuation Portfolio managers are frequently...Ch. 4 - Valuing a business Construct a new version of...
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