PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 4, Problem 33PS
DCF valuation
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You are a fixed term interest rate portfolio manager and have been advised that cash inflows for the fund are expected to be, $15 million now; a further $25 million is to be added to the initial investment in one years’ time, followed by a further $10 million at the beginning of the next year. These investments are made annually at the beginning of each successive year. The market is expected to provide annual returns of 7.5%, 1.5%, 5.5%% for each successive year.
A. Calculate the annualised Time Weighted Rate of Return (TWRR) and the Money Weighted Rate of Return (MWRR) provided over the three-year term
B. What do these calculations tell you about the timing of the investment decisions?
You are a provider of portfolio insurance and are establishing a four-year program. The portfolio you manage is currently worth $190 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 5.5% per year. Assume that the portfolio pays no dividends.
a-1. How much of the portfolio should be sold and placed in bills?
a-2. How much of the portfolio should be sold and placed in equity?
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?
b-2. What action should the manager take?
a. According to the rule of 72, how many times your money will be doubled over a 36- year period if it earns a rate of return of 8% per year?
b. Using the rule of 72, estimate the value of an initial investment of $100K at the end of a 36-year period if it earns a rate of return of 8% per year?
c. According to the 4% rule, what the size of your investment portfolio needs to be in order for you to withdraw an initial annual amount of $250K?
d. Referring to part c, what will be your 3 rd annual withdrawal amount if the inflation rate during the 2 years since your initial withdrawal averaged 2% per year? Show your work.
Chapter 4 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 4 - Stock markets True or false? a. The bid price is...Ch. 4 - Stock quotes a. I would like to sell 1000 shares...Ch. 4 - Stock quotes Here is a small part of the order...Ch. 4 - Stock quotes Go to finance.yahoo.com and get...Ch. 4 - Valuation by comparables Look up P/E and P/B...Ch. 4 - Dividend discount model True or false? a. All...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 - Prob. 11PSCh. 4 - Constant-growth DCF model Pharmecology just paid...Ch. 4 - Prob. 13PSCh. 4 - Cost of equity capital Under what conditions does...Ch. 4 - Cost of equity capital Each of the following...Ch. 4 - Two-stage DCF model Company Z-prime is like Z in...Ch. 4 - Two-stage DCF model Consider the following three...Ch. 4 - Two-stage DCF model Company Qs current return on...Ch. 4 - Two-stage DCF model Compost Science Inc. (CSI) is...Ch. 4 - Growth opportunities If company Z (see Problem 10)...Ch. 4 - Growth opportunities Alpha Corps earnings and...Ch. 4 - Prob. 24PSCh. 4 - Prob. 25PSCh. 4 - Prob. 26PSCh. 4 - Horizon value Suppose the horizon date is set at a...Ch. 4 - Valuing a business Permian Partners (PP) produces...Ch. 4 - Valuing a business Construct a new version of...Ch. 4 - Valuing a business Mexican Motors market cap is...Ch. 4 - Valuing a business Phoenix Corp. faltered in the...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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