ADMN 3116 Financial Management I Assignment 2 Name Danielle Kennedy Enter Name Question 1 Richard's investment in each stock Richard's Expected Value Richard's Portfolio Standard Deviation Question 2 The beta of J Corp's stock is The expected return on J Corp's stock is Question 3 J Corp's WACC is Question 4 The Expected Operating C.F. are The IRR for the factory is The NPV of the factory is Should J Corp build the factory? Question 5 The beta of Richard's portfolio is Richard's portfolio is Grade / 20 Student Number 0606602 Enter 7 Digit Student Number beginning with 0xxxxxx $500 8.23% 12.45% 0.86 6.47% 44.72% $1,075,885.36 6.10% -$64,924,114.64 No 2.7 Aggressive Question 1 (4 Marks) Richard must decide how to allocate the capital in his portfolio. Richard has $2,000 available to invest. He finds the rates of return for four stocks for the past 12 years and the results are given below. Richard plans to invest 25% of his funds in each stock. a) How much will he invest in each stock? $ 500.00 (1 Mark) b) The expected value of Richard's porfolio is: 8.23 % 12.45 % (2 Marks)(Round your answer to one one-hundreth of a percent) c) The standard deviation of Richard's portfolio is: (1 Mark)(Round your answer to one one-hundredth of a percent) Year 1 2 3 4 5 6 7 8 9 10 11 12 Stock A (%) 0.200 15.920 25.800 25.800 -23.400 32.480 49.080 26.720 7.000 17.920 -11.360 -7.400 Stock B (%) -0.040 3.890 6.360 6.360 -5.940 8.030 12.180 6.590 1.660 4.390 -2.930 -1.940 Stock C (%) 0.760 -3.170 -5.640 -5.640 6.660 -7.310 -11.460 -5.870 -0.940 -3.670 3.650 2.660 Stock D (%) -0.580 23.000 37.820 37.820 -35.980 47.840 72.740 39.200 9.620 26.000 -17.920 -11.980 Enter your Final Answer Here Complete your rough work in the space below Investment per stock =25% of $2000=500 b) Stock A= 158.76/12=13.23 Stock B= 3.1275 Stock C=-2.4075 Stock D=18.965 (500*0.1232)+(500*0.032175)-(500*0.024975) + (500* 0.18965) = $164.575 625 77 20.109375 118.53125 840.64063 $164.575/2000=8.23% Standard Deviation Stock A=19.92407 Stock B- 4.981018 Stock C= 9.981018 Stock D= 29.88611 Formula for Variance of Portfolio 155.0647^0.5=12.45% 840.6406/2500 0.3362562 Question 2 (3 Marks) Anna is a Vice President at the J Corporation. The company is considering investing in a new factory and Anna must decide whether it is a feasible project. In order to assess the viability of the project, Anna must first calculate the rate of return that equity holders expect from the company stock. The annual returns for J Corp. and for a market index are given below. Currently, the risk-free rate of return is 1.6% and the market risk-premium is 4.7% . 0.86 a) What is the beta of J Corp.'s stock? (1 Mark)(Round your answer to two decimal places) b) Using the CAPM model, what is the expected rate of return on J Corp. stock for the coming year? (2 Mark)(Round your answer to one one-hundreth of a percent) 6.47 % Enter your Final Answer Here Year 1 2 3 4 5 6 7 8 9 10 11 12 J Corp. Market Return (%) Return (%) -0.46 -0.20 15.26 7.66 25.14 12.60 25.14 12.60 -24.06 -12.00 31.82 15.94 48.42 24.24 26.06 13.06 6.34 3.20 17.26 8.66 -12.02 -5.98 -8.06 -4.00 Complete your rough work in the space below Year 1 2 3 4 5 6 7 8 9 10 11 12 Mean of JC= 150.84/12 JC Return Market Retu Deviation f Deviation from Mean of Market XY -0.46 -0.20 13.03 6.52 0.092 0.04 15.26 7.66 -2.69 -1.35 116.8916 58.6756 25.14 12.60 -12.57 -6.29 316.764 158.76 25.14 12.60 -12.57 -6.29 316.764 158.76 -24.06 -12.00 36.63 18.32 288.72 144 31.82 15.94 -19.25 -9.63 507.2108 254.0836 48.42 24.24 -35.85 -17.93 1173.7008 587.5776 26.06 13.06 -13.49 -6.75 340.3436 170.5636 6.34 3.20 6.23 3.12 20.288 10.24 17.26 8.66 -4.69 -2.35 149.4716 74.9956 -12.02 -5.98 24.59 12.30 71.8796 35.7604 -8.06 -4.00 20.63 10.32 32.24 16 150.84 75.78 11430.655 5742.6084 12.57 75.78/12= 6.315 75.06 5688.052 0.0022626 0.1077 0.8568019 Beta=.86 Rate of Return = 1.6*4.7*.86 6.4672 Y^2 Question 3 (3 Marks) Refer to Question 2. Now that Anna has determined an appropriate rate of return for J Corp.'s stock, she must calculate the firm's Weighted Average Cost of Capital (WACC). There are currently 50.6 Million J Corp. common shares outstanding. Each share is currently priced at $7.58 . As well, the firm has 6,000 bonds outstanding and each bond has a face value of $10,000, a yield to maturity of 3.66% and a quoted price of $10,066.00 . J Corp.'s tax rate is 30%. J Corp. has no preferred shares outstanding. What is J Corp.'s WACC? 44.72 (Round your answer to one one-hundredth of a percent) Enter your Final Answer Here Complete your rough work in the space below 50.6 putstanding common shares each share is 7.58 number of outstanding bonds= 6000 face value is 10,000 quoted price is 10,066.00 Tax rate is 30% Total Equity Value 50,600,000*$7.85= Total Debt 6000*10,066= Total Market Value equity weight 0.868017465 397,210,000 60,396,000 457,606,000 Debt weight 0.1319825352 weighted average 2.8030923305 0.1091 0.3381 0.4472 44.72 0.00 % Question 4 (5 Marks) Refer to Questions 2 and 3. The land for the factory will cost $20,000 . The factory will cost $6,600,000 to build and construction will take two years with construction costs payable in equal installments at the start of each year. The factory will operate for 20 years; however, at the end of the fifth, tenth, and fifteenth year of operation, refurbishment costs will be $600,000 . At the end of its 20 year lifespan, the land can be resold for $40,000 . There is a 70% probability that the factory's net operating cash flows will be $1,060,034 ; however, there is a 30% chance that net cash flows will only be $719,240 . You may assume that net operating cash flows flow at the end of each year. a) What are the Expected net operating cash flows per year? 0.00% 0.1 $ 1,075,885.36 (1 Mark)(Round your answer to 2 decimal places) b) What is the Internal Rate of Return for the project? 6.10 % (1 Mark)(Round your answer to one one-hundreth of a percent) c) What is the Net Present Value of the project? $ -64,924,114.64 (1 Mark)(Round your answer to 2 decimal places) d) Should Anna recommend that the J Corporation build the factory? (2 Marks) Yes No } Check only one box x Enter your Final Answer Here Complete your rough work in the space below Land Costs 60,000 Factory $6,600,000.00 2 Years to Construction 5, 10, 15 years 600,000 Land Resold 70% probablity 30% Chance Cash Flows 1800000 $40,000.00 1,060,034 $719,240.00 0 $6,660,000.00 $3,330,000.00 Year 333000 Cost 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 519416.66 $6,660,000.00 5,917,976 5,175,952 4,433,929 3,691,905 2,949,881 2,207,857 1,465,833 723,810 -18,214 -760,238 -1,502,262 -2,244,286 -2,986,309 -3,728,333 -4,470,357 -5,212,381 -5,954,405 -6,696,428 -7,438,452 Cash Flow 70% Total 742,024 742,024 742,024 742,024 742,024 742,024 742,024 742,024 742,024 742,024 742,024 742,024 742,024 742,024 742,024 742,024 742,024 742,024 742,024 742,024 Total Refurbish X3 Total Cost 70% 30% Total Cost per Year 8420000 421000 5,917,976 5,175,952 4,433,929 3,691,905 2,949,881 2,207,857 1,465,833 723,810 -18,214 -760,238 -1,502,262 -2,244,286 -2,986,309 -3,728,333 -4,470,357 -5,212,381 -5,954,405 -6,696,428 -7,438,452 -8,180,476 Cash Flow 30% Per Year $215,772.00 $215,772.00 $215,772.00 $215,772.00 $215,772.00 $215,772.00 $215,772.00 $215,772.00 $215,772.00 $215,772.00 $215,772.00 $215,772.00 $215,772.00 $215,772.00 $215,772.00 $215,772.00 $215,772.00 $215,772.00 $215,772.00 $215,772.00 6,444,228 5,702,204 4,960,180 4,218,157 3,476,133 2,734,109 1,992,085 1,250,061 508,038 -233,986 -976,010 -1,718,034 -2,460,058 -3,202,081 -3,944,105 -4,686,129 -5,428,153 -6,170,177 -6,912,200 -7,654,224 5,917,975.9 6,437,392.6 3218696.28 Question 5 (5 Marks) 0.00 Refer to Questions 1 and 2. Richard has just received an unexpected bonus at work worth $500 and, given the J. Corp.'s reputation for excellent investment decision making, he will invest all of the bonus in J Corp. stock. Given the rates of return for stocks A, B, C, and D presented in Question 1 and the rates of return for J Corp. stock and the market presented in Question 2, as well as the cash amounts he is investing in stocks A, B, C, and D as you determined in Question 1, a) What is the beta of Richard's portfolio? (3 Marks) 0.20 b) Richard's portfolio is... (2 Marks) Aggressive Defensive Neither -0.20 3.89 -3.17 23.00 7.66 6.36 -5.64 37.82 12.60 25.80 6.36 -5.64 37.82 12.60 -23.40 -5.94 6.66 -35.98 -12.00 32.48 8.03 -7.31 47.84 15.94 49.08 12.18 -11.46 72.74 24.24 26.72 7.00 6.59 1.66 -5.87 -0.94 39.20 9.62 13.06 3.20 17.92 -11.36 -7.40 } x -0.58 25.80 2.70 0.76 15.92 (round to two decimal points) -0.04 4.39 -2.93 -1.94 -3.67 3.65 2.66 26.00 -17.92 -11.98 8.66 -5.98 -4.00 Check only one box Enter your Final Answer Here Complete your rough work in the space below Beta = B = Covariance of stock to the market Variance of the market $500 Year 1 2 3 4 5 6 7 8 9 10 11 12 Stock A (%)Stock B (%) Stock C (%) Stock D (%) 0.200 -0.040 0.760 -0.580 15.920 3.890 -3.170 23.000 25.800 6.360 -5.640 37.820 25.800 6.360 -5.640 37.820 -23.400 -5.940 6.660 -35.980 32.480 8.030 -7.310 47.840 49.080 12.180 -11.460 72.740 26.720 6.590 -5.870 39.200 7.000 1.660 -0.940 9.620 17.920 4.390 -3.670 26.000 -11.360 -2.930 3.650 -17.920 -7.400 -1.940 2.660 -11.980 2500 625 625 77 20.109375 118.53125 840.64063 840.6406/2500 0.3362562 2.7008514 155.0647^0.5=12.45% Formula for Variance of Portfolio 155.0647^0.5=12.45% 0.86