Finance Management

Question 1:

It is now May 16, 2020. Ace Engineering of Oakland California has just developed a solar panel capable of generating 200% more electricity than any solar panel currently on the global market. As a result, the firm is expected to experience a 30% annual growth for the next five years. By the end of five years other firms will have developed comparable technology, and Aces growth rate will slow to 8% per year indefinitely. Stockholders require a return of 12% on the firm's stock. The most recent annual dividend D0, which was paid yesterday, was $1.50 per share.

a. Calculate the expected dividends for 2020 through 2025.

b. Calculate the value of the stock today. Assume that the stock is traded at the NASDAQ with a price of $120. Is this stock Overvalued/Undervalued?

c. Calculate the Dividend yield in 2020.

d. How does this model differs from a TWO STAGE Model that we have learned in class. Comment analytically.

e. What do we mean by the term Market Efficiency? Do you believe that Markets are Efficient? Carefully explain your answer.

Question 2:

Aphrodite Corporations common stock is selling at 120 dollar a share. It just paid a dividend of 6 dollars. Investors expect a return of 20% on their investment on Aphrodites common stock.

(1.) From this information what is the expected growth of future dividends?

(2.) What is the Dividend Yield?

(3.) The stock is traded at the NASDAQ Exchange with the Quoted Price of 33 dollars. Is the stock Overvalued/Undervalued?

(4.) What will be the price of the Aphrodites stock five years from now?

(5.) What are the limitations of this particular model?

Q3.

Consider the CEO of Zeus Engineering who knows very well how to use the Bloomberg Terminals and download the most contemporary data in the global financial markets. He calculates the historical returns by employing the CAPM MODEL.

Consider the following table and assist him in order to estimate the following relationships for Kronos (K) and Titan (T) Multinationals (hereafter, MNEs).

YEARMNE (K)MNE (T)MARKET

2016 14%13% 12%

2017 19% 7% 10%

2018-16%- 5%-12%

2019 3% 1% 1%

2020 20%11% 15%

Assume that the Risk-Free Rate is 2%

1. What are the betas of the MNEs K and T respectively?

2. What are the required rates of return for MNEs K and T?

3. Are stocks for the MNE K and T aggressive or defensive stocks?

4. What is the slope of the SML LINE for MNE stocks K and T respectively? Draw them carefully and provide comments and explanations for the Sharpes and Treynors Ratios.

5. How different is the CAPM model from the Mean Variance Model?

6. What is the Efficient Frontier? Carefully explain your answer.

Q4. m

Dr. GRECO a young CEO who holds an MBA degree from the Hermes Rinke-Dinke University understands completely the Portfolio Risk Diversification Concept. However, he/she forgot the finance formulae and cannot compute the portfolio results. Assist him/her using the Table I below to compute the following relationships:

Table I

Time

R [INTC]

R [Market]

PROB

2017

14%

35%

0.2

2018

17%

24%

0.3

2019

16%

28%

0.3

2020

19%

32%

0.2

1. The Expected Returns.

2. The Variances.

3. The Risks.

4. The Covariance

5. The Coefficient of Variations.

6. The Correlation Coefficient.

7. The Beta of the stock. Is the Stock Aggressive or Defensive?

8. Assume that the Risk-Free Rate is 3%. Calculate the Sharpes and Treynors Indices.

9. Derive the CAPM Model. Is it in equilibrium? Explain your answer.

10. Draw the CML, SML and the Efficient Frontier.

11. What is the difference between the CML and the SML lines?

12. How much is the Risk Premium?

Comment on your results analytically.