TOPIC: PORTFOLIO RETURN AND RISKS ( CORPORATE FINANCE)

Q6) You have $10,000 to invest in a portfolio containing Stock R, Stock S, and a risk-free asset. You must invest all of your money. Your goal is to construct a portfolio that has an expected return of 15% and that has only 120% of the risk of the overall market. If Stock R has an expected return of 25% and a beta of 1.6, Stock S has an expected return of 17.5% and a beta of 1.3, and the risk-free rate is 6%, how much money will you invest in Stock R? Explain your answer.

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TOPIC: COST OF CAPITAL ( CORPORATE FINANCE)

Q9) We find the following information on NPNG (No-Pain-No-Gain) Inc

EBIT = $2,000,000

Depreciation = $250,000

Change in net working capital = $100,000

Net capital spending = $300,000

These numbers are projected to increase at the following supernormal rates for the next three years, and 5% after the third year for the foreseeable future:

EBIT: 10%

Depreciation: 15%

Change in net working capital: 20%

Net capital spending: 15%

The firm's tax rate is 35%, and it has 1,000,000 outstanding shares and $6,000,000 in debt. We have estimated the WACC to be 15%.

a.) Calculate the EBIT, Depreciation, Changes in NWC, and Net Capital Spending for the next four years.

b.) Calculate the CFA* for each of the next four years, using the following formula:

CFA* = EBIT(1 - T) + Depr - NWC - NCS

d.) Calculate the present value of growing perpetuity at Year 3.

e.) Calculate the firm's value at time 0 using the WACC of the firm as the discount rate.

(Note that the first CFA* to be discounted is the cash flow from one year into the future.)

f.) Calculate the firm's equity value at time 0.