Transbot Inc, an all-equity financed company, is a manufacturer whose core operation is the production of robot machines and ansport. The CFO of the company is contemplating investing in two independent projects. The first project, RoboTrain is the production of robotic trains used in upscale shopping and leisure complex for carrying patrons within the facility. The second project, RoboMaid is the production of robotic maids used to pradually replace human domestic helpers. The CFO of Trambolire you to perform relevant financial analyses and determine the feasibility of these projects Based on estimates provided by your assistant, the expected retum and standard deviation for RoboTrain are computed to be 16% and 12%, respectively and fee RoboMaid 18% and 15% respectively for the upcoming year. The correlation between the two projects is estimated to be 0.35 The stock retums for Transat and the market (S&P 500 index) for the past 5 years are presented to you by your assistant as follows: Year she's stock returns Market returns Assume the Capital Asset Pricing Model (CAPM) is valid and the fimm beta is expected to remain unchanged in the foresccable future Required a) Calculate the mean return and standard deviation for Transbor's stock returns. (4 marks) b) Determine the stock but for Transbot marks) c) What are the expected retum and standard deviation of an equally weighted portfolio consisting of RoboTrain and RoboMaid? Do you see any benefit from diversification? Explain in one or two sentences. (4 marks) d) Your beta estimate for RoboTrain and RoboMaid are 1.52 and 1.65, respectively. What are the required retums for RoboTrain and RobeMaid for the upcoming year according to CAPM? Assume the market risk premium to be 7% and the risk-free rate to be 4% (4 c) Would you advise your CFO to proceed with these investments? Is it appropriate to use the firm's hundle rate as benchmark comparison when making your decision! Explain your answer. (1 mark) Transbot Inc., an all-equity financed company is a manufacturer whose cooperation is the production of robotic machines and transports. The CFO of the company is contemplating investing in two independent projects. The first project, RoboTrain is the production of robotic trains used in upscale shopping and leisure complex for carrying patrons within the facility. The second project, Robo Maid is the production of robotic maids used to gradually replace human domestic helpers. The CFO of Transbot hires you to perform clevant financial analyses and determine the feasibility of these projects Based on estimates provided by your assist the expected and standard deviation for RoboTrain are computed to be 16% and 12%, respectively and for RoboMaid 18% and 15% respectively for the upcoming year. The correlation between the two projects is estimated to be 0.15 years are presented The stock returns for Transbed and the market (S&P 500 index) for the to you by your assistant as follows: Year Transbot's ock returns Marketers 2015 2017 2018 Assume the Capital Asset Pricing Model (CAPM) is valid and the firm beta is expected to remain unchanged in the foreseeable future. Required a) Calculate the mean return and standard deviation for Tramshe's stock returns. (4 marks) b) Determine the stock bata for Transbot marks) What are the expected return and standard deviatiof y weighted portfolio consisting of RoboTrain and Robe Maid? Do you see any benefit from diversification? Explain in one or two sentences. (4 marks) d) Your beta estimate for RoboTrain and Robe Maidane 1.5 and 165, respectively. What are the required returns for RoboTrain and Robo Maid for the upcoming year according to CAPM? Assume the market risk premium to be and the risk-free rate to be 4% 4 marks) Would you advise your CFO to proceed with these investim i t appropriate to use the firm's hurdle rate as benchmark comparison when making your decision? Explain your answer. (1 mark)
