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Assessment 4

Name

Professor

Course

Date

Problem 1: Portfolio Required Return

Calculating the weights of each individual stock:

For stock-A: $300,000 / $10,000,000 = 0.3 or 30%

For stock-B: $100,000/ $10,000,000 = 0.1 or 10%

For stock-c: $2000,000 / $10,000,000 = 0.2 or 20%

For stock-D: $4,000,000 / $10,000,000 = 0.4 or 40%

Calculating the portfolio beta:

Portfolio beta = W1 * Beta of stock-A + W2 * Beta of stock-B + W3 * Beta of stock-C + W4 *

Beta of stock-D

= 0.3 * 1.50 + 0.1 * (0.50) + 0.2 * 1.25 + 0.4 * 0.75

= 1.05

Now, calculating the required rate of return:

E(Rp) = Rf + [Rm - Rf] * portfolio beta

= 0.04 + [0.12-0.04] * 1.05

= 0.124 or 12.4%
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Problem 2: Required Rate of Return

Stock R is expected to return

6% +1.5x (14%-6%)

=18%

Stock S is expected to return

6%+0.75x (14%-6%)

= 12%

Difference in Required Return = 18% -12%

=6%

So the calculation of the above answer is wrong

Problem 3: CAPM and Required Return

Nominal Rf=2%+3%=5%

use CAPM approach

Required return=Rf+beta*market risk premium

required return=5%+1.7*6%=15.2%

Problem 4: Bond Valuation

Price of both bond at three different market rate is calculated in excel and screen shot

provided below:
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b.

There is direct relationship between Bond interest rate, risk and maturity of bond. For

long maturity bond the probability of interest rate risk is higher than for short term bond. So

interest rate risk for long term bond is higher than short term bond.

Longer period bond higher interest rate risk.

Lower period bond lower interest arte risk.

This is because fixed coupon rate. if interest rate fall for shorter period bond then its

effect on price of bond less than for longer period maturity bond.

Problem 5: Yield to Call

So, here the investor would have paid $1000 five years back. He would have received

$120 every year for 5 years. Yesterday, when the bonds were called, he would have received

$1080 on his initial investment (i.e. 8% premium on the par value).

Realized return = RATE (5, 120, -1000, 1080, 0) = 13.23%

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Ideally, he would not be happy because he made an investment for 20 years at 12%.

Bonds are typically called in when the interest rates have declined and the firm could raise

money cheaply. Now, the investor needs to allocate his capital for another 15 years in a lower

interest rate environment which would yield him lower return.

Problem 6: Yield to Maturity

Price of bond = coupon payment * [1-(1+i)^-n ]/i + face value/(1+i)^n

=>

1)

80 * [1-(1+YTM)^-5]/YTM + 1000/(1+YTM)^5 = 800

=>

YTM = 13.80%

2)

80 * [1-(1+YTM) ^-5]/YTM + 1000/ (1+YTM) ^5 = 1200

YTM = 3.56%

Yes, i would pay 800 for each bond since at 12%, the price would be higher than 800

Problem 7: After-Tax Cost of Debt

The XYZ Inc.'s currently outstanding bonds have a 10 percent yield to maturity and an 8

percent coupon. It can issue new bonds at par that would provide a similar yield to maturity. If its

marginal tax rate is 40 percent, what is XYZ's after-tax cost of debt?

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Problem 8: Present Value of an Annuity

Find the present values of the following ordinary annuities if discounting occurs once a

year:

1. $300 per year for 10 years at 10 percent.

2. $150 per year for 5 years at 5 percent.

3. $350 per year for 5 years at 0 percent.

Problem 9: Uneven Cash Flow Stream

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