FIN 350 Managerial Finance Mini-Cases

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timer Asked: Apr 5th, 2019
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Question Description

Hi, Please provide answers for the Mini Cases attached.

There are 3 different cases, if you scroll down you will see it. After each case I have provided the HINTS for the assignment.

If you have any other questions please let me know.

Thanks for your help.


Here's the book link
https://b-ok.org/dl/3413815/f88084

These are related to chapter 8, 10 and 12

Tags: FIN 350

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Managerial Finance FIN 350 ALLIANCE STOCK FUND ANALYSIS Mini Case Study Points: 5 Name: __________________________________ A recent inheritance from your late uncle’s estate has provided you with funds available for investment. You have been provided with the following information for three stocks: Stocks X, Y, and Z. Stock Expected Return Standard Deviation Beta X Y Z 8.00% 9.50% 13.50% 15% 15% 15% 0.5 0.9 1.4 The returns on the three stocks are positively correlated, but they are not perfectly correlated. (I.e., each of the correlation coefficients is between 0 and 1.0.) There are two diversified stock funds available into which you could invest your inheritance funds: ❑ Fund P has thirty percent of its funds (30%) invested in Stock X and seventy percent (70%) invested in Stock Y. ❑ Fund Q has one-third (33.33%) of its funds invested in each of the three stocks. The risk-free rate (R F ) is 3.5%, and the market is in equilibrium. (I.e., the required returns equal the expected returns.) The market average rate of return ( r m ) is 8%. 1. What is the portfolio beta for each of the available stock funds? a. Fund P: b. Fund Q: 2. What is the generic equation for the Security Market Line (SML) that would apply to all publicly-traded stock shares, using the numerical values given for the risk-free rate ( R F ) and the market average rate of return ( r m ) that are provided in the case study above? 3. Using the Security Market Line (SML) equation that you developed in Question #2 above, calculate the required rate of return on each of the available stock funds: a. Fund P: b. Fund Q: 4. Based on your calculations, which stock fund appears to be most risky? Why? 5. Into which fund would you invest your inheritance funds? Why? 2 Mini Case Study: HINTS Alliance Stock Fund The Alliance Stock Fund mini case study also focuses on the Security Market Line (SML) equation. In Question #1 of this case study, you would calculate the beta of each portfolio using the information provided on page one of this case study. Note that the weight of each stock within each portfolio is provided for you in the case study. I.e., for Fund P, thirty percent of the funds ( .3 ) are invested in Stock X and seventy percent of the funds ( .7 ) are invested in Stock Y. For Fund Q, one-third of the funds ( .3333 ) are invested in each of the three stocks. Note that you can total these “weight” percentages for the stocks within a given portfolio together. If your calculations have been done correctly, these percentages should total to 100%. You would then use the formula shown at the top of page 352 of the textbook to calculate the beta for each portfolio.  bp = n wj X bj j =1 I.e., for each of the portfolios, you would multiply the portion of money invested in each security by the beta for that security. You would then sum together the results of these multiplication operations to calculate the beta for the portfolio. For Fund P, there would be two multiplication operations, as Fund P consists of only two securities. For Fund Q, there would be three multiplication operations, as Fund Q consists of three securities. In Question #2, you are asked to identify the generic SML equation based on the data provided in this mini case. The numerical values for the risk-free rate of return ( R F ) and the market rate of return ( r m ) are provided for you on page one of this case study. You can substitute these values into the Security Market Line (SML) equation: rj = RF + ( r m - R F) b j The only variables that would then remain as a letter variable for the generic version of this Security Market Line (SML) equation are beta ( b j ) and the required rate of return ( r j ). In Question #3, you would substitute the beta that you calculated for Fund P in Question #1 into the SML equation that you formulated in Question #2 of this case study. When you solve this SML equation, you will calculate the required rate of return on this portfolio: r p . I.e., this “required” rate of return is the minimum acceptable rate of return, given the level of risk of this portfolio as measured by the portfolio’s beta. You would then substitute the beta that you calculated for Fund Q in Question #1 into the SML equation that you formulated in Question #2 to calculate the required rate of return on this portfolio: r Q . 3 ENTERTAINMENT, INC. Mini Case Study The Computer Games Division of Entertainment, Inc. is considering two investment projects, each of which has an up-front expenditure of $30,000. You estimate that the cost of capital is 9 percent and that the investments will produce the following after-tax cash inflows: Year Project A Project B 1 2 3 4 6,000 12,000 16,000 22,000 22,000 16,000 12,000 6,000 Prepare answers to the following questions. Please show your calculations. 1. What is the payback period for each of the projects? 2. What is the Net Present Value (NPV) for each of the projects? 3. If the two projects are independent and the cost of capital is 9 percent, which project or projects should Entertainment, Inc. undertake? 4. If the two projects are mutually exclusive and the cost of capital is 9 percent, which project should Entertainment, Inc. undertake? (Hint: With mutually exclusive projects – a situation in which only one of the two projects could be done, but not both – the NPV method provides the theoretically best answer.) 4 Mini Case Study: Entertainment, Inc. HINTS In this mini case study, you are presented with two possible projects: Project A and Project B. In Question #1, you would calculate the payback period for each of these projects, using the methodology described in Problem #P10-3 above. In Question #2, you would calculate the NPV for each of these projects using the methodology described in Problem #P10-10 above. The decision criteria for accepting or rejecting a project, based on its NPV calculations, are found on Slide #36 of the Chapter Ten Powerpoint outline. This Powerpoint outline is available at the “Content” link at our course Web site. In Question #3 of this mini case, you are asked to select the project(s) that should be done, assuming the projects are “independent.” Independent projects have no relationship to one another. I.e., this would not be an “either/or” situation. Both projects could be done if both projects meet the NPV decision criteria specified on Slide #36 of the Chapter Ten Powerpoint outline. In Question #4 of this mini case, you are asked to select the project that should be done, assuming the projects are “mutually exclusive.” With mutually exclusive projects, only one project can be done, not both. Therefore, you would select the project that has the highest NPV, as that project will add the most value to the firm. MINI CASE: BREAKEVEN POINT Martin Corporation Possible Points: 5 Martin Corporation sells component parts for the electronics industry. Martin Corporation currently sells 160,000 units per year at a price of $6.50 per unit; its variable cost is $4.00 per unit; and fixed costs are $350,000 for the year. Martin is considering expanding into two additional states, which would increase its fixed costs to $570,000 and would increase its variable unit cost to an average of $4.24 per unit. If Martin expands, it expects to sell 250,000 units at $7.10 per unit. 1. How much operating profit (EBIT) is Martin Corporation currently realizing, with a sales volume of units per year? a. What is Martin Corporation’s current breakeven point in terms of: 1. Quantity: 2. Sales Dollars: 5 160,000 2. How much operating profit (EBIT) would Martin Corporation realize under the expansion proposal? a. What would be Martin’s new breakeven point in terms of: 1. Quantity: 2. Sales dollars: 3. Based on the above analysis, what recommendation would you make to Martin Corporation with regard to their proposed expansion plan? Mini Case Study: HINTS Martin Corporation In Question #1 of this mini case, you would calculate the “Earnings Before Interest and Taxes” (EBIT) that Martin Corporation will realize at its current sales volume of 160,000 units per year. The formula that you would use to complete this calculation appears at the bottom of page 508 in your textbook: EBIT = (P X Q) - FC - (VC X Q) P = Selling price per unit Q = Quantity expected to be sold during the year FC = Total fixed costs for the year VC = Variable cost per unit In Question #1.a.1. of this mini case, given the variables that you have identified in Question #1, you would calculate the breakeven quantity (Q) using the formula that appears at the center of page 509 of the textbook. 6 Q = FC (P - VC) “Q” is the breakeven point in units. This number represents the unit volume that must be sold during the coming year to cover the firm’s fixed costs and variable costs. In Question #1.a.2., you can calculate the breakeven point in sales dollars by multiplying the breakeven quantity that you calculated in Question #1.a.1. by the selling price per unit as follows: Q X P = Breakeven point in sales dollars. In Question #2, you would use the same formula as shown in Question #1 above, but assume an annual volume of 250,000 units. Be sure to adjust the numerical values of the other variables as noted in the first paragraph of this case study. EBIT = (P X Q) - FC - (VC X Q) In Question #2.a.1, you would calculate the new breakeven quantity, based on the new values for the cost variables that you identified in Question #2. Q = FC (P - VC) In Question #2.a.2, you would calculate the new breakeven point in sales dollars, based on the new breakeven quantity in units that you calculated in Question #2.a.1. Q X P = Breakeven point in sales dollars. 7 ...
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SelfiexWriter
School: Boston College

Attached.

Case Study: ALLIANCE STOCK FUND ANALYSIS
1. What is the portfolio beta for each of the available stock funds?
Fund p
Bx * 0.3 + By *0.7
(0.5 * 0.3) + (0.9 * 0.7)
= 0.78
Fund q
(Bx * 0.33) + (By * 0.33) + (Bz * 0.33)
(0.5 * 0.33) + (0.9 * 0.33) + (0.14 * 0.33)
=0.93
2. What is the generic equation for the Security Market Line (SML) that would apply to all
publicly-traded stock shares, using the numerical values given for the risk-free rate (R F)
and the market average rate of return (r m) that are provided in the case study above?
Required return = risk free rate + Beta (market premium – risk free rate)
Risk return = variance (Y)
Risk free rate = constant ©
Beta = variable x
Market premium – risk free rate = constant M slope of SML
Y = C + XM

If Rf is 3.5 and R...

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Anonymous
Thanks, good work

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