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Threer are 2 assignments that have to be done as saporated, all info is in 2 files attached. Work is due by Sunday
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SOLUTIONS TO CASE STUDY QUESTIONS.
QUESTION NO.1
INTEREST RATES AND BOND VALUATIONS.
BOND A,B,C
Par Value in Euros
Coupon Rate(annually)
Yield Maturity Rate
Time of Maturity(31/12/2020 to31/12/2026.)
rate for 6years
FORMULA
1000 coupon payments
6.50%
65
5.50%
6 Years
4.995
Coupon payment[1-(1+r)^-6/r]+par value/(1+r)^6 r=maturity rate
current price annual formula=
coupon payment[1-(1+0.055)-6]/0.055+1000/(1+0.055)6
1-0.7252=0.27475/0.055=
4.9954
1000/(1+0.055)6= value ofparvalue
725.247
New Current Price for bond ABC is=
1049.948
324.701
Finding yield to maturity of Bond XYZ
FORMULA
Annual Maturity Rate of bond XYZ will be,in %
AYMis equal to (1+r/m)^ m -1
r(rate)
m(period in years)
5.00%
8
0.00625+1=
1.00625
1.051108
1.051107529-1=
0.05111
5.111
QUESTION NO.1
Part B
Semi Annual Coupon Payments
Recalculation of current price of the ABC bond.
formular for semiannual compounding
cp is= par value*1/(1+r)^n*[1-1/(1+r)^n/r
par value
1000
r(rate) in %
0.05
n(semi annual
2 periods
compound period)
let 1/(1+r)^n be rep by New Rate
1/(1+0.05)^2
New Rate
let [1-1/(1+r)^ n/r] be rep by Original r
1-1/(1+0.05)^2 /0.05
Original r
1.8594
semi annual
0.90703
semi annual1686.532
Current Price
Part C
ABC bond
Initial price 1049.95
initial rate before increase
5.5
rate after increase7.5
to get the new1431.75
price after increase
multiply the initial bond price with increased rate and divide with initial rat
Relationship between markets interest rates and bond prices
Increase Market Interest rates are likely to decrease the original market value and this may inflate the bond raates and they
QUESTION NO.2
PART D
Equity Valuations
10000 dollars
SouthEast Carcop Preffered Stock
no.stock
10000 fixed dividends
dividends pay 1.63 645.5446
sell
25.25
returns%
0.09
value of preffered stock
fixed dividents payments/rate
7172.717
of return
Emerson Electric Common stock
div.received
stock
10000
sell price dividend 65
payment od dividends
1.8
Eps %
0.0915
returns%
0.12
1
price of stock
18000
1.12
dividents received+stock sell
18065
price/rate
16129.46
6129.464
Part E
i would choose to invest in EmersonElectric common stock because it has a lower price of stock of 6129.4642 dollars compa
a stock price of 7172.717272 dollars.This is because under common stock there will be high return rates which would lead to
Expected Rate of Return in Preffered Stock
pay dividend per share
1.63
selling price per 25.25
share
returns%
100
expected Return=
0.064554
6.455446
6.45%
expected Rate of Return in common Stock
PART F
calculated -
expected Dividends Payment/stock price+Dividend forcast growth rate
growth rate=Final Dividend/Initial Dividend^1/5 -1
initial
1.8
final
3.56
no.of periods
5
growth rate(3.56/1.80)0.2 -1
0.1463*100
14.63%
18000/6129.4642+14.63%
Rate Of Retun 0.0308
1+r)^6 r=maturity rate
r/m
%
0.00625
100
ck of 6129.4642 dollars compared to Southeast carcop which has
FINANCIAL MANAGEMENT
QUESTION NO.2
PART A
2013 Bill gates worth is 28 billion dollars
Manhattan Island solf for 24 dollars to Peter in the year 1628.
Present Value(in billion dollars)
Years
return rate%
(1+r)^ n
Future Value
24
365
6
6213980091
f.v=Pv(1+r)^n
f.v=24(1+0.06)^387
1+0.06=1.06^387=6213980090.8
FUTURE VALUE
1.49136E+11
149 dollars
therefore the required amount that billGates is required to pay is 149 dollars while he has only 28 billion dollars hence,
He is not able to afford.
Part B
Returns compounded monthly
1 year=12 months
387years=-
Present Value(in billion dollars)
years
monthly period
months
Return Rate%
(1+r)^ n
f.v=24(1+0.01)^387
Future Value
24
387
4644
12
0.01
1.1707384
28.0977216
280 dollars
Bill Gates will have to pay 280 dollars to pay for manhattan which will be difficult to afford since he has only 28 dollars.
Part C
plans to buy city of seattle
FUTURE VALUE
years
Rate
60,000,000,000.00
10
0.1
(1+r)^ n
60000000000=pv(1+0.1)^10
Pv
2.59374246
23132597366
23 dollars
Billgates needs to pay 23 billion dollars and he has 28 dollars so he can afford it.
Part D
net worth half of 28 billion
annual rate of return
(final value/beginning value)1/n
beginning value
final value
rate
4.2857^ 0.1
14
60
0.1
1
4.285714286
1.156505713
0.156505713
15.65%
QUESTION NO.3
PUBLIC MARINE TRANSPORT CORPORATION
INITIAL INVESTMENTS
REVENUES
OPERATING COSTS
REFITTING
SELLING PRICE
CASHFLOW
PV
NPV
QUESTION NO.4
RISKS AND RETURNS
0
-10000000
1
5500000
4000000
-10000000
1500000
1102457722
1024527127
As the Npv is positive the company should invest in the project
PART A
month
Avarage
S&p 500
1.26%
2.75%
Avarage monthly returns of S&P 500 are high compared to that of Walmart and Target with the lower level of risks at the sam
Part B
-400.0%
0.0%
0.0%
-200.0%
200.0%
400.0%
600.0%
-500.0%
STANDARD&POOR`S 500 INDEX
TARGET
HOLDING PERIOD RETURNS FOR TARGET
HOLDING PERIOD RETURNS FOR
WALMART
WALMART
-400.0%
-200.0%
0.0%
0.0%
200.0%
400.0%
-500.0%
STANDARD&POOR`S 500 INDEX
600.0%
STANDARD&POOR`S 500 INDEX
The returns of walmart and target are positively related to the marketreturns but with alot of noise
which represent unsystematic or diversiable risk.
Part C
Portfolio
RETURNS on portfolio
-400.0%
-200.0%
0.0%
0.0%
200.0%
400.0%
600.0%
-500.0%
STANDARD&POOR`S 500 INDEX
when we plot the stock portfolio of walmart and target together agaist rhe s&p500,
the spread of the returns is slightly tighter with the ecxception of one reality high monthly returns.
in other words more in the variation of the two stock portfolios (s&p500) than was the case with the individual stock
returns.That is systematic risk has been reduced somewhat.
Part D
compare risks and returns
month
Avarage
S&p 500
1.26%
2.75%
with ecxception of the S&P500 we observe that as the risk measured bystandard devia
avarage returns also increases.
Part E
If the data is representative for the rate of returns an investor would receive and the variation of these returns an investor w
a highrer expected rate of returns for targetmthe risks that exhibits greater total risks(a larger standard deviation) and
a greater systematic risk higher beta.
Part F
WALMART
RiskFree Rate
Market Return
beta
Required Retun Rate
4%
15.07%
0.48
9.32%
TARGET
RiskFree Rate
Market Return
beta
Required Retun Rate
4%
15.07%
0.85
13.41%
le he has only 28 billion dollars hence,
to afford since he has only 28 dollars.
invest in the project
2
3
4
5
6
7
8
9
5500000
4000000
5500000
4000000
5500000
4000000
5500000
4000000
-2000
5500000
4000000
5500000
4000000
5500000
4000000
5500000
4000000
WALMART
TARGET
0.15%
4.47%
0.74%
6.42%
Target with the lower level of risks at the same time.
600.0%
t with alot of noise
monthly returns.
as the case with the individual stock
WALMART
TARGET
0.15%
4.47%
portfolio
0.74%
6.42% 5.o3%
0.45%
that as the risk measured bystandard deviation of returns increase the
d the variation of these returns an investor would have
al risks(a larger standard deviation) and
10
11
12
13
14
15
5500000
4000000
-2000
5500000
4000000
5500000
4000000
5500000
4000000
5500000
4000000
5500000
4000000
Surname 1
Introduction to Financial Management
Name
Course
Professor
Institution
Date
Surname 2
Mutual funds are funds that are set aside and managed to be able to purchase securities
that generate money for investments and can also be sold to the public. Pension Funds are funds
that are specifically for providing retirement income for Retiring people who are enrolled under
the scheme.
In cooperation ownership, the shareholders of the directors’ work in the favor of the
enterprise and take decisions in the best interest of the shareholders. The ownership and
management are separate. Board may act in its own best interest rather than in the interest of the
enterprise and the shareholders. This leads to prejudice to shareholders' wealth and affects the
economy Roussanov et al (2018).
There could also be another case where the shareholders agree on prices of shares and
some company officers alter the prices during investing and this may result in a possible
generation of more money but to the benefit of the officer the money is channeled to individuals
account and the reports may be altered to read that the investments that were made there was a
loss instead.
The relationship between shareholders and management is known as an agency
relationship. The board or management is in full control of the operations, there could be a
dilution...