Finance 301 Sample Final Exam

Finance 301 Sample Final Exam
Question 1 – Bond Valuation Assume the following information for bonds A and B. Both bonds have the same YTM and have semi
–annual coupon
payments. Bond B is currently selling at par. Face Value Maturity Coupon Rate Bond A 1000 30 yrs 8% Bond B 1000 20 yrs 10% a) What is the price
for Bond B (2 pts)? What is the current yield for Bond B (2 pts)? Bond A is selling at a ________(discount /par/ premium) (2 pts). b) Suddenly interest
rates rise by 2%. The price of bond A will go________ (up/down) (2 pts). c) The percentage change in the price of Bond B (in absolute value) will be
_________ (smaller/bigger) than that of Bond A (in... Show more content on Helpwriting.net ...
( 3 + 3 pts) b) What is the expected return on an asset with a beta 1.6? (4 pts) c) What is the beta on a portfolio consisting of 30% XYZ, 30% ABC,
20% risk free asset and 20% market portfolio? (5 pts) d) If a security has beta 1.8 and expected return 18%, is this security above or below SML?
Over or under priced? ( 2 + 3 pts) Solution: a) Here we have the expected return and beta for two assets. We can express the returns of the two assets
using CAPM. If the CAPM is true, then the security market line holds as well, which means all assets have the same risk premium. Setting the
reward–to–risk ratios of the assets equal to each other and solving for the risk–free rate, we find: (.15 – Rf)/1.4 = (.115 – Rf)/.90 .90(.15 – Rf) =
1.4(.115 – Rf) .135 – .9Rf = .161 – 1.4Rf .5Rf = .026 Rf = .052 or 5.20% Now using CAPM to find the expected return on the market with both stocks,
we find: .15 = .0520 + 1.4(RM – .0520).115 = .0520 + .9(RM – .0520) RM = .1220 or 12.20%RM = .1220 or 12.20% b) 5.20% + 1.6 (12.20% –
5.20%) = 5.20% + 11.20% = %16.40 c) 0.30 * 1.4 + 0.30*0.9 + 0.2*1 +0.2*0 = 0.89 d) According to SML 5.20% + 1.8 (12.20%– 5.20%) = 5.20% +
12.60% = 17.80%. The security is above SML. It is underpriced. Question 5 1). For a multi–product firm, if a project 's beta is different from
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General Mills Inc. Executive Summary
| General Mills Inc.| Executive Summary| | Xiao(Cynthia) Chen| 2012/4/24|
|
Executive Overview
General Mills (NYSE:GIS), our company, is a global consumer foods company. We develop distinctive value
–added food products and market with our
unique brand names. We work continuously to improve our established products and to create new products that meet our customers' potential needs
and preferences. Our company has $14.88 billion in sales last year. Our sales has grown substantially throughout the years due in large part to our
popular brand names, this however is only part of the reason that we has been so successful. We markets global brands such as Green Giant, Old El
Paso, HГ¤agen–Dazs, Yoplait, Cheerios, Betty... Show more content on Helpwriting.net ...
And the above is the result of current value.
Our WACC is almost constantly these years– around 5.50% –– via from 5.04% to 5.82%. We also use the scenario analysis for how the WACC and
growth rate affect enterprise value and equity value.
The full report shows all the forecasting data for 2012 – 2016, it clearly estimate the financial trend of our company (attachment). For the data used in
this model, some of them are current data, the other are historical or most recently or average number. It only depends on actually situation – for which
method is much more realistic.
Conclusion
The current enterprise value is $41,335 million and the equity value is $34,455 million. According to yahoo finance, the shares outstanding of our
company are 647.31 million, so we can calculate the stock price for next year is $53.23. It will increase in following years.
Also, the WACC of our company is always around 5.5%, we can use Monte Carlo Simulation to run the estimation of Equity value by changing WACC,
growth rate and COGS/Revenue each year. The random calculation displays as the full report in attachment.
The most important thing is that, according to our estimation, the next five–year we will get additional funds needed increasingly with no surplus
funds; which means, our assets increase faster than our liabilities. Therefore, our company goes well in the short term future based on this model. In
conclusion,

Essay on Finance 100
L.Spight
FIN100 – Week 10
Integrative Case Study
Due – 9/5/10
Case Information:
You work for HydroTech, a large manufacturer of high pressure industrial water pumps. The firm specializes in natural disaster services, ranging
from pumps that draw water from lakes, ponds, and streams in drought stricken area to pumps that remove high water volumes in flooded area. You
report directly to the CFO. Your boss has asked you to calculate HydroTech's WAAC in preparation for an executive retreat. Too bad, you are not
invited, as water pumps and skiing are on the agenda in Sun Valley, Idaho. At least you have an analyst on hand to gather the following required
information:
1. The risk–free rate of interest, in this case, the yield ... Show more content on Helpwriting.net ...
3. Calculate the cost of equity capital using the CAPM, assuming a market risk premium of 5%.
Using CAPM: Risk Free Rate = 6%; Market Risk Premium = 5%; Beta = 1.2
Cost of Equity = Risk Free Rate + Equity Beta * Market Risk Premium
Cost of Equity = 6% + 1.2 * 5%
Cost of Equity = 0.06 + 1.2 * 0.05
Cost of Equity = .12
Cost of Equity = 12%
HydroTech's cost of equity using CAPM is 12%.
4. Using a tax rate of 35%, calculate HydroTech's effective cost of debt capital.

Cost of Debt = 7%; Tax Rate = 35%
Effective cost of debt capital = Cost of debt * (1 – tax rate)
Effective Cost of Debt Capital = 7% * (1 – 35%)
Effective Cost of Debt Capital = 0.07 * (1 – 0.35)
Effective Cost of Debt Capital = 0.07 * (0.65)
Effective Cost of Debt Capital = 0.0455
Effective Cost of Debt Capital = 4.55%
HydroTech's Cost of Debt Capital is 4.55%.
5. Calculate HydroTech's WACC
Weight of Equity = 71%; Equity Cost of Capital = 12%; Weight of Debt = 29%; Debt Cost of Capital = 4.55%
WACC = (Weight of Equity * Equity Cost of Capital) + (Weight of Debt * Debt Cost of Capital)
WACC = (71% * 12%) + (29% * 4.55%)
WACC = (0.71 * 0.12) + (0.29 * 0.0455)
WACC = 0.0852 + 0.013195
WACC = 0.098395
WACC = 9.8395% HydroTech's WACC is 9.8395%.
6. When is it appropriate to use this WACC to evaluate a new project?
WACC is the weighted average cost of capital and provides firms with the idea of the proportion of debt

Capm Model Builds On The Model
CAPM model builds on the model by Markowitz(1959).Markowitz assumes investors to be rational and risk averse. The model is one period model in
which investor chooses portfolio at time t–1 in anticipation of stochastic return in period t. He uses mean variance criterion that states that investor will
either choose highest expected return portfolio for given level of variance or lowest variance for a given level of expected returns
Sharpe (1964) and Lintner introduced two more assumptions to the Markowitz model. First that the investors have homogenous beliefs about risk and
expected returns in the market. That is in order to have higher returns, higher level of systematic risk must be undertaken. Therefore, the investors agree
on joint distribution of returns from time t–1 to t. Second assumption states that investors can borrow and lend any amount at ther risk–free rate which
implies that the correlation between expeted return on any asset and market return is given by the risk free rate.
Black(1972) develops the model of sharpe by eliminating the unrealistic assumption of risk–free borrowing and lending and adds the assumption for
unrestricted short sales of risky assets. Blacks ' model differs from the Sharpe model in the correlation between expected return on any asset and
market return. In Sharpe model this correlation is equal to the risk–free asset. In Black 's model this correlation is less than expected market return.
Early Empirical Tests.
To check the validity of

Hk-Disney Syndication by Chase
Chase's Strategy for Syndicating the Hong Kong Disneyland Loan
Group 15
XIA Yidan, ZHANG Kuo, ZHU Shihuai, WANG Qian
2012 acer CHUK
2012/9/24
Chase's Strategy for Syndicating the Hong Kong Disneyland Loan
Group 15
XIA Yidan, ZHANG Kuo, ZHU Shihuai, WANG Qian
2012 acer CHUK
2012/9/24
How should Chase have bid in the first round competition to lead the HK$3.3 billion Disneyland financing (Bid to win or bid to lose?)
In the first round of competition, there are 17 banks competing to propose a mandate for syndication. How should Chase make the proposal to Disney
depend on the following respects: (1) Disney's requests (2) Evaluation of the returns and risks. Based on the previous two parts, design the ... Show
more content on Helpwriting.net ...
Second we analysis the macro economy of HK and the anticipated effect on Disney HK's operating profits. As the "tiger" of Asia, Hong Kong has a
free market economy–low taxes, unrestricted capital movement, stable HK$ linked to US$. What's more, HK's economy was based on services,
tourism and trading. According to data in Exhibit1, the number of visitors is 1570 times its local population in 1999, with an amount of 10.7 billion.
Although we see the financial crisis had an impact on tourism, but it recovered quickly–from 11.7 billion in 1996 to 9.6 billion in 1998 then back to
10.7 billion in 1999. We anticipate a further recovery as the economy warm up. As a tourist resort, Hong Kong Disneyland has high profit potential.
In a word, the relative exposure of credit risk is low.
* Syndicate risk

Hong Kong Disneyland asked for full–underwriting. If the syndication is not successful–under subscription, Chase would end up holding too much
loans and higher credit exposure to the project. For example, if there is only one arranger and single–stage general syndication, the max exposure of
Chase would be the total amount $HK 3.3 billion–in an extreme case when nobody comes to commit for the loan.
However, a senior HK government official underscored the government's commitment to the project at Asia Pacific Loan Market Association
Conference, there is a high potential of success syndication since other banks observed the government's backing on this project.
What's

Chapter 7
1. Which of the following statements is CORRECT?a. The constant growth model takes into consideration the capitalgains investors expect to earn on
a stock.STATEMENT A is true because the expected growth rate is also the expected capitalgains yield.b. Two firms with the same expected dividend
and growth rates must alsohave the same stockprice.c. It is appropriate to use the constant growth model to estimate a stock 'svalue even if itsgrowth
rate is never expected to become constant.d. If a stock has a required rate of return rs = 12%, and if its dividend isexpected to grow at aconstant rate of
5%, this implies that the stock's dividend yield is also 5%.e. The price of a stock is the present value of all expected future dividends,discounted ... Show
? ? ?? TV3 = P3 = D4/(rs в€’ g4). Find using Estimated rs.
?Total CFs ? ? ?PVs of CFs when discounted at Estimated rs ? ? ?Calculated Price = P0 = Sum of PVs = $0.00A positive number will be here when
dividends are estimated. The Calculated Pricewill equal the Actual Market Price once the correct rs has been found.Sally told you that the growth rates
in the template were just put in as a trial, andthat you mustreplace them with the analysts ' forecasted rates to get the correct forecasteddividends and
thenthe estimated TV. She also notes that the estimated value for rs, at the top of thetemplate, is also just a guess, and you must replace it with a value
that will cause the CalculatedPrice shown atthe bottom to equal the Actual Market Price. She suggests that, after you have putin the correctdividends,
you can manually calculate the price, using a series of guesses as to theEstimated rs. The value of rs that causes the calculated price to equal the actual
price is thecorrect one. Shenotes, though, that this trial–and–error process would be quite tedious, and that thecorrect

Case Report for Midland Energy Resources, Inc: Cost of...
1. For what purposes does Mortensen estimate Midland's cost of capital? What would be the potential consequences of a too high estimate compared to
the firm's "true" cost of capital? What about a too low estimate?
The purpose is that the cost capital will be used for capital budgeting, financial accounting, performance assessment, stock repurchases estimations. Also
the cost of capital is a necessary basis for the expected growth and forecasted demand.
The too high estimated cost of capital means that Midland may miss out on investment opportunities and will under value the investment at hand.
Furthermore, it is possible for shareholders to see a lower return on their investment. On the other hand, a too low estimated cost of capital ... Show
To relever the ОІe, we use the formula, ОІe = ОІu +(D/E)*(ОІu–ОІd). And the "Target D/E" was found by taking "Target D/V" divided by "1
–Target
D/V". So we get the new ОІe, 1.3576. Then to get cost of equity, we use the CAPM formula, Re=Rf+ОІ(EMRP), 11.7679%. Since we have get the cost
of equity and cost of debt, we can determined the WACC, which is equal to Equity/Value*Cost of Equity+Debt/Value*Cost of Debt*(1
–tax rate). In the
end ,we arrived at 8.48%. Midland's choice of market risk premium of 5% does appear to be an appropriate selection in this instance. From exhibit
6, we found that this EMRP is lower than the historical data of U.S. stock returns minus Treasury bond yields and is higher than the market risk
premium from the survey results. So we recommend that the risk premium rate can be narrowed between 4.8% to 5.6%. 4.8% is the lowest of higher
EMRP while 5.6% is the highest of the lower EMRP. In a word, our team think that 5% is a reasonable market risk premium.
3. Should Midland use a single corporate hurdle rate (i.e. a firm–wide WACC) for evaluating investment opportunities in all of its divisions? Why or
why not? I do not think it is proper. Since hurdle rate is the key factor to determine whether we should accept a project, it is concerned with a specific
investment opportunity belonging to a division. As we can see in Table 1, each of Midland`s divisions had its own target debt ratio. Those

Ameritrade Harvard Case Study
Ameritrade – case study Executive Summary Ameritrade provides online brokerage services and operates an Internet–based financial management
services business. 90% of the company's revenues are from the provision of discount brokerage services. The company's objective is to improve its
competitive position in deep–discount brokerage. In order to achieve this objective, the company must grow its customer base, requiring an
investment of $100 million to upgrade its technological capabilities as well as an increase of $155 million for its advertisement budget. In order to
evaluate the company's cost of capital, we used the Cost Asset Pricing Model. Since the company went public recently, it would not be an accurate
assessment of the risk of... Show more content on Helpwriting.net ...
Estimating the Cost of Capital In order to calculate the cost of capital of Ameritrade we will use the Capital Asset Pricing Model. This model helps
estimate the required rate of return of a certain investment for the given risk. In the case of Ameritrade, we can use this method by finding the most
accurate risk free rate, market risk premium and asset beta. We can then find the return on assets by using the following formula: Ra= Rf+ ОІa
(Rm–Rf) To find the asset Beta (ОІa), we need to find the weighted average ОІ of equity and the weighted average ОІ of debt. We consider the ОІ of
debt to be 0, as debt has no relationship with market risk and it is evident from the balance sheet that Ameritrade had no interest bearing debt in
1997[1]. ОІa=D/(D+E)* ОІD+E/(D+E)ОІE ОІa=D/(D+E) *0+E/(D+E)ОІE So ОІa=E/(D+E)ОІE Estimating the Risk–free rate The historic average
returns from 1950 to 1996 and from 1929 to 1996 are given In Exhibit 3. We chose the latter time period as we considered it would give us a more
reliable estimate of the risk–free rate by discounting both the Second World War and the Great Depression. It is necessary to evaluate the expected
length of the project and utilize a risk free rate applicable for the same time period. Ameritrade is investing $100 million dollars in technology, which
is considered a long–term investment, in order to become the largest brokerage firm. We consider their

Michelle Dellatorre Financial Case
Examination One Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the
brokerage firm of Balik and Kiefer Inc. One of the firm's clients is Michelle Dellatorre, a professional tennis player who has just come to the United
States from Chile. Dellatorre is a highly ranked tennis player who would like to start a company to produce and market apparel that she designs. She
also expects to invest substantial amounts of money through Balik and Kiefer. Dellatorre is also very bright, and, therefore, she would like to
understand, in general terms, what will happen to her money. Your boss has developed the following set of questions which you must ask and answer
to explain... Show more content on Helpwriting.net ...
C. (2) Is stock price maximization good or bad for society? The same actions that maximize stock prices also benefit society. Stock price maximization
requires efficient, low–cost operations that produce high–quality goods and services at the lowest possible cost. Stock price maximization requires the
development of products and services that consumers want and need, so the profit motive leads to new technology, to new products, and to new jobs.
Also, stock price maximization necessitates efficient and courteous service, adequate stocks of merchandise, and well–located business
establishments––factors that are all necessary to make sales, which are necessary for profits. C. (3) Should firms behave ethically? Yes. Results of a
recent study indicate that the executives of most major firms in the United States believe that firms do try to maintain high ethical standards in all of
their business dealings. Furthermore, most executives believe that there is a positive correlation between ethics and long–run profitability. Conflicts
often arise between profits and ethics. Companies must deal with these conflicts on a regular basis, and a failure to handle the situation properly can
lead to huge product liability suits and even to bankruptcy. There is no room for unethical behavior in the business world. D. What factors affect stock
prices? The price of a firms stock depend on

The Islamic Banking System ( Credit Risk )
In the Islamic banking system,according to sources and causes of risks, it might be an external risk which due to changes in risk policies and
regulations caused by banking supervisory authorities ( regulatory risk ) or macro and external impact of benchmarks such as LIBOR interest rate
factors, namely the use of determine the speed mark Islamic Bank ( known as interest rate risk ) ;There are risks to fulfill obligations related to the
debtor by Islamic Banking( Credit risk ) , there are a set of risks, operational risks collectively,Islamic banks themselves , the people involved / staff,
including errors, negligence and fraud, the system and the use of technology in the Islamic Banking , the proceedings and / or processes and procedures
... Show more content on Helpwriting.net ...
Sundarajan and Errico (2002) pointed out that attach to various non– PLS methods, such as the specific risks of Salam and Ijara. Firstly, the Islamic
bank is exposed to credit and commodity price risk ; Secondly, unlike traditional lease contracts, Islamic banks can not transfer ownership , and
therefore have to bear all risks until the end of the lease .
Credit risk in Islamic banks
Musharakah, Mudarabah, Istisna', Salam, Ijarah and murabahah is the main contract with their customers to use in providing facilities for Islamic
banks. Possible classification , these contracts may be: Islamic pattern of non– debt financing (Musharakah and Mudarabah) and debt creation mode (
the Other ) . A third possible classification : Original Islamic mode of financing (Musharakah, Mudarabah, Istisna , Salam ) and financing of
"reinventing " mode (Ijarah and murabahah).
Credit risk is the most important source of risk in Islamic banking and in Conventional banks.Credit risk ( counterparty risk of failure ) is
significant for banks that 1988 standards of Basel Committee on Banking Supervision Bank. Capital requirements , the establishment of a major
deal with this risk. Default risk which the risk of the bank portfolio covering 80 % of the average bank account ; It is 80% of cases of bank failures
reasons. It is generally considered the Islamic Banks face higher credit risk than their traditional counterparts . Islamic banks ( which is not the Islamic
Bank based on

Personal Finance Unit 2 Term Paper
Q2
There is a high positive correlation between the interest rate of housing mortgage loan and the government's long–term guarantee interest rate.
Mortgage institutions offering fixed rate mortgages may be adversely affected by rising interest rates, because their mortgage financing costs will
increase, while mortgage interest income will remain unchanged. Lenders can reduce interest rate risk by offering adjustable rate mortgages, so
mortgage income may vary with changes in financing costs as interest rates change.
Q3
Adjustable rate mortgages usually offer lower initial interest rates than fixed rate mortgages to compensate borrowers for taking interest rate risks. The
ceiling of adjustable rate mortgages limits the extent to which interest rates shift from interest rates to mortgages. If the interest rate is beyond the
implicit range of the ceiling, the mortgage rate will not be fully adjusted to the market interest rate. Therefore, if interest rates rise substantially,
mortgage rates may not fully offset the increased cost of capital.
Q16
The effect of interest rate and risk premium on mortgage price. Economic growth, money supply and inflation will affect interest rates, thus ... Show
It should use the minimum down–payment, because it can get long–term funds at lower interest rates through mortgages rather than issuing bonds. So
it should get as much money as possible from the mortgage, so you don't have to get the same amount of money from other sources of higher capital
costs.
c. The money comes from individual savers, pooled by savings agencies to provide mortgage loans.
Internet exercises
PAYMENTPRINCIPALINTERESTTOTAL INTERESTBALANCE
$830.86$90.86$740.00$740.00$119,909.14
The outstanding balance after year 1 is $118,774.
The last monthly payment is $825.19, interest is $5.06 and principal is $820.13.
The reason for this difference is that interest rates are used by less and less principal, thus reducing the interest portion of the

Cost of Capital at Ameritrade
Case Study of Cost of Capital at Ameritrade 1–a How can the CAPM be used to estimate the cost of capital for a real business investment decision?
CAPM results can be compared to the best expected rate of return that investor can possibly earn in other investments with similar risks, which is the
cost of capital. Under the CAPM, the market portfolio is a well–diversified, efficient portfolio representing the non–diversifiable risk in the economy.
Therefore, investments have similar risk if they have the same sensitivity to market risk, as measured by their beta with the market portfolio. So, the
cost of capital of any investment opportunity equals the expected return of available investments with the same beta. This estimate is... Show more
content on Helpwriting.net ...
Then we noticed that in exhibit 4, the period of historical data is from 1992–1996. However , the stock of Waterhouse Investor Srvcs only last to Sep
1996, in order to compare the data in the same time horizon, we select the period of 5 years, started from Sep 1991 to Sep 1996. We use
ri=(Pt–Pt–1+Dt)/Pt–1 to calculate the monthly return rate of stocks. When the stock split, ri= (x/y*Pt–Pt–1+x/y*Dt)/Pt–1 We chose VW portfolio of
NYSE, AMEX, and NASDAQ rather than EW of NYSE, AMEX, and NASDAQ because the value–weight portfolio can reflect the real market
situation better. We use the equation ri=(Pt–Pt–1+Dt)/Pt–1 to calculate the monthly return of stock of Charles Schwab Corp, Quick & Reilly
Group and Waterhouse Investor Srvcs. Then we have two methods to calculate the Beta of Equity for each company. The first method is using
equation COV(Ri,Rm)/Var(Rm) to get the Beta. Then we use BAsset=E/(E+D)*BE+D/(E+D)*BD to calculate the Beta of Asset. We assume that
the debt of these companies is risk free, because debt represents only a small fraction of the firm's value. Here are the answers: | COV (Ri,Rm)| Var
Rm| Beta| D/V| E/V| Asset Beta| Charles Schwab| 0.001899719| 0.000746187| 2.545901945| 0.08| 0.92| 2.342229789| Quick & Reilly|
0.001902394| 0.000746187| 2.549486932| 0.00| 1| 2.549486932| Waterhouse Investor Services| 0.002690693| 0.000746187| 3.605922579| 0.38|

FIN 380 Exam 2 Supplemental Homework Problems
Chapter 8
Supplemental Homework/Practice Problems
Solutions may be found on the FIN 380 site of i–Tunes U near the bottom of the file list under "Supplemental Homework – Chapter 8"
8–1. AEH, Inc. just paid a $1.00 dividend and is expected to pay a $1.06 dividend next year. What is AEH's capital gains yield (growth rate, "g")?
8–2. XYZ, Inc. stock sells for $50.00 and is expected to sell for $54.50 next year. What is XYZ's capital gains yield (Hint: the percentage change in
stock price is the same as the growth rate, "g")?
8–3. PDQ, Inc. stock current sells for $15.00 per share. The company is expected to pay a $1.50 dividend and sell for $17.25 one year from now.
a. What is PDQ's dividend yield?
b. What is PDQ's ... Show more content on Helpwriting.net ...
Use the following Security Market Line to answer a – d below:
a. What is the risk free rate (Treasury Bill return)?
b. What is the market risk premium (slope of the SML)?
c. What is the CAPM equation based on the data represented by the above SML (be sure to incorporate Beta into the equation; it is the independent
variable – do not set it equal to one or any other value)?
d. What is the required return for an asset with a Beta of 2.0 based on your equation in 1c above (Calculate it below, and plot it on the graph above;
Does the graph confirm your calculation?)?
13–2. What is the standard deviation of asset A:

StateProbabilityReturn on A
Boom.25.16
Normal.50.09
Bust.25–.07
13–3. Identify the probability contained under each curve for the shaded areas indicated below.
a.b.
c. d.
13–4. What is the probability that a normally distributed asset with a mean of 12% and a standard deviation of 4% will provide a return below 8%?
Explain!
13–5. What is the standard deviation of returns for the following stock (ck. fig. 10.07%)?
StateProbabilityReturn Boom.3.23 Normal.4.10 Bust.3–.03
Assuming that the returns above are normally distributed, what is the probability that the stock will lose value (have a return less than zero)? Use 10%
for the standard deviation.

Asset-Liability Management for Correcting Mismatch
ASSET–LIABILITY MANAGEMENT: STRATEGIES FOR CORRECTING MISMATCH
Strategies that can be used to correct the mismatch in terms of D (A )> D ( L ) can be passive or benefit–driven. Assets driven strategies to correct the
mismatch approach in shortening the duration of the asset portfolio. The financing strategy based asset securitization is commonly employed. Normally
portfolios of long–term assets such as leasing and hire purchase portfolios are securitized, and the resulting product is redistributed or short–term assets
or used to pay short–term liabilities.Responsibility strategies driven primarily focus on lengthening the maturity profile of liabilities. These strategies
may include, for example issue of foreign equity in the form of additional shares of stock or convertible preference shares (which can also help in
increasing Tier I capital finance companies ) , the issuance of redeemable preference shares subordinated debt instruments , obligations and access to
long–term debt , including bank loans and long term loans . Strategies used to correct an imbalance in the form of D ( A) < D ( L ) (which is necessary
if you expect interest rates to decline ) will be the reverse of the strategies discussed above.
Assets driven strategies focus on lengthening the maturity profile of the assets by deploying loanable funds available in long–term assets such as
leasing and hire purchase .
Responsibility driven strategies focus on shortening the maturity profile of liabilities,

Empirical Evidence Bearing On Capital Asset Pricing Theories
This study explores the (troubling) empirical evidence bearing on capital asset pricing theories. General formulas for the coefficient on beta and it
standard error are derived, which show that the outcomes of cross–sectional tests have no causal relation to the pricing models. If a test refutes a model,
this could be because the model is misspecified or because poor proxies for true expected returns and betas are used. Simulation and calibration
results suggest that realized returns are a much poorer proxy than estimated betas are. The noise in realized returns typically inflates the estimated
standard error, with drastic effects on the statistical power. Inferences based on ex ante returns are more powerful but suffer from a serious size
problem. JEL: G12, C31, C52. I. Introduction One should hardly have to tell to financial economists that the noise in the data they use is critically
important: garbage in, garbage out. And yet the information surprises in returns are the neglected child in the house of empirical finance, a neglect
described by Elton (1999, p.1218) in the following terms: "When I first entered the profession, anyone using realized returns as expected returns made
the argument that in the long run we should get what we expect. Even this weak defense is no longer used and researchers generally treat realized
returns as expected returns in their tests without any qualifications." In this paper, I shall argue that the information surprises in returns, along

Case Study вЂ“Nike, Inc.: Cost of Capital Essay
Case Study –Nike, Inc.: Cost of Capital
FIN202a–Spring 2011
1. Please define Weighted Average Cost of Capital (WACC). Write down the WACC formula, and discuss its components.
WACC (Weighted Average Cost of Capital) is a market weighted average, at target leverage, of the cost of after tax debt and equity.
It is a critical input for evaluating investment decision, and typically the discount rate for NPV calculation. And it serves as the benchmark for
operating performance, relative to the opportunity cost of capital employed to create value.
Algebraically, it is given by
WACC = [E/(E + D)] *re + [D/(E + D )]*rd * (1–t)
Where WACC=Weighted Average Cost of Capitalre = cost of equity rd = cost of debt
E = market ... Show more content on Helpwriting.net ...
is not this kind of companies. If we want to use the data of dividends, we need to consider the growth rate and future potential changes of dividend. In
a word, we don't think DDM is fit for Nike's case.
4. Calculate cost of debt. Use market yields that are presented in Exhibit 4.
Present Value: $95.6
Future Value: $100
Matures: 40
Coupon Rate: 6.75%/2 = 3.375% (Semiannually)
3.375(1 + r)–1 + 3.375 (1 + r)–2 + 3.375 (1 + r)–3 + ......+ 3.375 (1 + r)–40+100(1 + r)–40 = 95.6 r = 3.5813% (Semiannually)
YTM= Kd= 3.5813%*2= 7.16%
5. Finally calculate WACC. * Please choose either the CAPM estimate or the DDM estimate for cost of equity based on your answer to Question 3. *
Risk–free rate: Choose a risk–free rate that is consistent with the life of the asset that is being valued. * Following our discussion in class, use the

market values of equity and book values of debt when calculating debt and equity weights.
We use the CAPM to estimate.
Market Value of Equity= 11,427.4 M
Book Value of Debt = 1,296.6 M
Total Capital= 12,724.0 M Formula, WACC = [E/(E+D)] re + [D/(E + D)]rd (1
–t) E = 89.89%, D = 10.19%, re = 10.46%, rd = 7.16%, tax rate = 38%
WACC =10.46%*89.89%/(89.89% + 10.19%)+ 7.16%*(1–0.38%)*10.19%/(89.89% + 10.19%) WACC = 9.846%
6. Does your estimate of WACC differ from Cohen's estimate? Why? What are the mistakes that Ms. Cohen make

Essay about Case Study 2 Emre BULUT
BA 5802 Financial Management Case Study 2Emre BULUT Lex Service PLC – Cost of Capital2056281 Questions: 1. Why is Lex Service PLC
concerned about its cost of capital in 1993? What role will an estimate of the cost of capital play within Lex? In general, how can and do companies
make use of cost of capital estimates? Since there are significant changes in the company for the last 3 years such as descending trend in car and truck
market in 1991, sale of one of their core electronics business, terminated Volvo agreement etc.; the company thinks that their financial value (equity
and debt ratios and weights) and accordingly cost of capital is changed. Also company has free cash (derived from the sales of electronics... Show more
As risk premium given average on long term equity annual return is used. Since it is not easy to observe the market premium, long term historical
data on equity return is better. c. Is your estimate of Lex's cost of equity appropriate as a discount rate for Lex's total operating cash flows? Why or
why not? For future cash flows, evaluation is done with WACC rate which consists from cost of equity and cost of debt in a weighted average. In
this case, using cost of equity is not appropriate since we doesn't know cost of debt and weights of equity and debt, it doesn't reflect the actual rate
for WACC. 3. If Lex had no debt in its capital structure, what would be its cost of capital? How could this estimate be used to value Lex? If Lex
operated with essentially no leverage in its capital structure and then added a moderate amount of debt, how would this affect its total value? How
might we capture this value impact of debt in our valuation analysis? If company doesn't have any debt, it means that WACC is equal to cost of
equity. There are two ways of increasing capital, (1) using debt and (2) issuing new shares. For profitable companies sometimes it is cheaper to use
debt instead of issuing new shares since cost of debt is tax shielded. In this case company didn't have any debt in past which means less default risk,
it will affect total value in a positive way. It will decrease the taxes paid and increase net income, accordingly share values. 4.

Peachtree Securities Case Essay
Peachtree Securities Case
1. The return on a 1–year T–Bond is risk–free since it does not vary according to the state of the economy. The T–Bond return is independent of the
state of the economy because the estimated return is 8% at all times. The only possible factor affecting a T–Bond may be inflation. 2. If we were only
to consider the expected return, then the S&P 500 appears to be the best investments since it has the greatest expected return.
3. The standard deviation provides a measurement of the total risk by examining the tightness of the probability distribution associated with the
different possible outcomes whereas the coefficient of variation measures risk per unit. The coefficient of variation is a
better ... Show more content on Helpwriting.net ...
Nevertheless, such reduction in diversification would make risk increase. The complete table "Risk and returns of portfolios" provides the different
changes.
5. The portfolio between TECO – S&P 500 has an expected return of
14.3% and a standard deviation of 14.1%. In this portfolio the correlation is greater than the one in the other portfolio because the risk–reducing effect
is much lower than the one in the portfolio TECO
– Gold Hill. (See all the possible combinations on TABLE 2).
6.
a) The portfolio's risk would decrease if more stocks were. The correlation between stocks is also relevant.
b) I think investors consider the risk as a whole rather than by each. Nevertheless, if a big part of a portfolio is made up of a risky stock, it would make
the portfolio more risky as a whole.
c) Total risk is made by Diversifiable (company–specific) risk and market (non–diversifiable) risk. Unique events to a particular firm cause the
diversifiable risk while factors that affect all companies cause the market risk. The difference between diversifiable and market risk is that
diversifiable risk can be reduced by diversifying whereas market risk can not be eliminated.

d) No, because the market compensates risk diversification if you don't diversify is your fault and you should be willing to accept the risk. 7.

Finance Week 2 Essay
Jamie Lyons
Finance
W2
4–1 Questions
Annuity–A financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization,
pay out a stream of payments to the individual at a later point in time. Annuities are primarily used as a means of securing a steady cash flow for an
individual during their retirement years.
Lump–sum payment– A one–time payment for the total or partial value of an asset.
Cash flow– A revenue or expense stream that changes a cash account over a given period
Uneven cash flow stream– Any series of cash flows that doesn't conform to the definition of an annuity is considered to be an uneven cash flow stream.
4–1 problem
Solve for FV ... Show more content on Helpwriting.net ...
[pic]
K.
The beta coefficient is a measure of a stock's market risk, or the extent to which the returns on a given stock move with the stock market.
[pic]

b average stock's beta– is equal to 1
6–1
0.8 + 1.4 = 2.2
2.2/ 2 = 1.10
1.12
6–2
k = RF + Beta(Market return – RF)
.06 + .7(.13 – .06) = 10.90%
10.90%
6–3
Required Return = Risk free Return + Beta*(Market Risk Premium)
5+1.0(6)=11%
5+1.2(6)= 12.2%
6–4
(0.1*–.5) + (0.2*–.05)+(0.4*.16)+(0.2*.25)+(0.2*.06)=0.114
11.4%
expected return= 11.40%
square root of [0.1(–.5)squared] +
[0.2(–.05)squared]+[0.4(.16)squared]+[0.2(.25)squared]+[0.2(.06)squared]
standard deviation= 26.69%
26.69% divided by 11.4 = .2669 divided by .114 coefficient of variation–= 2.34
6–9

|Stock |Investment |Beta |w |
|A |$400,000 |1.50 |10.00% |
|B |$600,000 |–0.50 |15.00% |
|C |$1,000,000 |1.25 |25.00% |
|D |$2,000,000 |0.75 |50.00% |

Star Appliances B
Star Appliance Company B
Executive Brief This proposal accounts for the new debt and equity mix of Star Appliances by estimating the company's cost of equity. The methods
used include the dividend discount model, the earnings/price model, and the CAPM model. After analyzing all three possibilities, it is apparent that the
CAPM model provides the most accurate estimate of Star Company's cost of capital because it accounts for the beta. Using the CAPM model, the new
Star Company cost of equity is calculated as 9.4% and the WACC is determined to be 9.14% at the 9.5% debt rate. In addition to the estimation of the
cost of equity, Star Appliance Company is also considering increasing their current debt ratio of 9.5% to the industry... Show more content on
Helpwriting.net ...
To calculate the new cost of equity for Star, the risk–free rate is added to the product of the beta and the risk–premium. Star's new cost of equity is
9.4% (Appendix A). Given that the cost of equity is 9.4% and the cost of debt is 12.2%, Star's cost of capital can be calculated as 9.14%
(Appendix B). The company was also considering raising the cost of debt to the industry average of 19%. At this cost of debt, Star Company
would have a lower cost of capital of 8.24% (Appendix B) because interest on debt capital is deductible whereas dividend payments on equity
capital are not. At the new WACC of 19%, the home appliance and agricultural machinery projects are valued based on their inherent levels of risk.
The beta of the industry average home appliance project is 0.95, whereas the beta for the industry average agricultural machine project is calculated
as 0.88. CAPM was then employed to find the cost of capital of each project. The cost of capital for the home appliance and agricultural machinery
projects were found to be 10.4% and 9.92%, respectively (Appendix B). This analysis allows Star Company to allocate funds to projects that create
returns greater than the industry cost of capital for each specific project. The IRR of the home appliance project is 11.29% and the IRR of the
agricultural machinery project is 10.70%, which are both greater than the calculated cost of capitals. Therefore, in

Sample Resume : Cost Of Mercedes Benz =
Answers: 1. Solution: A. Total cost of Mercedes Benz= $340,000 Deposit made= $130,000 Borrowed Amount = $ 340,000– $ 130,000 = $ 210,000,
OR P.V= $ 210,000 Time (n) = 5 years Rate (r) = 7.5% But, for monthly payment Compounding Time (n) = 5*12 = 60 months Periodic monthly Rate(r)
= 0.075/12 = 0.00625 Therefore, Payment (PMT) = P.V *r (1+r) n/ (1+r) n–1 = 210,000* 0.00625 (1+0.00625)60/ (1+0.00625) 60–1 = 1312.5
(1.00625)60/ (1.00625) 60–1 = 1907.45 / 0.45 = 4207.97 B. Amortisation Table Amount Borrowed210000Periods60Rate0.00625Payment$4,207.97
MonthsBeginningPmtInterestPrincipalEnding Balance 1210000$4,207.97 1312.5$2,895.47 $207,104.53 2$207,104.53 $4,207.97 $1,294.40
$2,913.57 $204,190.96 3$204,190.96 $4,207.97 $1,276.19 $2,931.78 $201,259.19 4$201,259.19 $4,207.97 $1,257.87 $2,950.10 $198,309.09
5$198,309.09 $4,207.97 $1,239.43 $2,968.54 $195,340.55 6$195,340.55 $4,207.97 $1,220.88 $2,987.09 $192,353.46 7$192,353.46 $4,207.97
$1,202.21 $3,005.76 $189,347.70 8$189,347.70 $4,207.97 $1,183.42 $3,024.55 $186,323.16 9$186,323.16 $4,207.97 $1,164.52 $3,043.45
$183,279.71 10$183,279.71 $4,207.97 $1,145.50 $3,062.47 $180,217.24 11$180,217.24 $4,207.97 $1,126.36

Bf Goodrich Bank Swap
B.F Goodrich/Rabobank interest rate swap case
By: Mitchell Gahan 13179537 James Grimard 13191612
Josh Hutchins 13220396
Lecturer: Colette Southam
Due Date: 17/06/13
The first key issue in the B.F Goodrich/Rabobank interest rate swap case was why they felt the swap was needed? B.F Goodrich was the fourth largest
U.S producer of tires and the largest U.S producer of polyvinyl chloride (PVC) resins and compounds. During 1982 Goodrich announced a $33million
dollar loss and needed to borrow 50 million to fund its ongoing financial needs. In addition Goodrich was disinclined to borrow the funds in the short
term as they didn't want to compromise its future flexibility by borrowing short term. The company also felt due to the ... Show more content on
Helpwriting.net ...
The floating rate is pegged to LIBOR – X therefore the interest rate risks would dependant on the London interbank rate (Refer to Exhibit A).
Conversely with Rabobank also known as the receiver in this transaction receiving fixed payments and paying a floating rate will make a profit if
interest rates decrease and a loss if interest rates increase. (Refer to Exhibit B)
Interest rate swaps are very popular due to the arbitrage opportunities they provide. Due to varying levels of creditworthiness in companies, there is
often a positive quality spread differential, which allows both parties to benefit from an interest rate swap. In the case of B.F. Goodrich and Rabobank
the QSD was +1.675% (Refer to Exhibit C), indicating that the swap of the interest rates is in the interest of both parties. The arbitrage in affect
between the two creditworthy firms moves the USD and the Euro currencies closer to purchasing power parity. This inturn contributes to the market
becoming more efficient as trading institutions take action on potential price mismatches.
Exhibit A
Exhibit B

Risk Management Failures of British Petroleum
BP is a British global energy company which is the third largest energy company and the fourth largest company in the world. As a multinational oil
company, BP is the UK 's largest corporation, with its headquarters in St James 's, City of Westminster, London. BP America 's headquarters is in the
One Westlake Park in the Energy Corridor area of Houston, Texas; the company is among the largest private sector energy corporations in the world,
and one of the six leaders.
In order to project social responsibility and improve its image British Petroleum changed its name into BP in year 2000 with a logo of green and
yellow sunflower patterns. Paradoxically the same company symbol is now under derision and the object of controversial attacks ... Show more content
on Helpwriting.net ...
On 16 October 2007 Alaska Department of Environmental Conservation officials reported a toxic spill of methanol (methyl alcohol) at the Prudhoe
Bay oil field managed by BP PLC. Nearly 2,000 gallons of mostly methanol, mixed with some crude oil and water, spilled onto a frozen tundra pond as
well as a gravel pad from a pipeline. Methanol, which is poisonous to plants and animals, is used to clear ice from the insides of the Arctic–based
pipelines.
From January 2006 to January 2008, three workers were killed at the company 's Texas City, Texas refinery in three separate accidents. In July 2006 a
worker was crushed between a pipe stack and mechanical lift, in June 2007, a worker was electrocuted, and in January 2008, a worker was killed by a
500–pound piece of metal that came loose under high pressure and hit him.
On April 1 2009, a Bond Offshore Helicopters Eurocopter AS332 Super Puma ferrying workers from BP 's platform in the Miller oilfield in the North
Sea off Scotland crashed in good weather killing all 16 on board.
On April 20, 2010, a semi–submersible exploratory offshore drilling rig in the Gulf of Mexico exploded after a blowout and sank two days later,
killing eleven people and causing a massive oil spill threatening the coast of Louisiana, Mississippi, Alabama, Texas, and Florida. The rig is owned
and operated by Transocean Ltd on behalf of BP, which is the majority owner of the oil field. The company originally estimated the size of the leak

Notes On The Value Of Diversification
The value of diversification Introduction Every finance students have learnt diversification is to reduce total risk by investing a basket of assets in
portfolios. But what contributes to the success of portfolio diversification? A large number of assets? A variety types of asset allocation? Adding
international investment? Numerous of risk factors? They are all indicators of a well–diversified portfolio. In this case, we will discuss about the
advantages and disadvantages of diversification in portfolio management with related indicators. On one hand, some mention dynamic and numerous
assets allocation in the portfolio will reduce both risks. While some also state the benefit of introduce multi–factor portfolio pricing models. On the
other hand, arguments arise demonstrating adding international investment may disappoint investors because foreign market could be correlated and
moved together. Another disadvantage could be the correlated assets collected weaken the effect of diversification. At the end, a balanced
conclusion will be drawn to support the useful diversification. Dynamic and numerous asset allocation benefits Since there are two types of risk we
need to account for: systematic risk and idiosyncratic risk, the easiest one to be diversified away is the idiosyncratic risk. It is known that an optimal
portfolio could gain on diversification by investing a large basket of stocks. This is a good way to offset firm–specific risk. According to Bodie, Kane
and Marcus

Marriott Corporation The Cost Of Capital Essay
Marriott Corporation: The Cost of Capital
Introduction
Dan Cohrs of Marriott Corporation has the important task of determining correct hurdle rates for the entire corporation as well as each individual
business segment. These rates are instrumental in determining which future projects to pursue and thus fundamentally important for Marriott's growth
trajectory. This case analysis seeks to examine Marriott's financial strategy in comparison with its growth goals as well as evaluate a detailed
breakdown of Marriott's cost of capital – both divisionally and as a whole.
Financial Strategy and Growth
Marriot's current financial strategy is in line with its overall goal of steady growth. By building and then promptly selling their hotels ... Show more
Assuming that Marriott's unlevered beta can be calculated as a weighted average of its divisions' betas based on identifiable assets, we can find
Contract Services unlevered beta by solving:
Using some algebra, this yields an unlevered beta of 1.55 for Contract Services. Relevering with the
2/3 desired debt–to–equity ratio yields a levered beta of 2.13. This time, we use the 1–day risk–free rate due to the even shorter lifespan of contracts.
Cost of Capital – Marriott as a Whole
There are several ways to approach Marriott's cost of capital as an entire firm. One way is to use
CAPM to find its cost of equity, long–term interest rates for the cost of debt, and weigh according to its capital structure to find WACC. Under this
method, we lever the previously found firm–wide ОІU of .79 to the desired 3/2 debt–to–equity ratio to find a cost of equity of 17.12%. Next, we apply
the CAPM using the 10–year Treasury for
1987 Assets % of total ОІunlev ered
Lodging 2777.4 60.6 % 0.47
Contract Services 1237.7 27.0 %
Restaurants 567.6 12.4 % 0.68
Total 4582.7 100.0 %
Contract Services
Rf 6.90 %
Market Premium 7.92 % ОІunlev ered 1.550
Target Debt % 40 % ОІlev ered 2.131

Cost of Equity 23.78 %
Cost of Debt 8.30 %
WACC 16.12 % the risk–free rate and the one–year arithmetic return for 1987. We use the arithmetic rather than geometric since
CAPM is a one–period model. For Marriott's cost of debt, we add the

bond case mutual of seattle insurance company Essay
Bond Case
Sam Strother and Shawna Tibbs are vice presidents of Mutual of Seattle Insurance Company and co–directors of the company's pension fund
management division. An important new client, The North–Western Municipal Alliance, has requested that Mutual of Seattle present an investment
seminar to the mayors of the represented cities, and Strother and Tibbs, who will make the actual presentation, have asked you to help them by
answering the following questions.
1) What are the key features of a bond?
2) What are call provisions and sinking fund provisions? Do these provisions make bonds more or less risky?
3) How does one determine the value of any asset whose value is based on expected future cash flows?
4) How is the value of a ... Show more content on Helpwriting.net ...
Nominal Yield (Coupon Rate). Theinterest rate defined on the coupon. This is generally the interest rate you receive if: you acquired the bond at par
(that is, at neither a discount nor a premium to its par value) there is no call feature on the bond you don't reinvest coupon payments and, you are
resolved to hold the bond until maturity. In reality, it is almost certainly not your actual interest rate. Current Yield. Factors in the bond's market price,
which is generally not the same as par value. Yield to Maturity. Considers the current market price, the coupon rate and the time to maturity and
assumes that interest payments are reinvested at the bond's coupon rate. This is the most accurate, and most widely quoted, measure of return on a

Risk Free Interest Rate
CHAPTER 12: COST OF CAPITAL A. OVERVIEW Definition: Cost of capital refers to the rate of return a firm must earn on its investment
projects to increase the market value of its common shares required by market suppliers of capital to attract funds to the firm Notes: If project rate
of return > cost of capital ( value of firm increases If project rate of return < cost of capital ( value of firm decreases Goal: minimize cost of capital
Assumptions: 1. Business risk (not able to cover operating costs) is unchanged 2. Financial risk (not able to cover financial obligations) is unchanged
3. Cost of capital is measured on an after–tax basis Basic equation: Ways to evaluate the basic... Show more content on Helpwriting.net ...
Keep weights in decimals; keep cost in %. Should we use kr or kn? – Kr is often less costly than Kn ( retained investment is often used first for
long–term financing. How to find weights? – Book value weights: use accounting values to measure the proportion – Market value weights: use market
values (prices) to measure the proportion (preferred) – Historic weights: book/market value weights based on actual capital structure proportion –
Target weights: book/market value weights based on desired capital structure Example A firm has on its books the amounts and specific (after–tax)
costs shown in the following table. Find WACC. |Source |Book value |Specific cost | |Long–term debt |$700,000 |5.3% | |Preferred equity |50,000 |12.0 |
|Common equity |650,000 |16.0 | 1. The text book uses slightly different notations: G. Final Notes 1. Relative risks and costs; not absolute 2. Changes
in capital structure may affect The weights in calculating WACC The relative risks and, therefore, return on equity (and the cost of debt) 3. Combine
with CAPM to assess changes in capital structures and the beta Example Suppose a

Essay on Introduction to Finals 2
This is one of two finals that you need to score a minimum of 70% on to be eligible for a certificate. [Recall that you should have also obtained a
minimum score of 70% on at least 5 out of 9 of the assignments.] If you do not score at least 70% on this test, you can try Final 2. You can of course
try both finals regardless. This system is unlike the assignments in that you do not get two attempts on the same exam, but one attempt each on two
separate exams. Also, unlike the assignments, these exams are timed. You have 100 minutes to finish each exam after you start it. So please find a
stretch of two uninterrupted hours to attempt each exam. Finally, and most importantly, YOU ARE NOT ALLOWED TO COLLABORATE WITH
ANYONE USING ANY MEANS OF... Show more content on Helpwriting.net ...
Question 5 (15 points) Your boss has requested that you analyze two projects for him and pick the one you would recommend for investment. Both
projects have the same risk because they are in the same business, and their cash flows are: Project A (Year 0:–$100,000; Year 1: $30,000; Year 2:
$40,000; Year 3: $50,000; Year 4: $100,410); Project B (Year 0:–$100,000; Year 1: 0; Year 2: $10,000; Year 3: $10,000; Year 4: $224,990). Which
project will you recommend if the discount rate is 35%? Your Answer Score Explanation Neither one. clip_image001[3] 15.00 Correct. You
understand that IRRs do not matter but NPVs do. Total 15.00 / 15.00 Question Explanation Analyzing your ability to make decisions based on
sound analysis. A very common situation in the real world. Question 6 (15 points) Your company is evaluating two different water purification
systems for its main factory: Option X will cost $3.00 million and $500,000 annually to operate, and has a life of five years. Option Y will cost $4.80
million and $20,000 per year to operate, and has a life of six years. Straight–line depreciation is to be used, and both systems will be depreciated fully
over their respective lives. The systems will have no salvage values at the end of their respective lives. Suppose your company is very profitable, has a
discount rate of 10%, and the corporate tax rate is 40%.

Case Study On Boeing
Question 1
Why is Boeing contemplating the launch of the 7E7 project? Is this a good time to do so?
We can see from the case study that Boeing and Airbus in 2002 dominated the large plane market. Whilst it was in competition with Airbus, Boeing
was falling behind and in 2002 Airbus was set to launch the A380 set to be the largest passenger aircraft ever built. The demand for commercial
aircrafts of this size was positive. Boeing's investment into the future through research and development could result in increased efficiency.
Boeing was seen as a leader of the commercial aircraft industry; however, it must be noted that as explained in the case study air travel in influenced by
business cycles, consumer confidence and exogenous events, and at the time of consideration there were a number of factors going against the launch
of the 7E7 project. War, SARS and terrorism; the September 11 attacks using commercial airplanes added to the challenges already presented.
Looking at all the factors we must accept that these challenges are short term and when reviewing the long–term lifecycle through the 20–year
predicted forecast the timing shows a healthy long–term outlook that will continue into the future.
Question 2
a. What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 7E7?
Hiller states that when the IRR is positive, the basic financial theory implies that the Board should accept the project, however, we know

Cost of Capital at Ameritrade
Cost of Capital at Ameritrade What factors should Ameritrade management consider when evaluating the proposed advertising program and technology
upgrades? Why? Mr. Ricketts believes that his role as CEO is to maximize shareholder value by accepting any project whose expected return on
investment is greater than the cost of capital. Therefore, the main factors that Ameritrade management should consider are the expected return on
investment for the project, and how this compares to the project's cost of capital. Other factors that should also be considered include: how market
swings will affect the expected return on investment, the project's payback period (the project will require massive initial outlays, so Ameritrade could
find... Show more content on Helpwriting.net ...
This is because market conditions have become more stabilized as time has passed, so it is useful to exclude data from more volatile time periods.
Specifically, we wish to exclude the effects of the Great Depression. Another option is to use data for small companies in order to match the high return
and high risk nature of Ameritrade. Although Ameritrade's investment may make it more risky than the average large company, the beta we have
chosen already reflects that higher risk. Therefore, we have chosen to use the market return for large companies because it more accurately depicts an
overall picture of the stock market and Ameritrade's status as a large firm. After subtracting the chosen risk–free rate of 5.24% from the average large
company market return of 14.0%, we estimated the market risk–premium to be 8.76%. Ameritrade does not have a beta estimate as the firm has been
publicly traded only for a short period at the time of the case. Exhibit 4 provides various choices of comparable firms. Which firms do you recommend
as the appropriate benchmark for evaluating the risk of Ameritrade's planned advertising and technology investments? Explain. Although technically
Ameritrade is a discount brokerage, because their prices are so much lower than their competitors, their revenue depends on the volume of transfers
more than anything else. Their system is very different from other discount brokerages who can earn a more significant

Banking Industry : An American Multinational Banking And...
Introduction
The banking industry is a huge sector of business and finance that has existed in human civilization in some form for thousands of years. In the modern
world, banks/financial institutions have become foundations of our economy for several reasons. They transfer risk, provide liquidity, facilitate both
major and minor transactions and provide financial information to individuals and organizations.
Citigroup Inc. or Citi is an American multinational banking and financial services and as of January 1st, 2015 is the third largest bank holding company
in the US by assets headquartered in Manhattan, New York City. Citigroup had the world 's largest financial services network, spanning 140 countries
with approximately 16,000 offices worldwide and holds over 200 million customer accounts in more than 140 countries (Citi, 2015).
Like any other bank, Citi deals with many risks faced by financial industry in its day to day operations. The risks to which Citi Bank is particularly
exposed in its day to day operations are: credit, market (interest rate, foreign exchange, equity and commodities risk), liquidity, systematic, operational,
and Business risk. (We will discuss credit and market risk in details as part of this paper).
Describe the industry you selected? Based on your research (i.e., web–based, news releases, business journals, etc.), what risks does this industry
currently deal with on a recurring basis (i.e., monthly, quarterly, annually)?Identify and describe a

Essay Arundel Partners Guidelines
Guidelines for the Arundel Partners Case Assignment
This is a group project and only one case–report should be submitted
FIN 6425 – "Arundel Case" GuidelinesNimalendran
In this case, a movie industry analyst is asked to evaluate a proposed venture in which a group of partners would purchase the sequel rights to movies
produced by the major studios. Your objective is to 1) discuss and evaluate the basic concept; 2) determine the value of the sequel rights on a
per–movie basis; 3) evaluate the possible upside and potential drawbacks to the proposed plan. As you will see, the ideas here incorporate elements of
capital budgeting coupled with a "real options" analysis.
Please provide answers to the following questions. You... Show more content on Helpwriting.net ...
Beyond this broad understanding, you shouldn't worry any more about how the specific numbers were estimated – but you should understand how to
interpret them. For example for The 'Burbs, the numbers in Exhibit 7 suggest that the value of the sequel at t=3 (using the suggested 12% discount rate)
is :
NPV (at t=3) = $27.3/1.12 – $24 = $0.375 million.
It follows that the NPV at t=0 can be found by discounting the above number three years at 12% –– doing so you get a value of $0.2669 million –
which is an estimate of what you pay for the sequel right at t=0.
Looking at this in terms of an internal rate of return – the one year return can be calculated as ($27.3/24) – 1=.1375 or 13.75% (this number has been
rounded up to .14 or 14% in Exhibit 7). Note that whenever this IRR is above 12%, the sequel will be positive NPV.
5. Assume that a maximum of ten sequels can be made in any given year (choose the sequels that are most likely to be made–for example if the main
character in the film dies then a sequel is unlikely to be made) Using the same decision–tree approach, what would you estimate to be the per–movie
value of the sequel rights to the entire portfolio of 99 movies released in 1989 by the six major studios?

6. Using the Black–Scholes approach, calculate the per–movie value of the sequel rights to the entire

Notes On The Value Of Diversification
The value of diversification Introduction Diversification is worth more than a word. It works on reducing the total risk of a portfolio with different
asset types. But what contributes to the success of portfolio diversification? A large size of portfolio? A variety types of asset allocation? Adding
international investment? Numerous of risk factors? They are all indicators of a well–diversified portfolio. But it is hard to achieve a perfectly
diversified portfolio in reality because you cannot diversify all types of risk. Following, we will discuss about the advantages and disadvantages of
diversification in portfolio management under circumstances. On one hand, some mention that dynamic and numerous asset allocations in the
portfolio will reduce idiosyncratic risk and some level of market risk. While some also suggest benefit exists of introducing multi–factor pricing models
to cover different risk factors. On the other hand, arguments arise demonstrating adding international investment may disappoint investors because
foreign markets could be correlated and moved together in a global world. Another disadvantage further defined will be the correlated asset
allocations weaken the effect of diversification. At the end, conclusion will be drawn to support the useness of diversification. Dynamic and numerous
asset allocation benefits Since there are two main types of risk we need to account for: systematic risk and idiosyncratic risk, the easiest one to be
diversified away is

Interest and Risk-free Rate
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Assignment 9
The due date for this quiz is Mon 16 Sep 2013 6:30 PM IST (UTC +0530).
Please read all questions ... Show more content on Helpwriting.net ...
Alpha, Inc., has debt that is viewed by the market as risk–less with a market value of $500 million. Beta, Inc., has no debt. Both firms are expected to
generate cash flows of $100 million per year for the foreseeable future and the market value of the equity of Beta, Inc is $1 billion. Estimate the return
on equity of Alpha, Inc. Assume there are no taxes, and the risk–free rate is 5%. (No more than two decimals in the percentage interest rate, but do not
enter the % sign.)
Answer for Question 7
Question 8

(10 points) Mango, Inc. has had debt with market value of $1 million that has paid a 6% coupon and has had an expiration date that is far, far away.
The expected annual earnings before interest and taxes for the firm are $2 million and the firm has not grown, nor does it have plans for any growth.
The firm however has just raised more equity to retire all its debt. If the required rate of return to equity–holders (after the capital structure change) is
now 20%, what is the market value of the firm? Assume there are no taxes. (Enter just the number without the $ sign or a comma; round to the nearest
whole dollar.)
Answer for Question 8
Question 9
(15 points) Suppose all investors are risk–averse and hold diversified portfolios. You are evaluating a new drug company that is going to have two
divisions: an R&D unit and a Sales unit. Your CEO and you are arguing about whether the two units should have the same cost

past paper
THE UNIVERSITY OF HULL
The Business School
HKU SPACE
Level 6 Examination
1 August 2010
Current Issues in Finance
Date : 1 August 2010
Time Allowed : 2 hours
Answer THREE questions –
At least ONE question from each section.
Standard calculators (non–programmable) may be used.
Tables are attached.
Do not open or turn over this exam paper, or start to write anything until told to by the Invigilator. Starting to write before permitted to do so may be
seen as an attempt to use
Unfair Means.
26143
1

SECTION A
Answer at least ONE question from this section
Question 1
You are considering three investments. The first one is a bond that is currently selling in the bond market at $1,200. The bond has a... Show more
Required:
(1) Should Murky Oil Ltd. accept the project? (Support your answer by appropriate calculations)
(11 marks)
(2) Briefly discuss the reasons of why venture capitalists always require relatively high returns, e.g. 60% on their investments. Such high returns cannot
be explained as being a reward for systematic risk according to the capital asset pricing model (Timmons, 1999).
(9 marks)
(question continues over page)
26143
4
Part 2
The mean and standard deviation of returns on the equity shares of two companies, Hello plc and Goodbye plc, are as follows:
Expected return
Hello plc shares
Goodbye plc shares
0.15
0.17
Standard deviation
0.35
0.45
The correlation coefficient between the returns of the two companies' shares is 0.3. Assume the risk free rate of return is

Case Study: Ameritrade Essay
Executive Summary: In mid–1997 Joe Ricketts the Chairman and CEO of Ameritrade, decided that Ameritrade's new mission would be to become
"the largest brokerage firm worldwide based on the number of trades." In order to accomplish this mission Ameritrade would need to invest
significantly in technology and advertising. This strategy would require large expenditures relative to Ameritrade's existing capital. In order to gauge
the financial impact of these large expenditures, there needed to be some accounting for the riskiness of the project. The average return on equity for
Ameritrade from 1975 to 1996 was 40% and recent returns were much higher, with each of the most recent five years having larger returns than the
40% average.... Show more content on Helpwriting.net ...
Ricketts planned to grow Ameritrade's revenues by targeting self–directed investors, even defining Ameritrade's mission 'to be the largest brokerage
firm worldwide based on the number of trades.' This strategy would require large expenditures relative to Ameritrade's existing capital. In order to
evaluate whether the strategy would generate
sufficient future cash flows to merit the investment, Ricketts needed an estimate of the project's risk. Ameritrade has been a pioneer in the
deep–discount brokerage sector, since it formed in 1971. Ameritrade not only helped to create the deep discount market but it also was the first to offer
many new services that changed the way individual managed their portfolio. The average return on equity during 1975 – 1996 was 40% and recent
returns in the last five years were much larger than the 40% average. In March 1997, Ameritrade raised $22.5 million in an initial public offering
allowing the company to continue adopting the latest advances in technology and to increase advertising to build its brand and improve market share.
Ameritrade two primary sources of revenue were from transactions and net interest. Which meant that virtually all of Ameritrade's net revenue were
directly linked to the stock market. Ameritrade therefore was much more sensitive to declines in the stock market than the full–service brokers. Many of

A Report On The Bank's Roe
in the 91st and 90th percentile respectively in the peer group. Figure 13 shows the peaks and valleys of the Bank's ROE over the course of the
previous five years.
Figure 13 shows the upward momentum of the Bank's ROE from 2011 through 2014 with a downturn in 2015. The 2015 downturn is contributed to
the overhead costs of the bank acquisition activity. Expect to see an uptick at year end due to recoveries gained from the acquisitions. The 9/30
/2015 UBPR reports the Bank's securities to assets represent 11.10%, compared to peers at 18.50%. The Bank's securities to assets have been
consistent over the previous five years. The portfolio is mostly made up of 4.30% US Treasury and Agency Securities, 38.50% Municipal Securities
and 50.62% Mortgage Backed Securities. The portfolio has little interest rate risk and as a result, the Bank's yields have remained high. Figure 14
reflects the banks exceptional returns on its securities portfolio at 2.78% which is higher than all peer group members. FirstBank's efficiency ratio has
remained one of its Achilles heels. Efficiency ratio is a large focus atmanagement level and steadily dropped from $76.77% in 2011 to 68.25% in
2014. The Bank experienced an increase to 73.91% in 2015 due to bank acquisition activity, adding staff and cost of funds. However, the Bank expects
staffing to level out and cost of funds to decrease due to FHLB payoffs. The Bank's current key strengths are strong loan growth, the local housing

Marriot
Ques 1–
The asset betas for the various divisions have been computed as follows:
Risk free rate: Risk free rate considered is the U.S. Government interest rates. For divisions with shorter useful life of assets, the US government
interest for 10 years as of April 1988 has been used (short term rate for restaurants and contract services) and for division with the assets with long
useful lives, the US government interest for 30 years has been considered (long term rate for Lodging). Since the information for US government
interest rates for different maturities is available it has been considered, in the absence of this information we can take the short term treasury bill rate.
Market risk premium (MRP=Market return– Risk free rate): The ... Show more content on Helpwriting.net ...
Since only contract services industry provide a return above this threshold, any future projects in lodging and restaurants industry which achieve the
threshold for the returns in that industry will be ignored unless they achieve a return of 12.02%. This would result in the INCREASE in the total
assets under contract services division of the company and a DECLINE in the proportion of assets for the other division. With the passage of time, the
company will stop taking any projects in other divisions and would exclusively handle the contract services division, this would result in a decline in
the value of the firm since the contract services industry contributes lesser to the total profits of the firm compared to its contribution in sales (For
1987, contract services contributed to 46% in sale and 33% in profits as against 41% and 51% for lodging and 13% and 16% for restaurants). Also this
would result in the company taking up the riskiest projects in the industry.
VALUE OF BUSINESS OVER TIME: As a result of the above, there will be incorrect allocation of capital between the divisions, resulting in
reduced value of the company. Also, since a single rate will be used to discount the cash flows from less riskier divisions (lodging), this too would
result in lower valuation

Finance 301 Sample Final Exam

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