Assignment 1 - Alex Sharpe's Portfolio Questions

Exhibit 1 has been replicated in the attached Excel file. Monthly risk free returns have also been included. Please address the following questions:

1) What is an expense ratio for a mutual fund? Give an example.

2) What does it mean for a mutual fund to be a no-load mutual fund?

3) Estimate the average monthly returns and standard deviation of Reynolds, Hasbro, and the S&P 500 Index over the years 2002-2006. Which stock appears to be the riskiest?

4) Suppose Alex Sharpe make the following portfolios: 1) 99% S&P / 1% Cash; 2) 99% S&P / 1% RJR; and 3) 99% S&P / 1% Hasbro. Estimate the average return and standard deviation of each portfolio. How does each stock affect the variability of the investment? How does this relate to your answer in question 3 above?

5) Perform a regression of each stock's excess return on the market excess return to compute a beta for each stock. Recall that the excess return is the equity return minus the risk-free rate. How does this calculation relate to your answer in question 4?

6) If Alex is going to add one of the stocks, which one do you think she should buy? Motivate your answer.

Assignment 2 - Questions and Assumptions for Intel Case

The purpose of this case is to learn how to value a company and to estimate its stock price. Further, this case will guide our discussion of market efficiency. The company announced that growth in revenues was 3-5% in the third quarter, but analysts had expected 10-12% growth. What we want to consider is how this news affects the stock price and whether the market overreacted to the news.

The case is somewhat vague about its assumptions. Therefore, to guide your analysis, please consider the following:

Guidance:

1) Use Exhibit 4 to project expected cash flows for the horizon 2000-2004. Assume that we are valuing the company as of January 1, 2000 (assume this is t=0).

2) Assume initially that revenues grow 19% year over year during that time.

3) Assume that Operating Income (EBIT) is 38.5% of revenues each year during 2000-2004.

4) Intel pays a marginal tax rate of 33%.

5) Depreciation is 9% of revenues each year. Note that depreciation expense has already been taken into consideration in the EBIT projections.

6) Change in NWC is 1% of revenues each year.

7) Capex is 12.5% of revenues each year.

8) Assume that Intel is an all equity firm.

9) The risk-free rate is 4.5% and the market risk premium is 6.5%.

10) Intel's beta of equity is 1.1.

11) Assume that Intel's pre-announcement stock price as of January 1, 2000 is $60.22.

12) There are 6,710,000,000 shares outstanding.

You should address the following:

1. Prepare a valuation of Intel using a discounted cash flow method.

2. Calculate the present value (Jan 1, 2000 dollars) of Intel's terminal value. What growth rate justifies a stock price of $60.22 per share?

3. After Intel announces that its revenues will not grow as fast as predicted, how much would revenue growth projections and growth in terminal value have to change to cause Intel's stock price to drop to $43.31. Note that there is not one right answer.

4. Do you think that the market over-reacted to the news or this is justified by your valuation? There is no right answer to this question. The idea here is to support your opinion with evidence.

Attachment:- Assignment Files.rar