Financial Management Assignment

Question 1 -

Richard must decide how to allocate the capital in his portfolio. Richard has $61,000 available to invest. He finds the rates of return for four stocks for the past 12 years and the results are given below. Richard plans to invest 25% of his funds in each stock.

a) How much will he invest in each stock?

b) The expected value of Richard's portfolio is:

c) The standard deviation of Richard's portfolio is:

Question 2 -

Anna is a Vice President at the J Corporation. The company is considering investing in a new factory and Anna must decide whether it is a feasible project. In order to assess the viability of the project, Anna must first calculate the rate of return that equity holders expect from the company stock. The annual returns for J Corp. and for a market index are given below. Currently, the risk-free rate of return is 1.1% and the market risk-premium is 4.0%.

a) What is the beta of J Corp.'s stock?

b) Using the CAPM model, what is the expected rate of return on J Corp. stock for the coming year?

Question 3 -

Refer to Question 2. Now that Anna has determined an appropriate rate of return for J Corp.'s stock, she must calculate the firm's Weighted Average Cost of Capital (WACC). There are currently 55.8 Million J Corp. common shares outstanding. Each share is currently priced at $6.98. As well, the firm has 8,000 bonds outstanding and each bond has a face value of $10,000, a yield to maturity of 3.81% and a quoted price of $10,581.60. J Corp.'s tax rate is 30%. J Corp. has no preferred shares outstanding.

What is J Corp.'s WACC?

Question 4 -

Refer to Questions 2 and 3. The land for the factory will cost $1,010,000. The factory will cost $8,160,000 to build and construction will take two years with construction costs payable in equal installments at the start of each year. The factory will operate for 20 years; however, at the end of the fifth, tenth, and fifteenth year of operation, refurbishment costs will be $160,000. At the end of its 20 year lifespan, the land can be resold for $1,030,000. There is a 70% probability that the factory's net operating cash flows will be $1,168,269; however, there is 30% chance that net cash flows will only be $718,624. You may assume that net operating cash flows at the end of each year.

a) What are the Expected net operating cash flows per year?

b) What is the Internal Rate of Return for the project?

c) What is the Net Present Value of the project?

d) Should Anna recommend that the J Corporation build the factory?

Question 5 -

Refer to Questions 1 and 2. Richard has just received an unexpected bonus at work worth $15,250 and, given the J. Corp.'s reputation for excellent investment decision making, he will invest all of the bonus in J Corp. stock. Given the rates of return for stocks A, B, C, and D presented in Question 1 and the rates of return for J Corp. stock and the market presented in Question 2, as well as the cash amounts he is investing in stocks A, B, C, and D as you determined in Question 1,

a) What is the beta of Richard's portfolio?

b) Richard's portfolio is.

Attachment:- Assignment File.rar