+1-415-315-9853

info@mywordsolution.com

## Finance

 Basic Finance Corporate Finance Financial Management Financial Econometrics Portfolio Management Risk Management Public Finance Business Law & Ethics

problem 1: Assume that a risk neutral agent has \$100,000 today that he wants to save for one year. Compare the given two savings plans.

Bank A offers a standard savings account with 4% p.a.

Bank B offers the following alternative:

There is a basis interest rate of 1% p.a. and 50% participation on the performance of the S&P500. The maximum interest rate is capped at 7% p.a. (ex; If the S&P increases by 6%, there is a bonus of 3% so that the total return is 4% p.a. If the return of the S&P is 20%, the plan has a return of 7%. Note, if the S&P has a negative return, the interest rate remains at 1% p.a.)

Assume that the S&P has 1000 points at t = 0. At t = 1 it can have {900, 990, 1000, 1020, 1040, 1100, 1120, 1200, 1260, 1300} points with equal probability.

a) Draw the payoff of alternative B as a function of S&P (with S&P performance on the X-axis, and the return of the plan on the Y-axis.)

b) The agent maximizes the expected amount at t = 1. Which plan is more better? How much more can the agent spend in expectation at t = 1, if he chooses the better one?

problem 2: Assume that Real Option Inc. has a product that produces the following cash flow.

At t = 1, the demand can be high or low with equal probability. If demand is high (low) the cash flow is CFH = 400 (CFL = 200).

At t = 2, the demand can as well be high or low. If demand was high at t = 1, then a high demand at t = 2 occurs with probability 0.8. If demand was low at t = 1, then a high demand at t = 2 arises with probability 0.2. If demand is high (low) at t = 2 then CFH = 400 (CFL = 200). The (risk adjusted) interest rate for this project is 10%.

a) Draw the event and decision tree.

b) Determine the market price (expected value) of Real Option Inc. at t = 0?

Now assume that Real Option Inc. can rent a platform to run a marketing campaign. For this  purpose Real Option Inc. should sign a two year contract with the platform provider. The costs for using the platform are 200 per period. Marketing itself doesn't cost anything and has the following effect. In the high demand state, marketing doubles the demand. In the low demand state it has no effect.

c) Should Real Option Inc. rent the platform at t = 0 and run the marketing campaign?

Contracts can only be signed at t = 0. However suppose Real Option Inc. can terminate the contract  after the first year by paying the fine of 10.

d) Determine the optimal strategy of Real Option Inc. and the maximum market value of the firm?

problem 3: Consider the expected return and standard deviation of the given two assets:

Asset 1:   E[r1] = 0.1   and  σ1= 0.3

Asset 2:  E[r2] = 0.2   and  σ2= 0.4

a) Draw (ex with Excel) the set of achievable portfolios for the cases: (i) ρ12= -1, (ii) ρ12= 0.

b) Suppsoe ρ12 = 0. Which portfolio has the minimal variance? Find out the minimal variance?

problem 4: Consider an economy with three states which take place with probability (0.2, 0.4, 0.4). Assuma that a firm has a project which generates the state dependent cash flows (100, 200, 200) at t = 1. The investment costs are 170 at t = 0. The firm owns this money. The market portfolio produces the payoff (200, 250, 300) and has an expected return of 8%. The risk free rate is 3%. Assuma that the CAPM holds.

a) What is the beta of this project?

b) Describe whether the firm should conduct the project.

Corporate Finance, Finance

• Category:- Corporate Finance
• Reference No.:- M91321

Have any Question?

## Related Questions in Corporate Finance

### Write an article on a blog to warn people about quick cash

Write an article on a blog to warn people about quick cash businesses. To discourage people from signing up at the "Promise Cash Center" site discussed in Exercise, write an online article. Imagine that you'll post your ...

### Evaluate audience focus in a company messageafter the oil

Evaluate audience focus in a company message After the oil spill in the Gulf of Mexico, Bob Dudley was appointed as British Petroleum's first American CEO. In a speech to business leaders in London, Dudley said the follo ...

### 1 why do you think it is important to use the market values

1. Why do you think it is important to use the market values of debt and equity, rather than book values, to calculate a firm's WACC? 2. Assuming that there are no corporate income taxes, how can the costs of preferred s ...

### Go to Go to

Go to www.philadelphiafed.org/consumer-resources/publications/establish-use-andprotect-credit.cfm and answer the following questions: a. What do lenders look for before lending money? b. After college, how will you go ab ...

### Use the following firms to complete this problem

Use the following firms to complete this problem: Anheuser-Busch Companies, Inc. (BUD) Coca-Cola Company (KO) Molson Coors Brewing Company (TAP) PepsiCo, Inc. (PEP) Go to http://fi nance.yahoo.com, and input the ticker s ...

### What are the three ways in which derivatives can be

What are the three ways in which derivatives can be misused? Contrast dollar return and percentage return. Be sure to identify which return is more useful when comparing investments? Compare and contrast options and forw ...

### Identify facial expressionsfind a partner and take turns

Identify facial expressions Find a partner and take turns telling each other a three-minute story. When each of you tells your story, try to exaggerate, as if you were on stage and telling the story to a live audience. A ...

### Write an email requesting a recommendationimagine that

Write an email requesting a recommendation. Imagine that you're interviewing for your ideal job. You're doing well in the process, and the HR manager has asked you for a letter of recommendation from one of your instruct ...

### 1 modern medical devices has a current ratio of 05

1. Modern Medical Devices has a current ratio of 0.5. Which of the following actions would improve (i.e., increase) this ratio? · Use cash to pay off current liabilities. · Collect some of the current accounts receivable ...

### 1 what is meant by a participation loan what does the

1. What is meant by a participation loan? What does the lender participate in? Why would a lender want to make a participation loan? Why would an investor want to obtain a participation loan? 2. What criteria should be u ...

• 13,132 Experts

## Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

### WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

### Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

### Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

### Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

### Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro