Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Corporate Finance Expert

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

Analyze a teams communicationthink about a recent situation

Analyze a team's communication Think about a recent situation when you worked as part of a team. In retrospect, what worked well about the communication, and what could have been improved? Call or meet with one of your f ...

Organize a restaurant review-prepare to write a review of a

Organize a restaurant review:- Prepare to write a review of a restaurant or a dining facility on campus. Use the process outlined: • Brainstorm ideas. What do you think is important to include in your review? Draw a mind ...

Finance paper1 no more than one and half page due 1212

Finance Paper 1. No more than one and half page. Due 12/12 8am. First one is article, second one is short vrideo. Links are below. Read the following article on Dimensional Fund Advisors: http://www.wsj.com/articles/maki ...

Practice using voip-if you dont have much experience using

Practice using VoIP:- If you don't have much experience using VoIP, such as Skype or Google Voice, try calling another student or a coworker. Both services are free, have simple sign-up procedures, and include optional v ...

Explains how consumers may make purchases that they cannot

Explains how consumers may make purchases that they cannot afford to keep up with their friends. This could prevent them from allocating any funds toward all the other financial planning functions such as liquidity, insu ...

Module assignmentcoogly company is attempting to identify

Module Assignment Coogly Company is attempting to identify its weighted average cost of capital for the coming year and has hired you to answer some questions they have about the process. They have asked you to present t ...

Do an online search of credit care debt management

Do an online search of credit care debt management, installment debt, and revolving credit. a. Is the total avoidance of debt an effective strategy to utilize in managing your debt and credit? Explain fully. b. Explain t ...

1 why do you think it is easier for firms with weak credit

1. Why do you think it is easier for firms with weak credit positions to obtain lease financing than bank loan financing? 2. Under what circumstances might a firm prefer intermediate-term borrowing to either long- or sho ...

Write a memo announcing employee layoffsyou are the svp of

Write a memo announcing employee layoffs. You are the SVP of human resources for a financial software company that has 7,500 employees. The company has decided to sell AccountSoft, one of its major products. The software ...

Project guidelinesproject part ipart i overviewbusiness

Project Guidelines Project Part I Part I Overview Business professionals typically need to demonstrate a core set of financial knowledge to earn the job and to succeed on a job. For this part of the assessment, you will ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

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.

Ask Now Help with Problems, Get a Best Answer

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