28 Aug 501C1
Present your answers to the problem below in a Word document, and also upload an Excel file with your computations
Question 1 Calculate the following:
i.Suppose you wish to raise some money for your favorite local charity. This charity needs $50,000 a year to run its operation and you want to make sure that it is ensured an annual payment of this amount from now on for every year in the foreseeable future. Given an interest rate of 5%, how much would you have to fund this perpetuity to guarantee the charity a payment of $50,000 per year?
ii.You decide to put $1,000 in a new bank account and don’t plan to withdraw the money for 10 years. If your bank does continuous compounding and the interest rate is 1%, what will be the value of this bank account in 10 years?
Excel is required for Questions 2 and 3. see the attached below
Question 4
Suppose the market return is 8%, the risk-free rate is 1% and the beta for a given stock is 1.2. Answer the following questions based on this information:
- What is the required return for this stock?
- If the beta increases by 50% (but risk-free rate remains 1%), what will be the new required return for the stock? What is the percentage-wise change in required return compared to your answer to A) above?
- If the market return increases by 50% (but beta remains at 1.2), what will be the new required return for the stock? What is the percentage-wise change in required return compared to your answer to A) above?
Question 5
Suppose there are three different companies. The first one, Trendy Tech Inc., has investors who are “fair-weather friends.” When the stock market is going up, everybody wants to invest in Trendy Tech, but as soon as the market goes down everyone jumps ships and sells their shares. The second company is Oily Oil Inc. Oily’s stock price seems to depend only on the price of oil and nothing else. Finally, there is Conglomerated Conglomerate Inc. Conglomerated is a giant company with holdings in almost every industry imaginable—from cell phones to grocery stores and even amusement parks. Based on this information, which company would you think has the highest beta? The lowest beta? Which one do you think has a beta closest to 1?
reference
holthausen, R. (2015). Time value of money. Coursera. Retrieved from: https://www.coursera.org/learn/wharton-decision-making-scenarios/lecture/ZE2tE/1-2-time-value-of-money
Pinder, S. (2017) Unsystematic versus systematic risk. Coursera. Retrieved from: https://www.coursera.org/learn/valuation/lecture/LLtZP/2-1-unsystematic-versus-systematic-risk-getting-rid-of-unrewarded-risk
Pinder, S. (2017). Capital asset pricing model (It’s all about the discount rate). Coursera. Retrieved from: https://www.coursera.org/learn/valuation/lecture/6Oh5F/2-2-capital-asset-pricing-model-its-all-about-the-discount-rate
Clifford, J. (2014). Time value of money. ACDC Leadership. Retrieved from: https://www.youtube.com/watch?v=nfkqCv3Rd_g
Vishwanath, S. (2007). Chapter 3: Risk and return. Corporate finance: Theory and practice. SAGE Publications India
Vishwanath, S. (2007). Chapter 2: Time value of money. Corporate finance: Theory and practice. SAGE Publications India
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