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Step2247 [10]
3 years ago
9

Suppose you held a diversified portfolio consisting of a $7,500 investment in each of 20 different common stocks. The portfolio'

s beta is 2.05. Now suppose you decided to sell one of the stocks in your portfolio with a beta of 1.0 for $7,500 and use the proceeds to buy another stock with a beta of 0.75. What would your portfolio's new beta be? Do not round intermediate calculations. Round your answer to two decimal places.
Business
1 answer:
Solnce55 [7]3 years ago
7 0

Answer:

What would your portfolio's new beta be? 2,04

Explanation:

"To calculate the ending Beta by changing one stock it's necessary to find how much weigh the stock we are removing from the portfollio.

7.500 / 150.000 = 0,050 , now we have the participation of the stock in the portfolio, then we weigh the beta of the stock we want to remove by this number, 1,00 (Beta) x 0,050 (weight in the portfolio) = 0,050 (Beta), the number it's the same as the weight because the Beta is 1,00.

Now with this final number we can ponderate the new Beta in the Portfolio, so we multiply the 0,50 (weight) * 0,75 (New Beta) = 0,038 New Beta. We substitute the beta we remove for this one and we get the NEW BETA PORTFOLIO of 2,04. Please see details below:

Portfolio  #   Beta    NEW Beta   Weight  Old Beta   New Beta  

$ 7.500 1  1,00   0,75   0,05   0,05   0,04  

$ 7.500 2  2,05   2,05   0,05   0,10   0,10  

$ 7.500 3  2,05   2,05   0,05   0,10   0,10  

$ 7.500 4  2,05   2,05   0,05   0,10   0,10  

$ 7.500 5  2,05   2,05   0,05   0,10   0,10  

$ 7.500 6  2,05   2,05   0,05   0,10   0,10  

$ 7.500 7  2,05   2,05   0,05   0,10   0,10  

$ 7.500 8  2,05   2,05   0,05   0,10   0,10  

$ 7.500 9  2,05   2,05   0,05   0,10   0,10  

$ 7.500 10  2,05   2,05   0,05   0,10   0,10  

$ 7.500 11  2,05   2,05   0,05   0,10   0,10  

$ 7.500 12  2,05   2,05   0,05   0,10   0,10  

$ 7.500 13  2,05   2,05   0,05   0,10   0,10  

$ 7.500 14  2,05   2,05   0,05   0,10   0,10  

$ 7.500 15  2,05   2,05   0,05   0,10   0,10  

$ 7.500 16  2,05   2,05   0,05   0,10   0,10  

$ 7.500 17  2,05   2,05   0,05   0,10   0,10  

$ 7.500 18  2,05   2,05   0,05   0,10   0,10  

$ 7.500 19  2,05   2,05   0,05   0,10   0,10  

$ 7.500 20  3,10   3,10   0,05   0,15   0,15  

$ 150.000               1,000   2,05   2,04  

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

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Most Company has an opportunity to invest in one of two new projects. Project Y requires a $350,000 investment for new machinery
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Answer:

Most Company

                                                          Project Y     Project Z

1. Annual expected net cash flows   $140,500  $151,347

2. Payback period                                2.5 years   2.3 years

3. Accounting rate of return                 15.3%         9.9%

4. Net present value, using 9%        $105,220   $33,059

Explanation:

a) Data and Calculations:

                                                          Project Y     Project Z

Initial investment costs                    $350,000    $350,000

Useful life of project                         4 years        3 years

Salvage value                                    $0                $0

Annual depreciation                          $87,500     $116,667

Sales                                                $390,000    $312,000

Expenses

Direct materials                                   54,600       39,000

Direct labor                                          78,000       46,800

Overhead including depreciation     140,400     140,400

Selling and administrative  expenses 28,000      28,000

Total expenses                                  301,000    254,200

Pretax income                                     89,000      57,800

Income taxes (40%)                            35,600      23,120

Net income                                       $53,400   $34,680

Accounting rate of return                   15.3%         9.9%

= Net income/Initial investment cost * 100

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Net income                                       $53,400   $34,680

Annual depreciation                           87,500    116,667

Annual expected net cash flows   $140,500  $151,347

PV annuity factor at 9% for 4 years    3.240       2.531              

PV of annual cash inflows            $455,220 $383,059

Net Present Value = (Initial investment - PV of annual cash flows)

NPV =                                             $105,220   $33,059

Payback period = Initial investment cost/Annual cash inflow

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