Metal Manufacturing has isolated four alternatives for meeting its need for increased production capacity. The following table s
ummarizes data gathered relative to each of these alternatives.Calculate the coefficient of variation for each alternative.If the firm wishes to minimize risk, which alternative do you recommend? Why?Alternative Expected return Standard deviation of returnA 20% 7.0%B 22 9.5C 19 6.0D 16 5.5
1 answer:
Answer:
a. 42.5%, 34.4%, 34.21%, 30.63%
b. Option D
The question in proper order
Metal Manufacturing has isolated four alternatives for meeting its need for increased production capacity. The following table summarizes data gathered relative to each of these alternatives,
The table is inserted below
(Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)
a. Calculate the coefficient of variation for each alternative.
A?
B?
C?
D?
b. If the firm wishes to minimize risk, which alternative do you recommend? Why?
Explanation:
Coefficient of Variation = Standard Deviation/Expected Return * 100%
Standard
Expected deviation Coefficient of
Alternative return of return variation
A 20% 8.5% 42.5%
B 25% 8.6% 34.4%
C 19% 6.6% 34.21%
D 16% 4.9% 30.63%
(b)
Coefficient of Variation, CV, denotes the risk per unit of return. This implies that a low CV means a low risk per unit of return. Hence, the firm can minimize risk by opting for option D which gives the lowest CV and therefore offers the lowest risk
You might be interested in
Answer:
(a) 9.9%
(b) 10.09%
The further explanation is given below.
Explanation:
The given values are:
Coupon payment
= $99
Price
= $1,000
(a)
The Yield to maturity (YTM) will be:
=
where,
C = Coupon payment
P = Price
n = years to maturity
F = Face value
On putting the estimated values is the above formula, we get
⇒
⇒
⇒ %
(b)
Although the 1st year coupon was indeed reinvested outside an interest rate of r%, cumulative money raised will indeed be made at the end of 2nd year.
=
Came to the realization compound YTM is therefore a function of r, as is shown throughout the table below:
Rate (r) Total proceeds Realized YTM ()
7.9% 1205.8 9.8%
9.9% 1207.8 9.9%
11.9% 1209.8 9.99%
Now,
Overall proceeds realized YTM:
=
=
=
=
=
=
= %
Answer:
b. 1,062.81
Explanation:
the key to answer this question is to remember that valuation of a bond depends basically of calculating the present value of a series of cash flows, so let´s think about a bond as if you were a lender so you will get interest by the money you lend (coupon) and at the end of n years you will get back the money you lend at the beginnin (principal), so applying math we have the bond value given by:
where: principal as said before is the value lended, coupon is the rate of interest paid, i is the interest rate and n is the number of periods
so applying to this particular exercise, as it is not said we will assume that 6% and 7% are interest rate convertible seminually, so the price of the bond will be:
price=1,062.81
take into account that here we are asked about semianually payments, so in 8 years there are 16 semesters.