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bagirrra123 [75]
3 years ago
12

Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $75,000 or $330,000 with equal p

robabilities of 0.5. The alternative risk-free investment in T-bills pays 4% per year.
A. If you require a risk premium of 7%, how much will you be willing to pay for the portfolio?
B. Suppose the portfolio can be purchased for the amount you found in (a). What will the expected rate of return on the portfolio be?
C. Now suppose you require a risk premium of 15%. What is the price you will be willing to pay now?
Business
1 answer:
jenyasd209 [6]3 years ago
8 0

Answer:

A. $182,432.43

B. 11%

C. $165,983.607

Explanation:

A. The computation of value of portfolio is shown below:-

Value of portfolio = (Cash flow × equal probabilities) ÷ (1 + (Risk free rate + Risk premium))

= (($75,000 × 0.5) + ($330,000 × 0.5)) ÷ (1 + (4% + 7%))

= $202,500  ÷ 1.11

= $182,432.4324

or

= $182,432.43

B. The computation of expected rate of return on the portfolio is shown below:-

Rate of return is

= (Cash flow × equal probabilities) - (value of portfolio) ÷ (value of portfolio)

= ($202,500 - $182,432.43) ÷ $182,432.43

= $20,067.57 ÷ $182,432.43

= 0.11

or

= 11%

C. The computation of value of portfolio is shown below:-

Required rate of return = Risk free rate + Risk premium

= 7% + 15%

= 22%

Price = Expected cash flow ÷ (1 + Required rate of return)

= $202,500 ÷ (1 + 0.22)

= $202,500 ÷ 1.22

= $165,983.607

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Answer:

The answer is C.

Explanation:

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High inventory turnover means that the company's product is in high demand and when the product is in high demand, it means there is an increase in sales.

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3 years ago
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On December 31, 20X5, Paris Corporation acquired 60 percent of Sanlo Company's common stock for $180,000. At that date, the fair
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Answer:

1. b. $15,000

2. a. $13,200

Explanation:

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Differential in value of Sanlo $45,000

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2 years ago
Which term refers to the age, gender, education, income, family size, career, and residence of the consumer?
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A. Butcher Timber Company hired your consulting firm to help them estimate the cost of equity. The yield on the firm's bonds is
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Answer:

14.35%

Explanation:

In this given case, Risk free return will be yield on bond = 10.50%

Risk Premium given = 3.85%

But beta of company is not given, and market beta also not given, hence we can not calculate beta.

we can assume beta of company is 1, then-

Cost of equity can be calculated as:

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Answer:

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