ASSIGNMENT BMMF5103

Question 1: 1. Net income (NI): We have:

And:

2. Preferred dividends (Dp): We have:

3. Return on common stock:

ASSIGNMENT BMMF5103

4. Times interest earned (TIE): We have :

es)

5. Earnings per share (EPS): We have:

6. Price/earnings ratio (P/E):

ASSIGNMENT BMMF5103

We have:

7. Book value per share (BVPS): We have:

Question 2
1. The present value of the following future cash inflows discounted at 10%, with: a. $1,000 a year for year 1 through 10 We have :

b. $1,000 a year for years 5 through 10 3

ASSIGNMENT BMMF5103

The value of cash inflow in the fifth year:

The present value of cash inflow:

2. Your father is about to retire. His firm has given him the option of retiring with a lump sum of $20,000 or an annuity of $2,500 for 10 years. Which is worth more now, if an interest rate of 6% is used for the annuity? If he select an annuity of $2,500 for 10 years, we have: PMT = $2,500, n = 10 and i = 6% And the present value of an annuity of $2,500 for 10 years:

ASSIGNMENT BMMF5103

The present value: $18,400.217 < $20,000. So, he should receive a lump sum of $20,000 now. Question 3. If you need $6,000 5 years from now, how much of a deposit must you make in your savings account each year, assuming an 8% annual interest rate? We have: $6,000 is the future value, so:

With: i = 8%, n = 5

So, I must make $1,022.738 of a deposit in my savings account each year in order to have $6000 5 year from now. Question 4 Set up an amortization schedule for a $10,000 loan to be repaid in equal installments at the end of each of the next 5 years. The interest rate is 12%. We have:

With: PV = $10,000; i = 12%; n = 5:

ASSIGNMENT BMMF5103

So, to pay a $10,000 within five years of the loan, the interest rate is 12%, the end of each year to pay a $2,774

Amortization schedule
YEAR 1 2 3 4 5 TOTAL BEG BAL $ 10,000 $ 8,426 $ 6,663 $ 4,689 $ 2,478 $ $ $ $ $ $ PMT 2,774 2,774 2,774 2,774 2,774 13,870 $ $ $ $ $ $ INT 1,200 1,011 800 563 296 3,870
PRIN PMT $ $ $ $ $ $ 1,574 1,763 1,974 2,211 2,478 10,000 $ $ $ $ $ END BAL 8,426 6,663 4,689 2,478 -

ASSIGNMENT BMMF5103

Question 5 Stock A and B have the following probability distributions of possible future returns:

Probability 0.1 0.2 0.4 0.2 0.1

A (%) -15 0 5 10 25

B (%) -20 10 20 30 50

1. Calculate the expected return for each stock and the standard deviation of returns for each stock. We have, expected rate of return :

Expected rate of return A ( : 5%

Expected rate of return B ( : 19%

ASSIGNMENT BMMF5103

Standard deviation ():

Standard deviation A (

Standard deviation B (

2. Calculate the coefficient of variation (CV) We have:

The coefficient of variation A (CVA):

ASSIGNMENT BMMF5103

The coefficient of variation B (CVB):

3. Which stock is less risky? Explain your answer. We have: CVA > CVB The coefficient of variation A: CVA = 1.898; that mean: when to achieve 1% profit, stock As risk is 1.898% And the coefficient of variation B: CVB = 0.895; that mean: when to achieve 1% profit, stock Bs risk is 0.895% So, stock B is less risky than stock A Question 6 1. To measure risk, standard deviation and coefficient of variation are used, then coefficient of variation is better. Because: Standard deviation measures the stand-alone risk of an investment, and coefficient of variation is an alternative measure of stand-alone risk. The coefficient of variation represents the ratio of the standard deviation to the mean, and it is a useful statistic for comparing the degree of variation from one data series to another, even if the means are drastically different from each other. The standard deviation is an absolute measure of risk while the coefficent of variation is a relative measure. The coefficient of variation is more useful when using it in terms of more than one investment.

ASSIGNMENT BMMF5103

2. The treasury bills yield 10%, and Vinaconex expected return for next year is 18% and its beta is 2 We have:

With: rrf = 10%; rs = 18%; b = 2

rM = 14% So, the markets expected return is 14% for next year. Question 7 The REE has the following data: Initial cost of proposed equipment Estimated useful life Estimated annual savings in cash operating expenses Predicted residual value at the end of the useful life Cost of capital 1. Compute payback period $75,000 7 years 18,000 3,000 12%

2. Compute present value of estimated annual savings

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ASSIGNMENT BMMF5103

We have:

With: i =12%; n = 7; PMT = $18,000:

The present value of estimated annual savings: $82,147.617 3. The present value of estimated residual value We have:

With: i =12%; n = 7; Peridicted residual value = $3,000

4. Total present value of estimated cash flows We have:

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ASSIGNMENT BMMF5103

5. Calculate NPV We have:

6. Calculate IRR We have:

When i = IRR, then NPV = 0:

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ASSIGNMENT BMMF5103

Thus, the REE has NPV = is a good project.

> 0; and IRR =

> i =12%, so this

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