Similarly the seventh row of results shows that for a five-year holding period and a “middle level” of risk aversion, the optimal allocation is 40.2% in the risk-free, 41.4% in T-Bonds, 3.2% in World Bonds, 9.0% in Large Stocks and 6.3% in Small Stocks. This portfolio’s expected return is 4.71% and its standard deviation is 2.38%. As the target date approaches the allocation shifts from the higher risk asset classes to the lower risk asset classes to a majority in the risk-free asset. 3. Look at the results in Table 1.
In summary, under the law of one price, Cypress asset value is higher than its current market value. Q2: Dirks can adopt the strategy of longing Cypress. From the case, Cypress has obtained a favorable ruling from IRS to distribute Sun Power shares tax free to all Cypress’s shareholders. This means that Dirks should consider accumulating (long) as many Cypress share as possible. Alternatively, if Cypress were to sell its share in Sun Power, it is worth $3,862,600,000 equivalent to $25.29 per share of Cypress in cash.
Operating leases B. Accounts receivable C. Inventory D. Accounts payable 16) Compute the payback period for a project with the following cash flows, if the company’s discount rate is 12%. Initial outlay = $450 Cash flows: Year 1 = $325 Year 2 = $65 Year 3 = $100 A. 3.43 years B. 3.17 years C. 2.88 years D. 2.6 years 17) For the NPV criteria, a project is acceptable if the NPV is __________, while for the profitability index, a project is acceptable if the profitability index is __________.
Question 1: How, if at all, would you change Cohen’s equity cost of capital calculation? Why? In this case, Cohen calculated the equity cost of capital by using CAPM: rE = rf +βi ( E[rmkt]-rf ) 10.5% = 5.74% + 0.80 * (5.9%) * Risk free rate: The rf should be kept consistent with the time horizon of the investment. Since Cohen did her estimate in 2001 and Nike’s bond will expire in 2021, it is reasonable to use the 20-year T-bond rate, 5.74% as the risk free rate. * Risk premium: Arithmetic mean is often used for one-year period valuation, while geometric mean is better for long-term period estimated expected returns.
A 5 year Certificate of Deposit yielding 3% APY. b. A bond fund yielding 4%. c. An Income Mutual Fund earning 5%. d. A Growth Mutual Fund earning 12%.
Next, each item commitment quantity was calculated using its contribution margin and its total contribution in dollar to the revenue of the company. For e.g. if an item had a margin of $15 if sold, and $5 loss if not sold, the commitment value would be 0.75. Hence the optimal stock to keep would be three quarters of the probability of demand. If for instance, the corresponding error for 0.75 is 1.3, the optimal stock to keep for that item would be 1.3 * frozen forecast.
1+5*BEY5yr=exp5r, where BEY5yr is the annualized Treasury Bill’s bond equivalent yield and r is the continuous compounded interest rate we want to derive, which is 5.2627%. Secondly, since historical volatility could not perfectly reflect the scenarios in the future, we use options prices that could reflect the investors’ expected volatility (due to the efficient market hypothesis). Moreover, as the volatility derived from long-term call options are more precise than that derived from short-term, we would use the 3 long
Since PacifiCorp is not a publicly traded company, we must use valuation multiples from comparable firms to determine the value of the firm. As you can see in Exhibit 1, if we use the valuation multiples we arrive at an implied firm value of between $6,252 million (low end) and $9,289 million (high end). This means that our offer of $9.4 billion is right in line with the high end valuation of the company. We also used multiples to determine that the market value of equity was worth between $4,277 million and $5,904 million (see Exhibit 1). As stated earlier, we offered to pay $5.1 billion for the equity portion of the company.
Notice that if Han chooses a limit price strategy, Coa can earn $1.5 billion rather than $1 billion by also charging a limit price. If Han chooses to charge monopoly prices, Coa can earn $2.5 billion rather than $1.75 billion by charging limit prices. Irrespective of the pricing strategy chosen by Han, Coa is better off charging limit prices. Limit pricing is a dominant strategy for Coa. The same holds true for Han.
d. None of the above is true regarding how Ben, Inc. accounts for its investment in Black, Inc. 5. Ben, Inc. follows U.S. GAAP for its external financial reporting. Ben, Inc. owns 25% of the outstanding stock of Black, Inc. and accordingly uses the equity method to account for its investment. Which of the following is true regarding Ben, Inc.’s policies related to Black, Inc.? a. Ben, Inc. will increase the investment account for its pro-rata share of Black, Inc.’s net loss for the year.