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Oct 28, 2023

Q1. Consider a portfolio consisting of the following three stocks.

Stock Portfolio weight Volatility (SD) Correlation with the market portfolio

Stock 

Portfolio weight 

Volatility (SD) 

Correlation with the  market portfolio

0.25 

0.12 

0.4

0.35 

0.25 

0.6

0.4 

0.13 

0.5

Q2. The actual return of the asset is 10% but based on its beta CAPM estimates its required  return as 8%. Is the asset overpriced or underpriced? Explain your answer. You may simply  draw the graph that explains your answer. 

Q3. The bank promises a stated annual interest of 8%. You invest $100. Find the future value  after four years from now using the following compounded interest rates:  

a. compounded annually 

b. compounded semiannually  

d. compounded continuously  

Q4. What is the present value of a perpetuity that promises to pay $1,000 today and $1,000 at the  end of the year forever? The interest rate is 5 percent. 

Q5. A company invests in a project that delivers annual payments of $100 forever! The payments start three years (t=3) from today. Use 5% discount rate. What is the present value of this investment today? (Hint: The formula we learned in class cc rr = 100 0.05 will give you the value of the perpetuity at t=2, not t=0)

Q6. Irvine Development Corporation is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 17%. The stock of Irvine Development Corporation has a beta of 0.75. Using the constant-growth DDM, find the intrinsic value of the stock.

Q7. The free cash flow to the firm is reported as $205 million. The interest expense to the firm is $22 million. If the tax rate is 35% and the net debt of the firm increases by $25 million, what is the approximate market value of the equity if the FCFE grows at 2% and the cost of equity is 11%?

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