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 A 0.25 0.12 0.4 B 0.35 0.25 0.6 C 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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