Trident FIN501 Module 1 CASE & SLP Latest 2019 August

FIN501 Strategic Corporate Finance

Module 1 Case

PRESENT
VALUE AND THE RISK/RETURN TRADE-OFF

Assignment
Overview

For this
assignment, make sure to first carefully review all of the required readings
about present value, future value, risk and return, and the CAPM. Once you are
relatively comfortable with these concepts, try working through some of the
examples in the background readings and try computing the answers on your own.
Once you are confident you both understand the concepts and the computational
steps, complete the assignment below.

Case
Assignment

Present
your answers to the problem below in a Word document, and also upload an Excel
file with your computations. Excel is required for Questions 2 and 3. Excel is
optional for Questions 1 and 4, but you are required to show your steps for all
quantitative problems. Even if you get the answer wrong, you can still get
partial credit if you show your work.

Calculate
the following:

Suppose you
wish to raise some money for your favorite local charity. This charity needs
$50,000 a year to run its operation and you want to make sure that it is
ensured an annual payment of this amount from now on for every year in the
foreseeable future. Given an interest rate of 5%, how much would you have to
fund this perpetuity to guarantee the charity a payment of $50,000 per year?

You decide
to put $1,000 in a new bank account and don’t plan to withdraw the money for 10
years. If your bank does continuous compounding and the interest rate is 1%,
what will be the value of this bank account in 10 years?

Suppose you
won the lottery but not all of your winnings will come in one year. Instead,
you will get a series of annual payments over the next five years. The table
below tells you what your payment will be every year for the next five years.
Use the information in the table to make the following computations:

The present
and future value of your lottery ticket if the interest rate is 8%

The present
and future value of your lottery ticket if the interest rate is 10%

Year	Payment
1	5000
2	6000
3	7000
4	8000
5	9000

The table
below gives the probability of different returns for three different assets.
Using this table, calculate the following:

The
expected return of each asset

The
standard deviation of returns of each asset

The
coefficient of variation of each asset

Based on
your answers to B) and C) above, which asset has the highest total risk and
highest relative risk?

Asset A	Asset B	Asset C
Probability	Return	Probability	Return	Probability	Return
0.3	5	0.1	25	0.1	4
0.4	8	0.3	20	0.8	5
0.3	9	0.5	15	0.1	6
		0.1	14

Suppose the
market return is 8%, the risk-free rate is 1% and the beta for a given stock is
1.2. Answer the following questions based on this information:

What is the
required return for this stock?

If the beta
increases by 50% (but risk-free rate remains 1%), what will be the new required
return for the stock? What is the percentage-wise change in required return
compared to your answer to A) above?

If the
market return increases by 50% (but beta remains at 1.2), what will be the new
required return for the stock? What is the percentage-wise change in required
return compared to your answer to A) above?

Suppose
there are three different companies. The first one, Trendy Tech Inc., has
investors who are “fair-weather friends.” When the stock market is going up,
everybody wants to invest in Trendy Tech, but as soon as the market goes down
everyone jumps ships and sells their shares. The second company is Oily Oil
Inc. Oily’s stock price seems to depend only on the price of oil and nothing
else. Finally, there is Conglomerated Conglomerate Inc. Conglomerated is a
giant company with holdings in almost every industry imaginable—from cell
phones to grocery stores and even amusement parks. Based on this information,
which company would you think has the highest beta? The lowest beta? Which one
do you think has a beta closest to 1?

FIN501 Strategic Corporate Finance

Module 1 SLP

PRESENT
VALUE AND THE RISK/RETURN TRADE-OFF

For the SLP
this session, you will be taking a close look at a company of your choice. You
are free to choose any company you want as long as it is publicly traded on one
of the major stock market exchanges such as NYSE or NASDAQ. This could be a
company that you personally are interested in investing in, or a company whose
product you buy, or one that you’ve read about in the news recently and would
like to know more about. Do some research on this company, including recent
articles. Also, look up the company on Google Finance. This will give you a
wealth of information including stock prices over the last month, year, five
years, etc., along with other information such as the beta or whether or not
the company is profitable.

Once you
have chosen a company and have done some initial research on it, write a 2- to
3-page paper discussing the following items:

Give a
brief description of the company and why you find it interesting.

What is the
beta of this company’s stock? Based on the magnitude of the beta, do you think
it is low risk, high risk, or somewhere in between?

Now look at
recent stock price movements. What is the highest price the stock has been over
the last year? The lowest price over the last year? Look at the five-year
pattern as well. Based on what you see, what does this tell you about the
riskiness of the stock?

Look at
some other companies in the same industry as your chosen company. How do they
compare in terms of beta and other measures of riskiness? Would you prefer to
invest in your chosen company, or do some of its competitors seem like a better
bet?