ASSIGNMENT BMMF5103 MANAGERIAL FINANCE 15 July 2013 QUESTION 1 a) Maximizing shareholder wealth is a “moral imperative” for financial manager means managers are supposed to work for shareholders who are the actual owners of a company or corporation. Shareholders elect company directors who in turn hire managers to run the company on day to day basis with the view to make profit for the company. Managers are paid for their services rendered to
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Answers to Warm-Up Exercises E8-1. Total annual return Answer: ($0 $12‚000 $10‚000) $10‚000 $2‚000 $10‚000 20% Logistics‚ Inc. doubled the annual rate of return predicted by the analyst. The negative net income is irrelevant to the problem. E8-2. Expected return Answer: Analyst 1 2 3 4 Total Probability 0.35 0.05 0.20 0.40 1.00 Return 5% 5% 10% 3% Expected return Weighted Value 1.75% 0.25% 2.0% 1.2% 4.70% E8-3. Comparing the risk of two investments Answer: CV1 0.10 0.15 0.6667 CV2 0.05
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compared to the best expected rate of return that investor can possibly earn in other investments with similar risks‚ which is the cost of capital. Under the CAPM‚ the market portfolio is a well-diversified‚ efficient portfolio representing the non-diversifiable risk in the economy. Therefore‚ investments have similar risk if they have the same sensitivity to market risk‚ as measured by their beta with the market portfolio. So‚ the cost of capital of any investment opportunity equals the expected return
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Accounting for Uncertainty in Discounted Cash Flow Valuation of Upstream Oil and Gas Investments∗ by William H. Knull‚ III‚ Scott T. Jones‚ Timothy J. Tyler & Richard D. Deutsch∗∗ Valuing future income streams from the production of oil and gas is a welldeveloped discipline within the industry and among sophisticated investors. Valuations drive companies’ investment decisions and market transactions every day. In the context of resolving disputes‚ especially international ones‚ arbitral tribunals
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condition of the borrower as well as the current value of any underlying collateral is of considerable interest to its bank. The real risk from credit is the deviation of portfolio performance from its expected value. Accordingly‚ credit risk is diversifiable‚ but difficult to eliminate completely. This is because a portion of the default risk may‚ in fact‚ result from the systematic risk outlined above. In addition‚ the idiosyncratic nature of some portion of these losses remains a problem for creditors
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Pricing Model‚ investors are primarily concerned with portfolio risk‚ not the isolated risks of individual stocks. Thus‚ the relevant risk is an individual stock’s contribution to the overall riskiness of the portfolio. a. True b. False 2. Diversifiable risk‚ which is measured by beta‚ can be lowered by adding more stocks to a portfolio. a. True b. False 3. If an investor buys enough stocks‚ he or she can‚ through diversification‚ eliminate all of the non-market risk inherent in owning
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Topic 5: Risk and Return Learning Outcomes introduction to risk and return expected return and risk on individual asset expected return and risk on portfolio systematic and unsystematic risk diversification capital asset pricing model (CAPM) and the security market line Risk and Return M K Lai Page 2 Introduction to Risk and Return finance can be complicated‚ but it can be reduced to three basic concepts cash flows Risk and Return time value of money risk
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CHINA DEVELOPMENT INDUSTRIAL BANK A case study Submitted to: Dr. Felix D. Cena‚ Phd Submitted by: Jose Farley Y. Tagle Lalaine D. Cosadio Cherryl L. Villaruel Raymund S. Belleza July 17‚ 2011 Given: Assume that you recently graduated with a major in finance. You just landed a job as a financial planner with China Development Industrial bank (CDIB)‚ a large financial services corporation. Your first assignment is to invest $100‚000 for a client. Because the funds to be invested
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demonstrates the function of ¦Á‚ and is used to determine the excess return (the amount by which the portfolio ’s actual return deviates from its expected return). Like Treynor‚ Jenson also considered only the un-diversifiable risk‚ assuming that the portfolio eliminates the diversifiable risk. ri = ¦Á + rf + ¦Âi [ E(rm) ¨Crf ] = ¦Á + E (ri) ¦Á = ri ¨C rf ¨C ¦Âi [ E(rm) ¨Crf ] ¦Á here is named as Jensen¡¯s Alpha‚ as illustrated in diagram: This measure indicates
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portfolio. Therefore‚ 1.5 = ($5‚000/$20‚000)1.2 + ($15‚000/$20‚000)bC. 1.5 = 0.3 + 0.75bc 1.2 = 0.75bc bc = 1.6. c. The unsystematic risk is the company-specific risk whereas the systematic risk is the market-specific risk. The former can be diversifiable away through the formation of portfolios comprising of assets that are negatively correlated with one another. The later continues to remain in the system and its presence is acknowledged by beta. The sources of unsystematic risk include the firm’
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