HomeworkLib
Question

3. Suppose the portfolio of a large institutional investor Animal has a beta of 1.25, and the standard deviation of the rate of return on its portfolio is 15 percent and its expected rate of return is 15 percent. The portfolio of another institutional investor Beast has a beta of 0.75. The market portfolio may be expressed as a portfolio comprising the portfolios of Animal and Beast. Suppose there is a firm called Cunning corporation, whose stocks beta is 2 and it can borrow at the risk free rate, which is 2.5 percent. Cunnings equity value is £1.5 million and its debt is £1 million. The present value of Cunnings tax shield is £0.3 million. Assuming that both CAPM and the Modigliani-Miller theorem with corporate taxes hold, answer the following questions. a) What is the expected return on the market portfolio? [5 marks] b) What is the standard deviation of the rate of return on Beasts portfolio? [5 marks] c) What is the weight attached to Beast if we express the market portfolio as a portfolio [5 marks] [5 marks] Total 20 marks] comprising the portfolios of Animal and Beast? d) What is the after-tax WACC of Cunning?
2. A firm Kappa Industries is a very young business, which is growing rapidly and to which intangible assets are very important. In contrast, another firm Gorgeous Food, whose business is profitable and stable, but has limited growth opportunities and most of its assets are tangible. With this setup, answer the following questions. a) Assuming that the predictions of the pecking order theory hold, which firm should have [20 marks] b) Assuming that the predictions of the trade-off theory hold, which firm should have a [20 marks] a higher payout ratio? Explain concisely why. higher debt-equity ratio? Explain concisely why.
business   economics   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Answer 3)

a)

b)

Beta should be proportional to standard deviation. Hence, σ B / σΑ = BB / BA; Hence, ƠB = ƠA x BB / BA = 1596 x 0.75 / 1.25-9.0096

c)

Lets say, the market portfolio can be expressed as a portfolio comprising of proportion p of Animal and proportion (1-p) of Beast. Hence, resultant beta of the portfolio-p x BA + (1-p) x BB = p x 1.25 + (1-p) x 0.75 0.75 + 0.50 x p = beta hence, p 1- 0.75)/0.5-0.5 So the weight attached to Beast 1-p-1-0.5-0.5 5096.

d)

Answer 2)

0 0
Add a comment
Know the answer?
Add Answer to:
3. Suppose the portfolio of a large institutional investor 'Animal has a beta of 1.25, and...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Suppose the portfolio of a large institutional investor ‘Animal’ has a beta of 1.25, and the...

    Suppose the portfolio of a large institutional investor ‘Animal’ has a beta of 1.25, and the standard deviation of the rate of return on its portfolio is 15 percent and its expected rate of return is 15 percent. The portfolio of another institutional investor ‘Beast’ has a beta of 0.75. The market portfolio may be expressed as a portfolio comprising the portfolios of Animal and Beast. Suppose there is a firm called ‘Cunning corporation’, whose stock’s beta is 2 and...

  • Suppose a large institutional investor Alliance’s portfolio has a beta of 0.5. Another institutional investor Best’s...

    Suppose a large institutional investor Alliance’s portfolio has a beta of 0.5. Another institutional investor Best’s portfolio has an expected return of 10 percent and a standard deviation of 15 percent. Both portfolios have the same Sharpe ratio of 0.6, and the market portfolio can be described as a portfolio comprising these two with equal weights. Suppose there is a firm called Cunning corporation, whose stock’s beta is 2 and it can borrow at the risk free rate. Cunning’s equity...

  • Suppose the portfolio of a large institutional investor ‘Ace’ has a beta of 1.5, and the...

    Suppose the portfolio of a large institutional investor ‘Ace’ has a beta of 1.5, and the standard deviation of the rate of return on its portfolio is 15 percent. The portfolio of another institutional investor ‘Yankee’ has a beta of 0.7. The market portfolio may be expressed as a portfolio comprising the portfolios of Ace and Yankee, and its Sharpe ratio is 0.8 Suppose there is a firm called ‘Rusty Steel’, whose stock’s beta is 2 and it can borrow...

  • 2. A firm ‘Kappa Industries’ is a very young business, which is growing rapidly and to...

    2. A firm ‘Kappa Industries’ is a very young business, which is growing rapidly and to which intangible assets are very important. In contrast, another firm ‘Gorgeous Food’, whose business is profitable and stable, but has limited growth opportunities and most of its assets are tangible. With this setup, answer the following questions. a) Assuming that the predictions of the pecking order theory hold, which firm should have a higher payout ratio? Explain concisely why. b) Assuming that the predictions...

  • An investor is forming a portfolio by investing $25,000 in stock A which has a beta...

    An investor is forming a portfolio by investing $25,000 in stock A which has a beta of 2.40, and $25,000 in stock B which has a beta of 0.60. The return on the market is equal to 8% and treasure bonds have a yield of 3% (rRF). What’s the portfolio beta? 2.40 1.50 1.40 1.80 calculate the required rate of return on the investor’s portfolio 8.0% 10.8% 11.2% 10.5%

  • An investor is forming a portfolio by investing $50,000 in stock A that has a beta...

    An investor is forming a portfolio by investing $50,000 in stock A that has a beta of 1.50, and $50,000 in stock B that has a beta of 0.90. The market risk premium is equal to 2% and Treasury bonds have a yield of 4%. What is the required rate of return on the investor’s portfolio? please show calculation, thank you!

  • A mutual fund manager, Sally Spartan, has a $24.0 million portfolio with a beta of 1.25....

    A mutual fund manager, Sally Spartan, has a $24.0 million portfolio with a beta of 1.25. The risk-free rate is 3.50%, and the market risk premium is 7.00%. The manager expects to receive an additional $16.0 million which she plans to invest in additional stocks. After investing the additional funds, the total portfolio will equal $40.0 million. Sally wants the final $40 million dollar fund's required and expected return to be 15.0%. What must the average beta of the new...

  • 4. Investor equilibrium The following graph shows the set of portfolio opportunities for a multiasset case....

    4. Investor equilibrium The following graph shows the set of portfolio opportunities for a multiasset case. The point RF corresponds to a risk-free asset, the red curve BME is the efficient frontier, the shaded area under the efficient frontier represents the feasible set of portfolios of risky assets, and the yellow curves II and I2 are indifference curves for a particular investor. EXPECTED RATE OF RETURN (Percent) 10 RISK (Portfolio's standard deviation) The points on the line PRF MZ represent:...

  • (LGI0-3) 10-22 Portfolio Beta You own $7,000 of Human Genome stock that has a beta of...

    (LGI0-3) 10-22 Portfolio Beta You own $7,000 of Human Genome stock that has a beta of 3.5. You also own $8,000 of Frozen Food Express (beta = 1.6) and $10,000 of Molecular Devices (beta 0.4). What is the beta of your portfolio? (LG10-3) 10-28 Portfolio Beta and Required Return You hold the positions in the following table. What is the beta of your portfolio? If you expect the market to earn 12 percent and the risk-free rate is 3.5 percent,...

  • An investor has constructed a portfolio with the following investments: ASSET: DOLLARS INVESTED: BETA: Apple $15,000.00...

    An investor has constructed a portfolio with the following investments: ASSET: DOLLARS INVESTED: BETA: Apple $15,000.00 1.40 Kelloggs $5,000.00 0.20 S&P 500 Index $20,000.00 1.00 The current risk free rate in the economy is 4.00%, while the market portfolio risk premium is 6.00%. What is the beta for this portfolio? Submit Answer format: Number: Round to: 2 decimal places. #12 An investor has constructed a portfolio with the following investments: ASSET: DOLLARS INVESTED: BETA: Apple $15,000.00 1.40 Kelloggs $5,000.00 0.20...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT