Please put the answer in a word document or excel spreadsheet. Thank you - see attached file first.
Calculate the expected return and standard deviation of for single stocks and portfolio
You have estimated the following probability distributions of expected future returns from stocks X and Y:
a) What is the expected return for stock X and Y?
Expected return of X = ??
Expected return of Y = ??
b) What is the standard deviation of expected returns for stock X and Y?
Standard deviation of X = ??
Standard deviation of Y = ??
c) Calculate the expected return and standard deviation of the mix of 50% X and 50% Y.
Expected return of the mix of 50% X + 50% Y = ??
d) Which stock would you consider to be riskier, X, Y, or 50% X + 50% Y? Why? (hint: calculate the coefficient of variation (COV) = standard deviation / expected return and compare.) Hints: please study the slides for the explanation of calculations.
Cov of X = ??
Cov of Y = ??
Cov of ( 50% X + 50% Y) = ??
Which do you pick? ---- ??
2) Capital budgeting decision on new branch
Initial cost of building and equipment is $1 million
Expected to have a useful life of 20 years
At the end of the project the building and its equipment are expected to be sold for a $200,000 salvage value
The building and its equipment will be depreciated over their 20-year life using straight-line depreciation to a zero balance
The building is to be constructed on land leased for $23,000 per year
Net working capital must be increased by $110,000
Annual revenues from the new branch will be $400,000
Of this $400,000 in revenues, $50,000 will be drawn away from the bank's main office
The new branch will incur about $130,000 per year in other expenses
Both expenses and revenues are expected to remain approximately constant over the branch's 20-year life
Marginal tax rate is 40%
Cost of capital 9%
Answer the following questions:
1. What is the cash flow for the branch's 20-year life
2. Calculate the NPV, Profitability index, and Internal rate of return (IRR).
3. Should the project be accepted? Why?