If you will not be able to attend class that day please

Question

If you will not be able to attend class that day, please submit it before class by email to [email protected] or at my office, 375A Jacobs (put Assignments under the door if I am not there).1.  BP has come out with a new product. As a result, the firm projects ROE will equal 12%, and that the plowback ratio will equal .70. Its earnings today (time 0) are $1.40 per share. Investors expect a 10% rate of return on the stock.

            (a) Find the intrinsic value of the stock P (show your work and remember to use D₁)

            (b) Find the PVGO

            (c) Find the P/E ratio

2.  Find a publicly traded stock that pays a dividend. Find an estimate of cash flow (you can use EBITDA or Levered Cash flow - but make sure it is adjusted to be a per share calculation), and

(a) estimate the intrinsic value of the stock using dividends assuming a six percent constant growth rate and that the discount rate is 8% for year 1, 9% for year 2 and 10% in year 3 and after.

(b) estimate the intrinsic value of the stock using cash flows assuming a six percent constant growth rate and that the discount rate is 8% for year 1, 9% for year 2 and 10% in year 3 and after. 

 (c) compare your results with the actual stock price. Which is closer to the actual price?   

3.  You are bullish on Telecom stock.  The current market price is $40 per share, and you have $10,000 to invest.  If the margin limit is 50% and you borrow the maximum from your broker at 4% interest, and invest everything in Telecom,

            (a) what will your return be if you hold the stock for a year and the price goes up to $50? Show your calculation including the cost of interest            (b) how far does the price have to fall for you to have a margin call if the maintenance margin is 30%? Show your calculation.

4.  You have decided PhoneCo stock is overpriced at $120 and you want to sell short the stock,

            (a) what is the maximum number of shares you can sell if you have $10,000 to invest and the initial margin is 50% for short sales?  Show your calculation.

            (b) what is the first price that results in a margin call if the maintenance margin on short positions is 30%? Show your calculation.

5. The risk-free rate is 1% and there are three stocks that you can invest in with the following E(r) and σ:

                        E(r)                    σ

Stock A           .11                   .29

Stock B           .09                   .21

Stock C           .13                   .32

 The pair-wise correlation coefficients are ρ_AB = .25, ρ_BC = .35, ρ_AC = .40

In addition to the stocks A,B,C you can also invest in the following portfolios as follows:

                                    Portfolio Weights

                         A                    B                   C

Portfolio 1:      50%                 50%                  0%     

Portfolio 2:      50%                 0%                  50%

Portfolio 3:      0%                   50%                 50%

Portfolio 4:      33^1/3%              33^1/3%              33^1/3%

(a) Construct a table showing the E(r) and σ for each of the seven investments.

(b) Carefully graph the seven investment choices from questions on a plot with E(r) as the y axis and σ as the x axis.

(c) Draw on your graph (approximately) the Efficient Frontier and the Capital Allocation Line for the minimum variance portfolio.

(d) Would risk averse investors invest in a combination of the minimum variance portfolio and the risk-free rate?  Explain.

(e) Using the approximate results from your graph, calculate the exact investment you would make to earn an E(r)=20%.