INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT

INSTRUCTIONS

YOUR GRADE IS BASED ON YOUR CORRECTNESS, CONVICTION , ELUCIDATION AND ELABORATION OF YOUR ANSWERS.

YOU HAVE TO DO ALL 10 QUESTIONS.

SHOW YOUR WORK

I WILL NOT INTERPRET THE TEST FOR YOU.

A.PROBLEMS

1.We know that the price earnings(P/E) ratio is 10. We expect the EPS to be $1 this year and to grow at 4% next year. What is the market price of the stock?

2. a) There is a stock which pays a $!2 dividend annually but it does not alter. If the cost of equit is 10%, what are investors willing to pay for that stock.

b) If the aforementioned stock has a dividend which grows at a 2% rate, what will the market price be, if the coe is the same?

3. We buy a put option of Florenthal, Lesser and associates. Its premium is $4 and the strike price is $44. The current market price is $50. If the price drops to $35, shall we exercise the put option? If not, why not, and If yes, why yes? Compare the two cases of owning the stock versus not owning it in terms of rate of return the investor makes

4.We have a stock Bottine and Despotakis (A&D) which we buy for $10. We keep it for 6 years at which point we sell it for $25. During the six year period, it pays us $12 which we reinvest at 5% annual return. Calculate the rate of return we make per annum.

5. We know the following about Alloy and Brant (A&B). Total assets are $220m, D is $140m, E is $60m, preferred stock of $20m, cash is $100m and the # of shares is 1m. We estimate that the market value of equity is 2 times the book value of it. Finally, a fire sale of the firm would bring 30% of the value to the company. Compute the book value, liquidation value, replacement value and enterprise value per share of A&B.

6. We have the following information for Clough, Garcia and associates. The stock pays a $1 dividend and it will grow by 200% the first year 100% the second year and 2% forever after that. The unlevered bheta is 1, D/E is 60/40 and the tax rate is .4. Additionally, we know the treasury bond rate is .03 and the ROR of the S&P has been 10%. Derive the stock price of (C&G).

B. ESSAYS

1.Expound on the concept of EPS. What are its determinants specifically and generally? Is it definitive? What if EPS is not definitive , in terms of a performance measure , is definitive?

2. Explicate how does bheta determine the cost of equity? What are the 3 factors which make up the value of bheta?

3. Explain what the meaning of market efficiency is, and what are the implications to investing.

4. Discuss the free cash flow to equity and the operating free cash flow. That means you need to define them in detail, to talk about how they are alternatives to dividends, whether they are superior, or inferior to dividends and how they are used to value firms.

Subject | Business |

Due By (Pacific Time) | 07/25/2015 12:00 pm |

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