MGF402 assignment 2 Investment Management Summer june 2015

| October 3, 2018

MGF 402
Investment Management
Summer 2015

You may work in a group of up to 4 on this
Assignment. Please indicate clearly on
all submitted Assignments who the members of the group are. Please
note, all assignments submitted with more than 4 group members will
automatically receive a 0 grade.

Assignment is due on Thursday, June 11th at the beginning of class. No late assignments will be accepted. If you will not be able to attend class that
day, please submit it before class by email to or at
my office, 375A Jacobs (put Assignments under the door if I am not there).

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

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

Find the PVGO

Find the P/E ratio

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?

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,
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
how far does the price have to fall for you to have a margin call if the maintenance
margin is 30%? Show your calculation.

You have decided PhoneCo stock is overpriced at $120 and you want to
sell short the stock,
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.
what is the first price that results in a margin call if the maintenance margin
on short positions is 30%? Show your

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

E(r) ?
Stock A .11 .29
Stock B .09 .21
Stock C .13 .32

The pair-wise correlation coefficients are
?AB = .25, ?BC = .35, ?AC = .40

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

Portfolio 1: 50% 50% 0%
Portfolio 2: 50% 0% 50%
Portfolio 3: 0% 50% 50%
Portfolio 4: 331/3% 331/3%

(a) Construct a table showing the E(r) and
? 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 ? as the x axis.

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

(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%.

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