# MGF402 assignment 2 Investment Management Summer june 2015

ASSIGNMENT

2

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.

This

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 dmohr@buffalo.edu 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 ?:

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

Weights

A

B C

Portfolio 1: 50% 50% 0%

Portfolio 2: 50% 0% 50%

Portfolio 3: 0% 50% 50%

Portfolio 4: 331/3% 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

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%.

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