Alternative Approaches to Valuation and Investment

Week 4 Assignment :

PROMPT

Part A – Defining and Measuring Risk – 2 questions (2 points, 3 points, total 5 points)

Portfolio standard deviation is equal to 21.06%

PROMPT

Use the information from question 1 to assist in answering question 2:

Your brother gets very angry when you tell him what the standard deviation of the returns of the portfolio will be following his proposed diversification saying; “This is crazy – by following your advice my risk has actually increased!! What sort of silliness is this?”

2. Provide a short response to your brother (including a calculation) that demonstrates the impact of diversification (maximum 100 words).

While standard deviation has expanded – in light of the fact that we have added a less secure advantage for the portfolio – we have still accomplished an expansion advantage on the grounds that the danger of the portfolio is not exactly the weighted normal of the individual resources.

PROMPT

Part B – Linking Risk with Expected Return – 2 questions (4 points each, total 8 points)

Following your explanation, your brother calms down a little bit and then asks you to estimate the expected return of his portfolio. You estimate that Treasury bills are paying 2.5% per annum and that the S&P500 index is expected to outperform Treasury Bills by 5% per annum.

3. Estimate the betas for Disney Ltd AND MGM Resorts International [express to two decimal places – eg. 2.56].

Beta Disney = 1.16 and Beta MGM = 1.50

PROMPT

4. Estimate the beta AND the expected return of the diversified portfolio proposed by your brother [express beta and expected return to two decimal places – e.g. 2.56 and the expected return to two decimal place – e.g. 35.24%].

Part C – Using Financial Information to Estimate Cost of Capital – 1 question (3 points)

5. Critically discuss this statement:

A firm’s WACC reflects the return required by contributors of capital and hence will always be a good benchmark discount rate for assessing new projects being considered by a firm.

Note: A critical discussion requires you to discuss the statement with a critical eye - that is identify the valid and invalid parts of the statement and discussing why the different parts are (or are not) correct.

Portfolio standard deviation is equal to 21.06% Beta Disney = 1.16 and Beta MGM = 1.50

PROMPT

Part D – Real Options Analysis – 1 question (4 points)

Five years ago, Rednip Ltd purchased a block of land to establish manufacturing operations. They spent $1 million for the 4 acres of land, which was significantly larger than what they needed to conduct operations at the time. In fact they could have gotten away with spending only $700,000 on a smaller parcel of land. Now they are considering building a new factory on the site in response to an increase in demand for their product. It will cost them $200,000 to construct the new buildings on the previously unused part of their land parcel.

6. Answer ALL of the following questions:

a. What style of option has been described? [e.g. Option to abandon]

b. Is the option described in the text above a put option or a call option?

c. What was the price paid for the option?

d. What is the exercise price of the option?

Alternative approaches involve the application and use of alternative test methods not involving the use of live animals. Ensuring that non-animal alternatives are used in place of live animals is part of the project evaluation process performed by the HPRA.

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