Rose berry and other given tutorial in excel

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P8–14 Portfolio analysis You have been given the expected return data shown in the first table on three assets—F, G, and H—over the period 2013–2016.

Expected return

Year     Asset F     Asset G   Asset H

2013       16%           17%         14%

2014       17              16             15

2015       18              15             16

2016       19              14             17

Using these assets, you have isolated the three investment alternatives shown in the

following table.

                          Alternative Investment

                          1) 100% of asset F

                          2 )50% of asset F and 50% of asset G

                          3 )50% of asset F and 50% of asset H

a. Calculate the expected return over the 4-year period for each of the three

alternatives.

b. Calculate the standard deviation of returns over the 4-year period for each of the

three alternatives.

c. Use your findings in parts a and b to calculate the coefficient of variation for

each of the three alternatives.

d. On the basis of your findings, which of the three investment alternatives do you recommend? Why?

P8–23 Portfolio betas Rose Berry is attempting to evaluate two possible portfolios, which

consist of the same five assets held in different proportions. She is particularly

interested in using beta to compare the risks of the portfolios, so she has gathered

the data shown in the following table.

                                         Portfolio weights

Asset       Asset beta    Portfolio A    Portfolio B

1                    1.30                 10%             30%

2                    0.70                 30                 10

3                    1.25                 10                 20

4                    1.10                 10                 20

5                     0.90                 40                20

                                   Totals 100%           100%

a. Calculate the betas for portfolios A and B.

b. Compare the risks of these portfolios to the market as well as to each other.

Which portfolio is more risky?

P9–1 Concept of cost of capital Wren Manufacturing is in the process of analyzing its

investment decision-making procedures. The two projects evaluated by the firm

during the past month were projects 263 and 264. The basic variables surrounding

each project analysis and the resulting decision actions are summarized in the following

table.

Basic variables    Project 263     Project 264

Cost                         $64,000               $58,000

Life                           15 years               15 years

Expected return         8%                       15%

Least-cost financing

Source                     Debt                        Equity

Cost (after-tax)           7%                         16%

Decision

Action                       Invest                   Don’t invest

Reason                     8% > 7% cost        15% < 16% cost

a. Evaluate the firm’s decision-making procedures, and explain why the acceptance of

project 263 and rejection of project 264 may not be in the owners’ best interest.

b. If the firm maintains a capital structure containing 40% debt and 60% equity,

find its weighted average cost using the data in the table.

c. If the firm had used the weighted average cost calculated in part b, what actions

would have been indicated relative to projects 263 and 264?

d. Compare and contrast the firm’s actions with your findings in part c. Which decision

method seems more appropriate? Explain why.

P9–2 Cost of debt using both methods Currently, Warren Industries can sell 15-year,

$1,000-par-value bonds paying annual interest at a 12% coupon rate. As a result of

current interest rates, the bonds can be sold for $1,010 each; flotation costs of $30

per bond will be incurred in this process. The firm is in the 40% tax bracket.

a. Find the net proceeds from sale of the bond, Nd.

b. Show the cash flows from the firm’s point of view over the maturity of the bond.

c. Calculate the before-tax and after-tax costs of debt.

d. Use the approximation formula to estimate the before-tax and after-tax costs of

debt.

e. Compare and contrast the costs of debt calculated in parts c and d. Which

approach do you prefer? Why?

P9–17 Calculation of individual costs and WACC Dillon Labs has asked its financial

manager to measure the cost of each specific type of capital as well as the weighted

average cost of capital. The weighted average cost is to be measured by using the following

weights: 40% long-term debt, 10% preferred stock, and 50% common stock

equity (retained earnings, new common stock, or both). The firm’s tax rate is 40%.

Debt The firm can sell for $980 a 10-year, $1,000-par-value bond paying

annual interest at a 10% coupon rate. A flotation cost of 3% of the par value is

required in addition to the discount of $20 per bond.

Preferred stock Eight percent (annual dividend) preferred stock having a par

value of $100 can be sold for $65. An additional fee of $2 per share must be

paid to the underwriters.

Common stock The firm’s common stock is currently selling for $50 per share.

The dividend expected to be paid at the end of the coming year (2013) is $4. Its

dividend payments, which have been approximately 60% of earnings per share

in each of the past 5 years, were as shown in the following table.

Year      Dividend

2012        $3.75

2011          3.50

2010          3.30

2009          3.15

2008          2.85

It is expected that to attract buyers, new common stock must be underpriced $5 per

share, and the firm must also pay $3 per share in flotation costs. Dividend payments

are expected to continue at 60% of earnings.((Assume that r1+=r5)

a. Calculate the after-tax cost of debt.

b. Calculate the cost of preferred stock.

c. Calculate the cost of common stock.

d. Calculate the WACC for Dillon Labs.

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