ADM 3415 – 1A Assignment 1 Question 1 You are involved in a project that require

ADM 3415 – 1A
Assignment 1
Question 1
You are involved in a project that requires an immediate investment in Net Working Capital (NWC) of
$10,000. At the end of the year the level of NWC is expected to be $12,000. At the end of year two it is
expected to be $5,000. How much is the inflow/outflow due to NWC in time 0, 1, and 2. Clearly identify
the amount and state whether it is an inflow or an outflow.
Question 2
Stock A has an expected return of 17%, its beta is 1.5, and the risk-free rate is 5%. What must be the
market risk premium? Useful to know:
R j R f j ( R m R f )
Question 3
Project “git ‘er done” has the following cash flows over its lifetime:
Year 0
Years 1, 2, 3, 4, and 5
– $15,000
$4,700 Each
Assuming a discount rate of 12%, find:
a)
b)
c)
d)
e)
The payback period
The discounted payback period
The Net Present Value
The approximate IRR
The Profitability Index.
Question 4
You decide to hold a portfolio with 80% invested in the S&P 500 stock index and 20% invested in the
MSCI Emerging Markets index. The expected return is 9.93% for the S&P 500 and 18.20% for the
Emerging Markets index. The risk (i.e. standard deviation) is 16.21% for the S&P 500 and 33.11% for the
Emerging Markets index. What will be the portfolio’s expected return and risk given that the covariance
between the two indexes is 0.5% (i.e. 0.005)?