Case 6 - Nova Southeastern University H Wayne Huizenga...

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Nova Southeastern University H. Wayne Huizenga College of Business & Entrepreneurship Assignment for Course: FIN 5130 – Financial Management Submitted to: Hassan A. Khazem, PhD Submitted by: Aisat Olarinde N01313804 Date of Submission: May 15, 2016 Title of Assignment: Chapter 6: Mini Case CERTIFICATION OF AUTHORSHIP: I certify that I am the author of this paper and that any assistance I received in its preparation is fully acknowledged and disclosed in the paper. I have also cited any sources from which I used data, ideas or words, either quoted directly or paraphrased. I also certify that this paper was prepared by me specifically for this course. Student's Signature: Aisat I. Olarinde ***************************************************************** Instructor's Grade on Assignment: Instructor's Comments: 1
Assume that you recently graduated with a major in finance, and you just landed a job as a financial planner with Barney Smith Inc., a large financial services corporation. Your first assignment is to invest $100,000 for a client. Because the funds are to be invested in a new business the client plans to start at the end of one year, you have been instructed to plan for a one-year holding period. Further, your boss has restricted you to the investment alternatives shown in the table below. Returns On Alternative Investments Estimated Rate Of Return State of the T- Alta Repo Am. Market 2-stock economy Prob. Bills Inds Men Foam portfolio portfolio Recession 0.1 8.0% -22.0% 28.0% 10.0%* -13.0% 3.0% Below avg 0.2 8.0 -2.0 14.7 -10.0 1.0 Average 0.4 8.0 20.0 0.0 7.0 15.0 10.0 Above avg 0.2 8.0 35.0 -10.0 45.0 29.0 Boom 0.1 8.0 50.0 -20.0 30.0 43.0 15.0 r-hat (r) 8.0% 1.7% 13.8% 15.0% Std dev (σ) 0.0 13.4 18.8 15.3 Coef of var (cv) 7.9 1.4 1.0 beta (b) -0.86 0.68 Economy is in a flat-out recession, a large number of consumers who were planning to purchase a more expensive inner spring mattress may purchase, instead, a cheaper foam mattress. The estimated returns of American Foam do not always move in the same direction as the overall economy. When the economy is below average, consumers purchase fewer mattresses than they would if the economy were stronger. Under these circumstances, we would expect American Foam’s stock price to be higher if there is a recession than if the economy was just below average. Barney Smith’s economic forecasting staff has developed probability estimates for the state of the economy, and its security analysts have developed a sophisticated computer program that was used to estimate the rate of return on each alternative under each state of the economy. Alta Industries is an electronics firm; Repo Men collects past-due debts; and American Foam manufactures mattresses and various other foam products. Barney Smith also maintains an “index fund” which owns a market-weighted fraction of all publicly traded stocks; you can invest in that fund, and thus obtain average stock market results. Given the situation as described, answer the following questions.

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