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FIN344 WK4 Assignment 1.docx

FIN344 WK4 Assignment 1.docx - Brittany Sharpe FIN344 Wk4...

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Brittany Sharpe FIN344 Wk4 Assignment 1 April 3, 2018 P8-1 Rate of Return: 10 points SLO 3 Rate of return Douglas Keel, a financial analyst for Orange Industries, wishes to estimate the rate of return for two similar-risk investments, X and Y. Douglas’s research indicates that the immediate past returns will serve as reasonable estimates of future returns. A year earlier, investment X had a market value of $20,000, and investment Y had a market value of $55,000. During the year, investment X generated cash flow of $1,500, and investment Y generated cash flow of $6,800. The current market values of investments X and Y are $21,000 and $55,000, respectively. a. Calculate the expected rate of return on investments X and Y using the most recent year’s data. X investment= 12.5% 1,500+21,000-20,000 =$2,500 $2,500/$20,00 = X Rate of return = 12.5% Y investment= 12.36% 6,800 + 55,000 – 55,000= $6,800 6,800 / 55,000 = 12.36% Y Rate of return = 12.36% b. Assuming that the two investments are equally risky, which one should Douglas recommend? Why?
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