Solution_Practice_Fi - Question 1 You will accept the offer if the price suggested is lower than the PV of the Cash Flows you will get from buying

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Unformatted text preview: Question 1 You will accept the offer if the price suggested is lower than the PV of the Cash Flows you will get from buying the house. Those Cash Flows are the rents after the lease expired and the cost of the lease you will not have to pay anymore. The rents you stand to incrementally receive by buying the house are all the rents from the year 11 onwards. So, since you just received a yearly rent of $20,000 and they are growing at a 5% growth rate, the Present Value of those rents is 20,000 ∗ (1.05) 11 0.1 − 0.05 1 1.1 ¡ 10 = 263,763.9 On top of that you will same the next ten lease payments. The present value of those payments is 1,000 ? 10% 10 = 6,144.6 So the present value of you are buying is 269,908.5 which is less than the price being asked. You should not buy. Question 2 In the first part, you simply make the expected value and standard deviation of the combination of a risky asset and a risk free asset. The expected return will be 0.6 ∗ 15% + 0.4 ∗ 6% = 11.4% The standard deviation will be 0.6 ∗ 30% = 18% In the second part of the question there is a typo. The standard deviation of Advanced Medicals is 40% and not 35% Determining the proportions of the two is made through the expected return of the portfolio....
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This note was uploaded on 03/30/2011 for the course FIN 5514 taught by Professor Jaffe during the Three '11 term at University of New South Wales.

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Solution_Practice_Fi - Question 1 You will accept the offer if the price suggested is lower than the PV of the Cash Flows you will get from buying

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