Chapter 09 Questions and Problems

Chapter 09 Questions and Problems - ENTREPRENEURIAL FINANCE...

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E NTREPRENEURIAL F INANCE : Strategy Valuation and Deal Structure Chapter 9 Valuation Questions and Problems 1. You are considering purchasing shares of DeltaCad Inc. for $40/share. Your analysis of the company and the economy produce the following one-year scenarios with equally likely outcomes: State of the Economy Dividend (D 1 ) Price (P 1 ) Boom $1.40 $51.00 Average $0.75 $43.00 Bust $0.00 $33.00 Calculate the mean and standard deviation of the expected return. 2. Stave Four Enterprises is currently selling for $27 per share. You have an analyst report with the following forecast: Probability State of the Economy Dividend (D 1 ) Price (P 1 ) 10% Boom $2.00 $35.00 30% Good $1.25 $31.50 40% Likely $1.00 $29.00 20% Poor $0.25 $22.25 Calculate the mean and standard deviation of the expected return. Which appears to be a better potential investment, Stave Four or DeltaCad? 3. Suppose the risk-free rate of interest is 5 percent, the market risk premium is 6 percent, and the market standard deviation is 20 percent. a. Plot the risk-free asset and the market portfolio on coordinates with expected return on the vertical axis and total risk (standard deviation) on the horizontal axis. Plot both assets on coordinates with expected return on the axis and market risk (beta) on the horizontal axis and sketch in the security market line. b. Suppose the CAPM is correct and that an asset with a standard deviation of holding period returns of 30 percent has an expected return of 12 percent. Plot the asset on both sets of coordinates. How much of the total risk of the asset is market risk? What is the correlation between the asset and the market portfolio. c. Explain why another asset with a standard deviation of holding period returns of 30 percent could have an expected return of 10 percent. What would the asset’s risk characteristics need to be?
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4. Consider a wager that will pay either $55 or $20, with equal probability. a. Calculate the mean and standard deviation of the expected payoff. b. If the cost of the wager is $35, calculate the expected return and the standard deviation of holding-period returns. What if the cost of the wager is $30? c. Now assume the risk-free rate is 3.0 percent, the market risk premium is 6.5 percent, the standard deviation of holding-period returns of the market portfolio is 18 percent, and the correlation between the payoff of the bet and the return you could earn by investing in the market portfolio is 0.4. Use the CEQ approach and Equation 9.8 to compute the PV of the wager. d. What is the NPV of the wager if it is acquired for $30? e. What is the correct risk-adjusted discount rate for this wager? 5. You are considering the purchase of a Manhattan apartment. The unit is a one bedroom with 1.5 baths and 720 square feet and has an assessed value of $575,000. Use the data below to estimate the market value of your potential apartment. Comparable
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Chapter 09 Questions and Problems - ENTREPRENEURIAL FINANCE...

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