# 0064447505 00802792 the standard deviation of stock k

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the standard deviation of stock J = 0.00644475^0.5 = 0.0802792 the standard deviation of stock k = 0.00032475^0.5 = 0.01802082 d) Calculate the covariance between the two stocks EXPECTED RETURN = probability * return on stock stock J =0.25* (-0.020) + 0.60 * (0.138) + 0.15 * (0.218) Economic State Return on Stock J %

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stock J = (-0.005) + 0.0828) + (0.0327) 0.1105 or 11.05% stock K = 0.25 *(0.034)+ 0.60 * (0.138) + 0.15 * (0.218) stock K = (0.0085) + (0.0372) + (0.0138) 0.0596 or 5.95% e) Calculate the correlation coefficient between the two stocks the correlation coefficient betwee n two stocks = 0.00139725/(0.0802792*0.0 f) What is the portfolio standard deviation? the portfolio staandard deviation =(0.3^*(0.0802792^2) + (2*0.7*0.3*0.00139
(Dev A)^2 (Dev B)^2 0.022 0.0003240 0.000484 0.172 0.021904 0.029584 -0.418 0.110224 0.174724 0.082 0.002304 0.006724 0.142 0.013924 0.020164 Sums 0.148680 0.231680 Variance 0.037170 0.23168 Std deviation 0.192795 0.0579200 variance eturns for each of two stocks, over the period 2007 to 2011: Deviation k R(B) - R(mean B) er of years -1

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0%) weightings. he range of expected returns for each stock (i.e.+ or – one Std Dev about the mean exp 48% 87%
e 5-year sample, for each stock tell you? ou prefer and why? s because the risks of stock A is lower than Stock B. 6657) = 0.798806757 between stocks A and B. e, both stocks are higher than the average historical returns at the same time. 0.798806757 is an if return on stock A is increased by 1%, then return on stock B will be incresed by 1%

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A and 65% of stock B. pected return of A) + (weight portfolio of B * expected return of B) ent between the returns is 0.5 ) when the correlation coefficient is now -0.5. ^2 - 2*35% *65% *36% *62% * 0.5) ^0.5 he standard deviation of the portfolio? relation higher is the standard deviation f A) 2 + (weight of B * deviation of B) 2 + 2*weight of A * standard deviation of %) ^2 + (65% + 62%) ^2 +2*35% *65% *36% *62% * 0.5) ^0.5 tandard deviation of A) 2 + (weight of B * deviation of B) 2 + 2*weight of A * sta
Dev J RETURN Dev K RETURN Dev J sq Dev K sq Dev J sq*pr -0.1305 -0.0255 0.01703025 0.0006503 0.00425756 0.0275 0.0025 0.00075625 6.25E-06 0.00045375 0.1075 0.0325 0.01155625 0.0010563 0.00173344 Var 0.00644475 Std Dev 0.0802792 Coviariance Correclation is the expected return of the portfolio?

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STATE PROBABILITY RETURN ON STOCK BEAR 0.25 -0.02 NORMAL 0.6 0.138 BULL 0.15 0.218 01802082)= 0.96582068 9725) +(0.7^2*0.01802082^2)^0.05= 0.03641428
pected return).

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A* weight of B * standard deviation of B * correlation) 0.5 andard deviation of A* weight of B * standard deviation of B * correlation) 0.5
Dev K sq*pr Dev J*Dev K*Pr 0.00016256 0.00083194 3.75E-06 4.125E-05 0.00015844 0.00052406 0.00032475 0.0 0.00139725 0.965820680

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-0.13 0.034 -0.026 0.000845 0.028 0.062 0.002 3.36E-05 0.108 0.092 0.032 0.0005184 RETURN ON STOCK J [R1n - E(R1) RETURN ON STOCK k Dev of return on stock k [R2n - E(R2) Pn*[R1n - E(R1) [R2n - E(R2)
Section 5: Basic Firm Valuation 2018 Free cash flow \$500,000,000.00 WACC to be calculated from extradata Constant growth rate in next 5 years 6% Long term growth rate after 5 years 3% Corporate tax rate 28% = 6% (1 – 0.28) = 4.32% = 10% [assuming Preference Dividend will be paid at end of Year 1] = (4.32% X 50%) + (12.5% X 40%) + (10% X 10%) 8.16% calculation pf discounted cash flows of the year millions Year 2018 2019 2020 2021 2022 Free Cashflows \$530.00 561.80 595.51 631.24 669.11 \$0.925 0.855 0.790 0.731 0.676 Present Value 490.01 480.23 470.64 461.24 452.03 calculation of terminal value Present Value of Cash Flows at end of Year 5 = \$ 452.03 millions Now, Present Value of Cash Flows from Year 6 to infinity = You are to calculate the value today of Minor Enterprises using the following 2018 data. Yo forecast future free cash flows for the next five years and the terminal cash flow using the g listed: Minor’s capital structure is 50% debt which costs 6%, 40% common stock equity which cos 10% preferred stock. The preferred stock dividend is \$3.00 and the preferred stock price is K 1 = Post Tax Cost of Debt R e = 12.5% (given in question) K p = \$ 3 / \$ 30 WACC = (K d X W d ) + (K e X W e ) + (K p X W p ) Present Value Factor @ 8.16%

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