Practice Assignments on Financial Management, Time Value of Money, Risk and Return

This assignment aims at putting in the practice the concepts covered in the first part of the course: Introduction to the Financial Management, Time Value of Money, the Meaning and Measurement of Risk and Return

Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits. Please explain this in the context of the company’s goals. Prepare a short (1-page) essay.

In 2013 Bill Gates was worth about $28 billion after he reduced his stake in Microsoft from 21% to around 14% by moving billions into his charitable foundation. Let’s see what Bill Gates can do with his money in the following problems.

1. I’ll take Manhattan? Manhattan’s native tribe sold Manhattan Island to Peter Minuit for $24 in Now, 387 years later in 2013, Bill Gates wants to buy the island from the “current natives.” How much would Bill have to pay for Manhattan if the “current natives” want a 6% annual return on the original $24 purchase price? Could he afford it? (5 points)
   
   
2. How much would Bill have to pay for Manhattan if the “current natives” want a 6% return compounded monthly on the original $24purchase price? (5 points)
   
   
3. Microsoft Seattle? Bill Gates decides to pass on Manhattan and instead plans to buy the city of Seattle, Washington, for $60 billion in 10 years. How much would Mr. Gates have to invest today at 10 percent compounded annually in order to purchase Seattle in 10 years? (5 points)
   
   
4. Now assume Bill Gates wants to invest only about half his net worth today, $14 billion, in order to buy Seattle for $60 billion in 10 years. What annual rate of return would he have to earn in order to complete his purchase in 10 years? (5 points)

Yang Ming Marine Transport Corporation is considering the purchase of a new bulk carrier for $8 million. The forecasted revenues are $5 million a year and operating costs are $4 million. A major refit costing $2 million will be required after both the fifth and tenth years. After 15 years, the ship is expected to be sold for scrap at $1.5 million.

1. What is the NPV if the opportunity cost of capital is 8%? (10 points)
2. Should the company accept the purchase of the carrier? (10 points)

The data below presents monthly closing prices of Standard & Poor’s 500 Index, Wal-Mart, and Target to calculate the holding-period returns for the 24 months from May 2013 through May 2015

1. Use the price data from the table (use the excel available in week 7) for the Standard & Poor’s 500 Index, Wal-Mart, and Target to calculate the holding-period returns for the 24 months from May 2013 through May 2015. Calculate the average monthly holding-period returns and the standard deviation of these returns for the S&P Index, Wal-Mart, and Target. Please compare the results obtained for these three series. (15 points)
   
   
2. Plot (1) the holding-period returns for Wal-Mart against the Standard & Poor’s 500 Index, and (2) the Target holding-period returns against the Standard & Poor’s 500 Index. From your graphs, describe the nature of the relationship between stock returns for Wal-Mart and the returns for the S&P 500 Index. Make the same comparison for Target. (5 points)
   
   
3. Assume that you have decided to invest one-half of your money in Wal-Mart and the remainder in Target. Calculate the monthly holding-period returns for your two-stock portfolio. Academic Year 2020-2021 (The monthly return for the portfolio is the average of the two stocks’ monthly returns.) Plot the returns of your two-stock portfolio against the Standard & Poor’s 500 Index as you did for the individual stocks in part b. How does this graph compare to the graphs for the individual stocks? Explain the difference. (10 points)