ADM 3415 – 1A Assignment 1 Question 1 You are involved in a project that requires an immediate investment in Net Working Capital (NWC) of $10,000.

ADM 3415 – 1A

Assignment 1

Question 1

You are involved in a project that requires an immediate investment in Net Working Capital (NWC) of

$10,000. At the end of the year the level of NWC is expected to be $12,000. At the end of year two it is

expected to be $5,000. How much is the inflow/outflow due to NWC in time 0, 1, and 2. Clearly identify

the amount and state whether it is an inflow or an outflow.

Question 2

Stock A has an expected return of 17%, its beta is 1.5, and the risk-free rate is 5%. What must be the

market risk premium? Useful to know:

R j R f j ( R m R f )

Question 3

Project “git ‘er done” has the following cash flows over its lifetime:

Year 0

Years 1, 2, 3, 4, and 5

– $15,000

$4,700 Each

Assuming a discount rate of 12%, find:

a)

b)

c)

d)

e)

The payback period

The discounted payback period

The Net Present Value

The approximate IRR

The Profitability Index.

Question 4

You decide to hold a portfolio with 80% invested in the S&P 500 stock index and 20% invested in the

MSCI Emerging Markets index. The expected return is 9.93% for the S&P 500 and 18.20% for the

Emerging Markets index. The risk (i.e. standard deviation) is 16.21% for the S&P 500 and 33.11% for the

Emerging Markets index. What will be the portfolio’s expected return and risk given that the covariance

between the two indexes is 0.5% (i.e. 0.005)?

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