BUS FPX 4070 Assessment 4 Evaluating Returns and Cash Flow Streams
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BUS FPX 4070 Assessment 4 Evaluating Returns and Cash Flow Streams

BUS FPX 4070 Assessment 4 Evaluating Returns and Cash Flow Streams

Name

Capella university

BUS-FPX4070 Foundations in Finance

Prof. Name

Date

Problem 1: Portfolio Required Return

As the manager of a $10 million investment fund comprising four stocks, determining the required rate of return is crucial. Given the investments and betas of each stock, and considering a market-required rate of return of 12 percent and a risk-free rate of 4 percent, we can calculate the fund’s required rate of return.

Portfolio Beta Calculation:

=(0.30×1.50)+(0.10×(−0.50))+(0.20×1.25)+(0.40×0.75)=0.95

Required Rate of Return Calculation:

=0.04+0.95×(0.12−0.04)=0.04+0.95×0.08=0.04+0.076=0.116

Therefore, the required rate of return for the fund is 11.6%.

Problem 2: Required Rate of Return

Given a required return on an average stock of 14 percent and a risk-free rate of return of 6 percent, we can determine the required returns for two stocks and find the difference between them.

Calculation for Stock R:

=0.06+1.5×(0.14−0.06)=0.06+1.5×0.08=0.06+0.12=0.18

Calculation for Stock S:

Stock S’s Required Return=0.06+0.75×(0.140.06)=0.06+0.75×0.08=0.06+0.06=0.12

The difference between the required returns of Stock R and Stock S is (0.18 – 0.12 = 0.06), which is 6%.

References:

Borad, S. B. (2022, April 16). eFinance Management. Present value of uneven cash flow – all you need to know. Retrieved from https://efinancemanagement.com/investmentdecisions/present-value-of-uneven-cash-flows

Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management. Retrieved from https://capella.vitalsource.com/reader/books/9780357088562/epubcfi/6/36[%3Bvnd.vst.id ref%3DM18]!/4/204/9:237[at%20%2Csho]

Geler, B. (2022, January 12). Smart Asset. What is the present value of an annuity. Retrieved from https://smartasset.com/retirement/present-value-of-annuity

Hayes, A. (2022, January 16). Investopedia. Cost of debt. What is the cost of debt? Retrieved from https://www.investopedia.com/terms/c/costofdebt.asp

BUS FPX 4070 Assessment 4 Evaluating Returns and Cash Flow Streams

Loo, W. B. (2021, October 5). Omni Calculator. Yield to maturity calculator. Retrieved from https://www.omnicalculator.com/finance/yield-to-maturity

Smyth, D. (2021, December 1). Sapling. How to calculate the fair value of a bond. Retrieved from https://www.sapling.com/7646916/calculate-fair-value-bond

Wall Street Prep. (n.d.). What is yield to call (YTC)? Retrieved from https://www.wallstreetprep.com/knowledge/yield-to-call-ytc/

BUS FPX 4070 Assessment 4 Evaluating Returns and Cash Flow Streams