1. You have a $2 million portfolio consisting of a $100,000 investment in each o

Question

1.  You have a $2 million portfolio consisting of a $100,000 investment in each of 20 different stocks. The portfolio has a beta of 1.20.  You are considering selling $100,000 worth of one stock with a beta of 0.80 and using the proceeds to purchase another stock with a beta of 1.50.  What will the portfolio's new beta be after these transactions? Round your answer to two decimal places.

2. The Moore Corporation had operating income (EBIT) of $950,000. The company's depreciation expense is $237,500.  Moore is 100% equity financed, and it faces a 35% tax rate.

What is the company's net income? What is its net cash flow?

3.What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 9% of par, and a current market price of (a) $52, (b) $86, (c) $96, and (d) $147? Round the answers to two decimal places.

Explanation / Answer

1. Incremental beta = (-100,000*0.8+100,000*1.5)/2,000,000 = 0.035

So new beta = old beta + incremental beta = 1.2+0.035 = 1.235

2. Net income = EBIT*(1-t) = 950,000*(1-35%) = 617,500

Net cash flow = net income + depreciation = 617,500 + 237,500 = 855,000

3. Rate of return at:

a. Price of $52 = 9/52 = 17.31%

b. Price of $86 = 9/86 = 10.47%

c. Price of $96 = 9/96 = 9.38%

d. Price of $147 = 9/147 = 6.12%

Hope this helped ! Let me know in case of any queries.

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