Finance Exam

Therefore, the Smith Pie Company should go with alternative B. Even though Alt 8 has a longer payback period than Alt A, it will look better In the company assets longer and have a better return. 3. CAMP is equal to the cost of capital, which provides a usable measure of risk for the investor and their investment. It let’s investors know if they will get the return they deserve prior to making any decisions. Also, the higher the risk the higher a return could be. 4. A. Is the required return on the stock. B. Beta Is . 9 C. The company’s cost of capital is 9. Percent.

D. If the risk of the project is similar to the risk of the other assets, then the appropriate return is the cost of capital, which in this case is 9. 8% (Math is on last page) 5. The beta for the portfolio Is . 5 (Math Is on last page) 6. The alpha for this portfolio is 1. 79 while the beta is . 71. What this mean is that this company is defensive and while it could be considered a safe investment, the company is also outperform the market. This would be a great investment for any investor. (Math is on last page) 7. When investing is a film outside of the U. S. N investor needs to know about currency changes, the state of the economy, and as well as any political risks the country might incur. All these actions need to be taken into account, as they are systematic risks. One or all of them, could drastically change the value of an investment, which could lead to lose in profits. Were higher, we would expect a larger return since the risk would be higher as well. B. If there are no other companies with higher return rates than this company, there is no reason on why one shouldn’t invest in stock of United Merchants.

The risk is at , so you are fairly certain to get 20% return on your investment. 9. The best investment for this company in building a new plant would be to invest in the US rather than Italy. Based solemnly on the NP and the expected rate of return, one can see that Italy is underperforming the US by a large margin. An investor in Italy would be expecting a return of at least 19%, or 1330 Euros, but the NP is only 442. 22 Euros, after a 5% depreciating, and way below the expected value. In the US, the same investor would be expecting an 11% return or about $550, and the NP is 849. 54, which is almost 18%.

Also while taxes may be slightly higher in the US, an investor can expected to have a fairly safe investment compared to if they invested in Italy. Betas are of . 94 in the US, while 1. 98 in Italy. While at times risks do pay off, taking a higher risk in a foreign country could be recipe for disaster. The alpha for both countries, 1. 03 US and -4. 85 Italy, show that the US is Just slightly over performing, while Italy is largely underperforming 10. A multinational firm reviewing future investments has more than one beta, v’, systematic risks, and cash flows because all countries are different.

What may seems like a low return on capital in one country, might be the highest possible return in a different country due to the state of each country’s economy. This is the resulting factor for different betas. For example, say that a firm in the US has a beta of 1. 5,a free rate of return of 8%, and a market expected return of 10%. The required return for this case would be of 11%. Since the beta is greater than 1, an investor can conclude that it involves a higher risk than say an investment with a beta of Just . Therefore, an 11% return, while not much higher than the market 10%, let’s an investor know that the risk is worth it.

This firm might also want to invest in a country with a smaller economy than that of the U. S. Increasing the beta from 1. 5 to 2, but reducing the market expected rate of return and free rate of return to 8% and 5% respectively. The required return for this investment would be as well, but since the market expected return is only 8%, there is a much higher risk involved. By Just using these simple numbers, the firm could possibly conclude that investing in the mailer country would have a greater return on the initial investment. Unfortunately it is not that easy and clear.

Firms have to take in consideration systematic risks, which would greatly affect the value of any investment. For instance, is the company investing in a country that is known to be historically unstable? These could be things such as: wars, high rates of inflation, regulations, and an unstable government. Taking these risks into account, help a firm know if their investment will retain or lose value. If the currency in the country loses value compared to the dollar, he investment could end up losing value and become worthless and more expensive.

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