MAF203 : Risk and Return : Capital Budgeting – Finance Assignment
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Myer Inc. would like to set up a new plant. Currently, Myer has an option to buy an exsiting building at a cost of $24,000. Necessary equipment for the plant will cost $16,000, including installation costs. Depreciation of the equipment and of the building is as follows: Year 1=$3512, Year 2= $5744, Year 3=$3664, and Year 4= $2544.
The project would require an initial investment of $12,000 of net working capital and will be made at the time of the purchase of the building and equipment. The working capital will be fully recovered at end of year 4. The project’s estimated economic life is four years. At the end of that time, the building is expected to have a market value of $15,000 and a book value of $21,816, whereas the equipment is expected to have a market value of $4000 and a book value of $2720.
Annual sales will be $80,000. The production department has estimated that variable manufacturing costs will be 60% of sales and that fixed overhead costs, excluding depreciation, will be $10,000 a year ( hint: total costs = 0.6*80,000+10,000=58,000). Myer’s marginal tax is 40%; its cost of capital is 12% and for capital budgeting purposes, the company’s policy is to assume that operating cashflows occur at the end of each year. The plant will begin operations immediately after the investment is made, and the first operating cash flows will occur exactly one year later.
Questions :
- Using daily price from the data, compute 2015 monthly Holding Period Return (HPR) of the above stocks and index using adjusted Close Price (Adj Close).
Hint: HPRMonth t = Price end of the month-Price beginning of the month/Price begining of the month
- Compute the standard deviation of the above stocks and index using monthly HPR in part (a).
Hint: Use Excel function STDEV.S() to compute standard deviation of a series.
- Compute the (monthly) return correlation coefficient between any two of the above stocks.
Hint: Use Excel function CORREL() to compute the correlation coefficient between two data series.
- Using the correlation coefficient, comment on the return movement of these stocks in the specified date range.
- If you were to form a portfolio of 2 stocks, which ones are your choice to maximise diversification benefit? Explain the rationale behind your investment choice.
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