Student Name:
PROBLEM 1: Week 1 and Week 2 -TVM Exercises
Find the following values for a lump sum:
– The future value of $400 invested at 7 percent for one year
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– The future value of $400 invested at 7 percent for five years
– The present value of $400 to be received in one year when the opportunity cost rate is 7 percent
– The present value of $400 to be received in five years when the opportunity cost rate is 7 percent
assuming:
a. Annual compounding
b. Semiannual compounding
c. Quarterly compounding
PROBLEM 2: Week 1 and Week 2 -TVM Exercises
Consider the following investment cash flows:
Year
Cash Flow
0
-$1,100
1
$275
2
$325
3
$425
4
$575
5
$650
a. What is the return expected on this investment measured in dollar terms if the opportunity cost rate is 10%
b. Provide an explanation, in economic terms, of your answer.
c. What is the return on this investment measured in percentage terms?
d. Should this investment be made? Why?
Exercise Assignment Instructions: • Provide answers to each problem for each weekly exercise assignment. • Include any calculations, equations, and/or formulas for each question in the problem.• Show your work for each answer. • Submit Your Weekly Exercise Answers for the Excel Workbook to the Classroom by the Assigned Due Date for the Assigned Week(s).
Student Name:
PROBLEM 1: Week 1 and Week 2 Risk & Return Exercises
A few years ago, the Value Line Investment Survey reported the following market betas for the stocks of
selected healthcare providers:
Company
Beta
Tenet Healthcare
0.80
Beverly Enterprises
1.10
HCA Healthcare
1.35
United Health Group
1.60
At the time these betas were developed, reasonable estimates for the risk-free rate, RF, and the required
rate of return on the market, R(Rm), were 6.5 percent and 13.5 percent, respectively.
a. What are the required rates of return on the four stocks?
b. Why do their required rates of return differ?
c. Suppose that a person is planning to invest in only one stock rather than hold a well-diversified stock
portfolio. Are the required rates of return calculated above applicable to the investment? Explain your
answer.
PROBLEM 2: Week 1 and Week 2 Risk & Return Exercises
Assume that HCA is evaluating the feasibility of building a new hospital in an area not currently served
by the company. The company’s analysts estimate a market beta for the hospital project of 1.2, which is
somewhat higher than the 0.8 market beta of the company’s average project. Financial forecasts for the
new hospital indicate an expected rate of return on the investment of 20 percent. If the
risk-free rate, RF, is 7 percent and the required rate of return on the market, R(Rm), is 12 percent, is the
new hospital in the best interest of HCA’s shareholders? Explain your answer.
Exercise Assignment Instructions: • Provide answers to each problem for each weekly exercise assignment. • Include any calculations, equations, and/or formulas for each question in the problem.• Show your work for each answer. • Submit Your Weekly Exercise Answers for the Excel Workbook to the Classroom by the Assigned Due Date for the Assigned Week(s).
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