This assignment is due Sunday 9.30 pm EST Complete the following: Case Problem 4.1 A-F (page 154) Case Problem 4.2 A-D (page 155) Case Problem 5.1 A-E (page 208) Case Problem 5.2 A-E (page 209) Case Problem 13.1 A-E (page 543) Format your submission consistent with APA guidelines. Case Problem 4.1 A-F (page 154) Case Problem 4.1 Coatess Decision 1. LG 2 2. LG 4 On January 1, 2017, Dave Coates, a 23-year-old mathematics teacher at Xavier High School, received a tax refund of $1,100. Because Dave didnt need this money for his current living expenses, he decided to make a long-term investment. After surveying a number of alternative investments costing no more than $1,100, Dave isolated two that seemed most suitable to his needs. Each of the investments cost $1,050 and was expected to provide income over a 10-year period. Investment A provided a relatively certain stream of income. Dave was a little less certain of the income provided by investment B. From his search for suitable alternatives, Dave found that the appropriate discount rate for a relatively certain investment was 4%. Because he felt a bit uncomfortable with an investment like B, he estimated that such an investment would have to provide a return at least 4% higher than investment A. Although Dave planned to reinvest funds returned from the investments in other vehicles providing similar returns, he wished to keep the extra $50 ($1,100 ? $1,050) invested for the full 10 years in a savings account paying 3% interest compounded annually. As he makes his investment decision, Dave has asked for your help in answering the questions that follow the expected return data for these investments. Expected Returns End of Year A B 2017 $?? 50 $??0 2018 $?? 50 $150 2019 $?? 50 $150 2020 $?? 50 $150 2021 $?? 50 $200 2022 $?? 50 $250 2023 $?? 50 $200 2024 $?? 50 $150 2025 $?? 50 $100 2026 $1,050 $?50 Questions a. Assuming that investments A and B are equally risky and using the 4% discount rate, apply the present value technique to assess the acceptability of each investment and to determine the preferred investment. Explain your findings. b. Recognizing that investment B is more risky than investment A, reassess the two alternatives, adding the 4% risk premium to the 4% discount rate for investment A and therefore applying a 8% discount rate to investment B. Compare your findings relative to acceptability and preference to those found for question a . c. From your findings in questions a and b , indicate whether the IRR for investment A is above or below 4% and whether that for investment B is above or below 8%. Explain. d. Use the present value technique to estimate the IRR on each investment. Compare your findings and contrast them with your response to question c . e. From the information given, which, if either, of the two investments would you recommend that Dave make? Explain your answer. f. Indicate to Dave how much money the extra $50 will have grown to by the end of 2026, assuming he makes no withdrawals from the savings account. Case Problem 4.2 A-D (page 155) Case Problem 4.2 The Risk-Return Tradeoff: Molly ORourkes Stock Purchase Decision Over the past 10 years, Molly ORourke has slowly built a diversified portfolio of common stock. Currently her portfolio includes 20 different common stock issues and has a total market value of $82,500. Molly is at present considering the addition of 50 shares of either of two common stock issuesX or Y. To assess the return and risk of each of these issues, she has gathered dividend income and share price data for both over the last 10 years (20072016). Mollys investigation of the outlook for these issues suggests that each will, on average, tend to behave in the future just as it has in the past. She therefore believes that the expected return can be estimated by finding the average HPR over the past 10 years for each of the stocks. The historical dividend income and stock price data collected by Molly are given …
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