Mike and Sarah are evaluating two funds in which to invest. FundA had a 17% compound annual return with 17% annual volatility,while fund B had a 14% compound annual return with 7%volatility. Why might some investors choose to invest in the lowereturning Fund B. Assume the risk free rate was 2% during thisperiod, calculate a financial ratio for both funds and show whyfund B on this ratio looks more attractive. What is the name of theratio you would use to justify your recommendation?



2. Mike and Sarah decide to look at investing in a hedge fund. Onefund, called the Hot Shot fund, returned 10% after fees running itsportfolio with an average beta delta adjusted net portfolio longposition of 90%. The other fund, called Steady Eddy, returned 7%after fees with an average net beta delta adjusted portfolio longposition of 50%. The index returned 10%. What financial conceptcan you use to show that the funds added value that year andwhich fund fares the best on this metric? Show your calculations.

Calculate the WACC and discounted cash flow valuation ofthe firm, using a firm that has 100 mm in debt and 100 mm inmarket cap with a beta of 1.5, risk free rate of 3%, equity market
risk premium of 6%, and tax rate of 30%, and cost of debt of 5%.Assume three years of unlevered cash flows of 6, 8, 9 and then asteady state growth of 3%.


Calculate the enterprise value of a firm with 100 mm indebt, mcap of 200, and 25 mm in cash?

Mike and Sarah want to reduce the market risk of theirportfolio but stay 100% invested in their current long stockositions? What could they do to accomplish this goal?



You are brought in as a consultant to a company. Youcalculate its WACC to be 9%. Its operating profit is 8 million, taxrate is 33%, total assets are 105 mm, cash is 5mm and noninterest
bearing liabilities are 0. If you present to the CEO wouldyou say current profitability is satisfactory? Why not? Show with aratio?

Answer rating: 100% (QA)

SOLUTION Question 1 Some investors might choose to invest in the lowerreturning Fund B because it has lower volatility than Fund A Even though Fund A has a higher compound annual return its higher vol... View the full answer