PART - A

1. Your employer, a mid-sized human resources management company, is considering expansion into related fields, including the acquisition of Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporary heavy workloads. Your employer is also considering the purchase of Biggerstaff & McDonald (B&M), a privately held company owned by two friends, each with 5 million shares of stock. B&M currently has free cash flow of $24 million, which is expected to grow at a constant rate of 5%. B&Ms financial statements report short-term investments of $100 million, debt of $200 million, and preferred stock of $50 million. B&Ms weighted average cost of capital (WACC) is 11%.

Answer the following questions.

a. Briefly describe the legal rights and privileges of common stockholders. b. What is free cash flow (FCF)? What is the weighted average cost of capital? What is the free cash flow valuation model? c. What is the market multiple method of valuation? What are its strengths and weaknesses? d. What are the advantages of the free cash flow valuation model relative to the dividend growth model? e. What is the preferred stock? Suppose a share of preferred stock pays a dividend of $2.10 and investors require a return of 7%. What is the estimated value of the preferred stock?

PART - B

1. Describe the steps involved in measuring portfolio return. Explain the role of the portfolios HPR in this process and explain why one must differentiate between realized and unrealized gains.

2. What is the relation between an investments risk and its return?

3. What are the pros and cons of using the Internet to choose and manage your investments?

4. Discuss the difference between a cash market and a futures market.

5. Using the data in the following table, assume you are using a constant-dollar plan with a rebalancing trigger of $1,500. The stock price represents your speculative portfolio, and the MM mutual fund represents your conservative portfolio. What action, if any, should you take in time period of 2? Be specific.

MM MutualTime PeriodStock PriceSharesFund NAVShares1$20.001,000$20.001,0002$25.00 $21.00