Homework problems Investment Management (Finance) 2
Mannno5
ExcelModelExample1.xlsBasic example
| Step 1 is to set up a Data Table containing all of the elements listed in the problem. | ||||||||||
| Next, describe what you are doing. | ||||||||||
| Finally, solve the problem, listing the equations to show you know what you are doing. | ||||||||||
| All of your calculations must be done within Excel cells; just listing the solution as a comment will not be accepted. | ||||||||||
| a. | Calculate forward price | |||||||||
| Length of forward contract (months) | 6 | T | ||||||||
| Current stock price | $ 50.00 | S0 | ||||||||
| Risk-free interest rate (annual) | 8% | r | ||||||||
| Dividend-1 | $ 1.00 | |||||||||
| Timing of Dividend-1 | 2 | months | ||||||||
| Dividend-2 | $ 1.00 | |||||||||
| Timing of Dividend-2 | 5 | months | ||||||||
| Calculate PV of all dividends | ||||||||||
| I= | $ 1.954 | Equation 5.1 | ||||||||
| These are unacceptable: | ||||||||||
| Price of forward contract F0 = | (S0 - I)*e(r*T) | Equation 5.2 | F0 = | (S0 - I)*e(r*T) | = $50.01 | |||||
| = | $ 50.01 | or | ||||||||
| F0 = | $50.01 | |||||||||
| b | Stock price | $ 48.00 | ||||||||
| Risk-free interest rate | 8% | |||||||||
| Length of forward contract | 3 | months | ||||||||
| Calculate PV of all dividends | ||||||||||
| I= | $ 0.9868 | Equation 5.1 | ||||||||
| Price of forward contract F0 = | (S0 - I)*e(r*T) | Equation 5.2 | ||||||||
| = | $ 47.96 | |||||||||
| Value of short forward contract= | $ 2.003 | Equation 5.6 |
Example 1.1
| Ex. 1.1 | ||||
| p. 5 | ||||
| Stock purchase price/share | 35 | Pt | ||
| Stock end-of-year price/share | 49 | Pt+1 | ||
| Dividend received | 1.40 | Dt+1 | ||
| Total investment | 1,400 | |||
| Number of shares purchased | 40 | |||
| Calculate dividend yield = | Dt+1 / Pt | |||
| = | 4% | |||
| Calculate capital gain per share = | PT+1 | - | Pt | |
| = | 14 | |||
| Calculate capital gains yield = | Capital gain / Pt | |||
| = | 40% | |||
| Calculate total percentage return = | Dividend yield + Capital gain yield | |||
| = | 44% | |||
| Calculate total dividends = | Dividend Yield * Total investment | |||
| = | 56 | |||
| Calculate total capital gain = | Capital gain per share * Number of shares purchased | |||
| = | 560 | |||
| Calculate total gain = | Total dividends + Total capital gain | |||
| = | 616 | |||
| Calculate total return on investment = | Total gain / Total investment | |||
| = | 44% | |||
| Note: the benefit of setting up this model is that you can change solve similar problems | ||||
| just by changing only the data items. |
