Finance-AW-Q355

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1. Portfolio Management
 

The table below shows the historical prices for Stock A and Stock B. You are managing a simple portfolio consist of these two stocks. Please find out the proper weights you should assign to these two stocks. Under such weights, your portfolio should yield a minimized coefficient of variation. Create an Excel Spreadsheet for the portfolio management, and report the Coefficient of Variation for the optimum portfolio and the weights of Stock A and Stock B in the portfolio.
 

Date Amazon Microsoft
3-Feb-14 8.1% 8.5%
2-Jan-14 16.4% 6.4%
2-Dec-13 11.3% -0.4%
1-Nov-13 -6.7% 5.6%
1-Oct-13 8.5% -7.8%
3-Sep-13 3.2% -1.0%
1-Aug-13 6.1% 6.2%
 

To save time, you may copy and paste the table to your spreadsheet.
 
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Hints
 

Step1, Calculate the annual returns for the two stocks
Step2, Set equal weights for two stocks and calculate the portfolio returns, standard deviation, and coefficient of variation
 
Step 3, Use the “Solver” function and change the weights to optimum
 
2. Sway’s Back Store is considering a project which will require the purchase of $1.5 million in new equipment. The equipment will be depreciated straight-line to a book value of $0.5 million over the 5-year life of the project. Annual sales from this project are estimated at $950,000. The variable cost is 40% of the annual sales and there is an annual fixed cost of $100,000. Sway’s Back Store will sell the equipment at the end of the project for a salvage value of $0.7 mil. Additional net working capital equals to $0.4 mil to support the project. All of the new net working capital will be recouped at the end of the project. The firm desires a minimal 10% rate of return on this project. The tax rate is 40%.
 
a. Create a capital budgeting table in a spreadsheet. Fill the cash flows necessary and calculate the project NPV.

 
b. Report the project NPV when the Cost of Equipment changes by 30%, 0%, -30%, separately. Repeat the same procedure to get the NPVs in response to the changes of annual sales.
 

c. Create a sensitivity diagram with percentage change of variable as the horizontal axis and percentage change of NPV as the vertical axis. This diagram should include 2 straight lines for 2 variables. Which variable is more influential to NPV? Extra credit: calculate the slope of the two lines in the chart.
 
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