# Probability Distribution Assignment

PART 2

8.The probability distribution of possible net present values for project X has an expected value of \$20,000 and a standard deviation of \$10,000. Assuming a normal distribution:

• Calculate the probability that the net present value will be zero or less,
• Calculate the probability that the NPV will be greater than \$30,000,
• Calculate the probability that the NPV will be less than \$5,000

9. Macy announced they will pay a dividend of \$2 on its common stock next year.  Thereafter, you expect dividends to grow at a rate of 6 percent a year in perpetuity.

• If you require a return of 12 percent on your investment, how much should you be prepared to pay for the stock?

10. Lord & Taylor bond has a 10 percent coupon rate and a \$1,000 face value.  Interest is paid semiannually, and the bond has 20 years to maturity.

• If investors require a 12 percent yield, what is the bond’s value?

1. General Electric bond carries a coupon rate of 8 percent, has 9 years until maturity, and sells at a yield to maturity of 9 percent.
1. At what price does the bond sell?
1. New York Concrete Cement Co  just paid its annual dividend of \$2 per share, and it is widely expected that the dividend will increase by 5 percent per year indefinitely. What price should the stock sell at?  The discount rate is 15 percent.
2. Black Bear catering is proposing to market a world renown kitchen appliance. The product will be test-marketed for 2 years in New York at an initial cost of \$500,000. This test launch is not expected to produce any profits but should reveal consumer preferences. There is a 60 percent chance that demand will be satisfactory. In this case, Black Bear will spend \$5 million to launch the scotch nationwide and will receive an expected annual profit of \$700,000 in perpetuity. If demand is not satisfactory, diet scotch will be withdrawn. Black Bear requires a 12 percent return on its investments.
• What is the expected NPV of the diet scotch?
3. Two machines, A and B, which perform the same functions, have the following costs and lives. Which machine would you choose? Justify your decision. The two machines are mutually exclusive and the cost of capital is 15%.

15.The following table shows the one-year return distribution of Startup, Inc.

• Calculate the expected return.
• Calculate the standard deviation of the return.

16. Using the data in the following table:

• What is the volatility (standard deviation) of an equally weighted portfolio of the seven stocks?
• What is the covariance between the stocks of Alaska Air and Southwest?

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