# Sample Essay: “Problem and Solving in Finance”

Question 8_1
In the context of stock problems, Beta is a variable whose use helps to determine various aspects. The calculations resulting from its application can derive the prices of various stocks, the value of a company and the value of individual shares. Its main purpose is to highlight the connection of the market premium rate with the rate of return. This provides appropriate investment information that will assist investors make appropriate decisions. Thus, the slope function refers to the value of beta when it has representation on a graph.
Therefore, the procedure for finding the value of beta is similar to that of finding the value of a line’s slope. The same formula applies because of the nature of the beta to highlight the relationship between two aspects. Thus, one of the aspects will give a value for the y – axis while the other will give a value for the x – axis. However, the successful calculation of the value of beta will require the value of the risk free rate, the time it takes to have returns and the premium rate in the market. These aspects produce the relationship between the two different rates and hence the name beta.
The calculation of beta is by multiplying beta by the market rate and adding the rate free of risks. Therefore, the required rate of return for 2009 is 0.14 = 0.06 + (beta x 0.1). Likewise, the value of beta is 0.8 from the above calculation, which represents the relationship between the investment and the market forces. It provides appropriate information that will allow the management to make the best decisions for the company. This will also facilitate an appropriate planning process that will incorporate all the available resources.

Question 9_2
The assets portfolio return is the profit from an investment with the help of the company’s specific resources. The asset portfolio can engage any number of possessions that the company has for use in productivity. Therefore, the calculation of this is by the multiplication of the correlation of the stock with the rate of return. The correlation of each stock determines the manner in which they will operate seamlessly to guarantee profitability. Therefore, there is the weighting of the expected rate of return in the market to assess the level of risk. This provides the investors with adequate information of what to expect.
Thus, the stock A is by 0.3 x 0.1, giving 3 percent, which represents the asset portfolio returns for stock A. For stock B, it is by 0.3 x 0.14, giving 4.2 percent. The standard deviation shows by how much the return is varying from the company’s expectations. It is a good measure for correcting any abnormalities because it enables the company to make corrections. Therefore, the given information shows that there are some variances in the returns. There is a standard deviation of 0.1 for stock A and a standard deviation of 0.15 for stock B.
More often than not, several aspects affect the market price of bonds and several market forces that result from competition. They also cause undervaluation or overvaluation of stocks, which can be advantageous depending on the scenario in play. The main reason for this is that overvaluation will improve the amount of investments in the company. This has the propensity of lowering the cost of capital, making the stock of the firm appear favorable. However, it is necessary to consider an undervaluation because it can signal losses. The valuation of bonds is very important in ensuring that the company plans appropriately.
The par value for the bonds of both firm A and B is \$1,000, which means that their returns will pave way for evaluation. With a coupon rate of 8 percent per year for the bonds of company A, the return per year is \$80. However, the coupon rate of the bonds of firm B is also 8 percent but it is semi-annual. This means that the value of the rate of return after the year will also be \$80, and therefore, no difference in the value of the bonds of both firm A and B. Market forces will be the main determinant of how their values will differ over a financial year.
The difference between the corporate bond and the ten year Treasury bond is the return from them. The maturity to premium for the corporate bond has a constant MRP rate whose representation is 0.2 (t). Therefore, the main difference comes in the changing MRP value for the ten year Treasury bond. Therefore, the MRP rate for the corporate bond over a five year spell will be 10 percent whereas the same value for the Treasury bond will be 20 percent.
Holding the stock for the next two years will be a short term venture. Therefore, it requires an appropriate price in order to attract the investor and generate a high buy back value. With a cost of equity of 10 percent on the value of \$25, the price to pay is \$2.5. If the holding of the stock will be for a one year period, then the best selling price in the stipulated period is ten percent less of the current price. This represents \$(2.5 – 0.25), an appropriate pricing value of \$2.48.
The capital gain yield for the first year will be \$1.5 a share divided by two. This gives a yield of \$0.75 per share and represents the value that the investor will get should they hold the stock they have for just a single year. It is imperative to note that this will be in spite of having it for two years and allowing them to extract a higher value for the returns. The dividend yield for the first year should the stock be held for this period is by determining the value of the company. The yield will be 10 percent of the value of the company divided by two. This gives \$1.25 as the dividend yield for the single year of holding the stock.

Question 28_30_6
The P / E ratio represents the relationship between the price and equity within a company. It is an important ratio as it shows the difference between what investors should invest in the company and the capital the company should raise for operations. Therefore, the P / E ratio is 12.5 percent x 3.45 for the EPS, which gives a price of \$43.13. The price using the enterprise value to the EBTIDA ratio is \$45 million divided by 7, giving \$6.43 million. Conversely, the current price of gold should continue regardless of a drop in production to allow its demand, which can increase and result to an ease of accessibility.