Investment and Analysis Part A

Investmentand Analysis

PartA

NetWorking Capital for 2012 = Total Current Assets – Total CurrentLiabilities

$8,752- $6,862

=$1, 890

NetWorking Capital for 2011 = Total Current Assets – Total CurrentLiabilities

$10,083- $6,486

=$3,597

Changein Net Working Capital (NWC) = 2012 NWC – 2011 NWC

$1,890- $3,597

=-$1,707

CashFlow from Assets = Operating Cash Flows (OCF) – Net Capital Spending(NCS) – Total Liabilities

=($7,155 – $2,372) – $6,486

=$-1,703

PartB

Assumethat you are 23 years old and that you place $3,000 year-end depositseach year into a stock index fund that earns an average of 9.5% peryear for the next 17 years.

  1. How much money will be in the account at the end of 17 years?

Amount= FV = PV+PMT*n (1+iT)

=$3000 (1+0.095) ^17-1

=$3000 (1.095) ^16

=$103,324.66

  1. How much money will you have in the account 15 years later at age 55 if the account continues to earn 9.5% per year but you discontinued making new contributions?

Amount= PV (1+r) ^ t

=$103,324.66 (1+0.095) ^15

=$103,324.66 (1.095) ^15

=$103,324.66 (3.9013)

=$403,100.50

  1. How much money would you have at the end of 17 years if you had made the same number of deposits, but at the beginning of the year instead of at the end of the year?

Amount= FV = PV+PMT*n (1+iT)

=$3000 (1+0.095) ^17+1

=$3000 (1.095) ^18

=$113,140.50

4. Howmuch money will you have in the account 15 years later at age 55 ifthe account continues to earn 9.5% per year but you discontinuedmaking new contributions?

Amount= PV (1+r)^ t

=$113,140.50 (1+0.095) ^15

=$113,140.50 (1.095)^15

=$113,140.50 (3.9013)

=$441,395.03

PartC

  1. a. The possible range for a correlation coefficient

Therange for a correlation coefficient is a measure of the dependencebetween two variables. It measures the correlation between the twovalues by giving values between -1 and +1 to show the relationship oftwo variables. In the relationship, the strength of the correlationis measured by the value of the coefficient of the relationship. Zeroshows there is no correlation while unity on both sides shows thatthere is perfect correlation (Lasher,2010).Negative unity correlation (-1) coefficient shows a perfectlyindirect correlation, while a positive unity (+1) coefficient showsperfect proportionate correlation. The possible values (between -1and +1) that a relationship holds are the possible range for acorrelation coefficient.

b. Forpurposes of diversification, what type of correlation coefficientamong asset returns is preferred by investors? Provide a briefexplanation.

Thelinear correlation coefficient is most preferred by investors. Thisis because investors prefer a correlation that involves few variablesthat they can manage. Therefore, investors prefer the Pearsonproduct-moment correlation coefficient since it shows therelationship between few variables. It should be noted that investorsprefer investments that do not attract many variables.

  1. a. Description of the two (2) investment rules identified in the text.

Oneof the investment rules is the golden rule. The golden rule viewsinvestment as a venture that an investor explores to invest fromfunds with cost of capital. The rule stipulates that an individualwill borrow to invest. Therefore, by using this rule, the investorwill ensure that he or she gains more than he is paying in terms ofcost of the capital. Another investment rule is diversification.According to Lasher(2010), diversificationallows the investor to spread the risks across a number ofinvestments. Diversification is achieved thorough evaluation of theinvestment opportunities available to understand and evaluate them.This will give the investor the investors the platform to not hold upto put their eggs in one basket.

b.Explanation of the validity of the following statement and provideone (1) supporting fact to justify your reasoning. &quotInvestors donot like risk and will always choose the investment with the leastrisk.&quot

Inthe investment world, the existence of risks marks the parametersthrough which investors chose the type of investments to venture in.Every investment contains the risk that underlies its rate of returnas well as its profitability. The most risky investments attract ahigher rate of return, meaning that the investors gain from theirventure (Lasher,2010).On the other hand, the least risky investments carry lesser returnsin terms of income. Therefore, some investors are less motivated toventure into such projects or investments due to their lowexpectation of returns.

Consequently,an investor needs to evaluate every investment and determine its rateof return against the risk of the venture. This requires a balancewhere the investor opts for investments with optimum rate of returnsas well as optimum risks. However, in most cases, investors willgenerally choose the investment with the least risk, no matter therate of return that accrues with it. This is because most investorsare risk averse and will choose the investments that do not exposethem to lose or anticipated risks.

Reference

Lasher,W. (2010). PracticalFinancial Management. Nashville,Tennessee: South-Western

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