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Portfolio managers are frequently paid a proportion of funds under management. Suppose you manage $100 million equity portfolio offering a dividend yield (DIV1/P0) OF 5%. Dividends and portfolio values are expected to grow at constant rate. Your annual fee for managing this portfolio is 0.5% of portfolio value.
a.Assuming that you will continue to manage the portfolio from now to eternity, what is the present value of the management contract?
b.How would the contract value change if you invested in stock with 4 percent yield?
Good Times Co. is regional chain department store. It will remain in business for one more year. The probability of boom year is 60% and probability of a recession is 40%. It is projected that the company will generate a total cash flow of￥250 million in a boom year and ￥100 million in a recession. The company’s required debt payment at the end of year is ￥150 million. The market value of company’s outstanding debt is ￥108.93 million. The company pays no taxes. Assume a discount rate of 10 percent.
a.What payoff do bondholders expect to receive in the event of recession?
b.What is the promised return on the company’s debt?
c.What is the expected return on the company’s debt?
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