Financial management – Fundamental goal conflicts

University of Nevada, Las Vegas

William F. Harrah College of Hospitality

TCA 420-1003 Summer 2020

Homework #1

Student Name :

Student Id       :

Please complete questions using a word processing program (e.g. MS Word) or a spreadsheet program (e.g. MS Excel). Points for questions are shown below. All calculations must be shown for intermediate calculations. Homework #1 is due on July 25, Saturday by midnight. Assignments must be submitted on the Homework #1 folder at WebCampus. No late assignments will be accepted and/or graded. In your submission, please also return this cover page as the first page of your final output.

Points Distribution:  
  Question 1 ___  / 20
  Question 2 ___  / 20
  Question 3 ___  / 20
  Question 4 ___  / 20
  Question 5 ___ / 20
  Total    ___ / 100

1.      (20 pts.) A primary goal of financial management is to maximize the value of the stock of the firm. Do you think this fundamental goal conflicts with other goals such as avoiding unethical or illegal corporate behavior? Consider a hospitality company’s responsibility to its social environment and explain how issues like employee safety, environmental protection and fair competition etc. fit in the value maximization framework? Illustrate your answer with an example from the hospitality industry.

2.    (20 pts.) Darden Restaurant Inc. has several corporate bonds outstanding. Table below exhibits information related to one of those bonds. This $1,000 face value, 6% bond is selling at 102.5 in the market.

Given the information, above:

a.       What is the bond’s market price?

b.      How much is the annual coupon payment of the bond?

c.       What is the current yield on this bond?

d.      How would you comment about the riskiness of this bond given its rating?

3.      (20 pts.) Ada Hotel & Resorts’ stock is expected to return 8.5 percent if the economy is normal. If the economy falls into a recession, the stock’s return is projected at a negative 5.4 percent. If the economy booms, the stock’s return is expected to be 12 percent. The probability of a normal economy is 60 percent while the probability of a recession and boom is 20 percent each. Given this information, what is the expected return and variance of the returns on this stock?

4.     (20 pts.) You are given the following information about the stocks in a two-stock portfolio:

StockReturnPortfolio WeightStandard Deviation
The Blue Hotel, Inc.22%45%9%
Joys Food, Inc.25%55%11%

Correlation coefficient between the two stocks is 0.5.

Using the information above, calculate the following:

a.       The expected return of the portfolio,

b.      The variance of the portfolio,

c.       The standard deviation of the portfolio.

5.      (20 pts.) See below the expected returns and standard deviation of returns for five restaurant stocks. Which one of these stocks is most attractive to a risk-averse investor? Why?

StockReturnStandard Deviation
Super Foods, Inc.16%9%
Crazy Snacks, Co.12%7.8%
Jedi Fast Food, Inc.11%8.5%
Porter’s Dining, Inc.21%18%
Truman Restaurants18.5%12%

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