Fundamentals of Financial Management, Third Edition

SOLVED NUMERICAL PROBLEMS

1. A company is expecting the following scenario of returns the next year. Find out the expected return.

   Possible return %	Likelihood	Probability %
   14	Normally likely	30
   8	Most likely	50
   3	Meagrely likely	18
   −2	Least likely	2

   Solution

   Expected return = (0.14 × .30) + (0.08 ×.50) + (0.03 × 0.18) + (−0.02 × 0.02)

                       = 0.042 + 0.040 + 0.0054 + -0.0004 = 0.087 = 8.7%

    

2. A company has the possible outcomes of cash flow given below:

   Probability %	Cash flow Rs
   40	2,00,000
   30	5,00,000
   30	3,00,000

   Find the expected return and the variation in terms of standard deviation.

   Solution

   Expected return = (0.40 × 2,00,000) + (0.30 × 5,00,000) + (0.30 × 3,00,000) ...