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Assessment 3 : Estimating Returns And Deciding On Refinancing

Complete a 2-4-page, two-part assessment addressing two different hypothetical scenarios. In Part 1, apply a probability analysis in estimating returns for a company. In Part 2, recommend whether or not to refinance a home.

Introduction

By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:

Competency 1: Maximize shareholder wealth.

- Estimate the expected return for a company.
- Formulate the standard deviation for a company.
- Assess how the standard deviation clarifies expectations in terms of a return.

Competency 3: Evaluate capital expenditure investment projects.

- Describe the decision-making process for refinancing.
- Explain qualitative considerations in the decision-making process.
- Devise examples of calculations.

Overview

This assessment consists of two parts, each of which includes a hypothetical situation for you to respond to.

**Part 1: Estimating Returns**

Imagine the following scenario:

A company is faced with a 20 percent chance of a poor economy, a 40 percent chance of an average economy, and a 40 percent chance of an above-average economy. The company would expect only a 10 percent return in a poor economy, an 18 percent return in an average economy, and a 30 percent return in an above-average economy.

Use the hypothetical situation above to answer these questions to demonstrate the use of probability analysis in estimating returns:

- What would the expected return be for this company?
- What would the standard deviation be for this company?
- How does the standard deviation help you better understand what to expect in terms of a return?
- Use at least two resources to support your ideas.

**Part 2: Deciding on Refinancing**

Changing interest rates create opportunities for home owners to gain advantage by refinancing their homes. For this part of the assessment, use the following scenario to consider this issue.

Imagine you have a $100,000 mortgage. Your current loan is at 7 percent with 14 years left, negotiated one year ago and involving $2,000 in closing costs. You are considering refinancing at 5.5 percent for 15 years. The closing costs would be $1,500.

Complete a 1–2 page evaluation of the refinancing possibility.

- Would you decide to refinance? Why or why not?
- What qualitative considerations would you consider in your decision to refinance or not refinance?
- Provide examples of calculations you would use to help you make your decision. In addition, use at least two resources to support your ideas.

Additional Requirements **Length**: Your analyses should total 2–4 double-spaced pages. In addition, include a title page and references page.**Written communication**: Written communication should be free of errors that detract from the overall message.**Style and Formatting**: Apply APA style and formatting.**Resources**: You must use at least two references for each part of the assessment (totaling at least four references).**Font and font size**: Times New Roman, 12 point.- Competencies Measured

By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria: - Competency 1: Maximize shareholder wealth.
- Estimate the expected return for a company.
- Formulate the standard deviation for a company.
- Assess how the standard deviation clarifies expectations in terms of a return.

- Competency 3: Evaluate capital expenditure investment projects.
- Describe the decision-making process for refinancing.
- Explain qualitative considerations in the decision-making process.
- Devise examples of calculations.