Reference no: EM132215803
Fundamentals of Finance Practice Questions -
Q1. Your company is considering a capital investment of $120 million. The project will produce operating cash flows of $30 million annually for 6 years. It will require $25 million of net working capital, all of which will be recovered at the end of the project. At termination, the asset will be sold for $35 million, $20 million above its adjusted tax basis. The company has a marginal tax rate of 35%. What is the project's NPV using a discount rate of 12%?
Q2. Stock XYZ just paid its $5 annual dividend, which is expected to grow 20% annually for the next three years. After that, the dividend is expected to grow a mere 2% forever due to emerging competition. If you require a 14% return, what is the most you'd pay for this stock today?
Q3. Suppose you make a $10,000 investment for 4 years. In the first year you lose $600. In the second year you gain $2,500. In the third year you lose $1,000. What must you earn ($) in the fourth year to make your average annual geometric mean return equal 5.0%?
Q4. You just finished a capital investment analysis on a $100 million project that has a 5-year life. The resulting NPV is $3 million using a 12% required return and a 35% marginal tax rate. You assumed a $10 million salvage value, $5 million above its adjusted tax basis. What would be the NPV if you reduced your salvage assumption by $2 million?
Q5. You've been analyzing a $10 million capital investment with a 5-year useful life, but it has a negative NPV of $500,000. However, the SVP of Operations just phoned with good news: The initial investment in the capital asset will be $1 million less than originally thought. What is the revised NPV? The discount rate is 12%, the marginal tax rate is 35%, and the asset is 3-year MACRS property.
Q6. Redd, Inc. is planning to cease operations in a few years. It will continue to pay its customary $8 annual dividend for the next 4 years, followed by a final one-time dividend of $75 one year later. Given a required return of 14% EAR, what is the current value of this company's stock?
Q7. Suppose you just finished a capital investment analysis on a $250 million project with the following results. What's the standard deviation of the project's IRR?
|
Scenario
|
Probability
|
IRR
|
|
Worst case
|
30%
|
-2%
|
|
Base case
|
50%
|
14%
|
|
Best case
|
20%
|
23%
|
Q8. Stock X is trading for $72, has an expected return of 10.5%, and is fairly priced. The risk-free rate is 3%, and the market risk premium is 6%. If you want to construct a $100,000 portfolio of stock A and Treasury Bills that has a beta of 0.9, what dollar amount of Stock X must you buy?
Q9. A capital investment will produce cash flows of $200,000 annually over its 10-year life, resulting in an IRR of 14% and a Profitability Index of 1.05. What's the discount rate being used for this analysis?
Q10. Stock Z just paid an $8 annual dividend. The company has a beta of 1.2 and a Treynor Ratio of 10%. If you think the dividend will grow 2% annually forever, what is a fair price for this stock? Assume T-Bills yield 3% and all stocks are fairly priced.
Q11. A tax-paying company purchased machinery that originally cost $300,000. After three years of use, the asset was sold as scrap for $35,000. The asset is classified as five-year MACRS property for tax purposes. Given a 35% marginal tax rate, what is the after-tax salvage value?
Q12. A stock is presently trading for $53. It just paid a $5 annual dividend, and investors require a 16% return on this stock. According to the Dividend Growth Model, what should be the price of this stock one year from now?
Q13. Machinery that originally cost $300,000 is sold for $120,000 after three years of use. The asset is classified as five- year MACRS property for tax purposes. Given a 35% marginal tax rate, what is the after-tax salvage value?
Q14. Stock Z has a beta of 1.2, an expected return of 15%, and a Treynor Ratio of 8%. If all stocks are fairly valued, what should be the expected return of a stock with a beta of 0.75?
Q15. You just finished a capital investment analysis on a $150 million project that has a 6-year life. The resulting NPV is $3 million using a 12% required return and a 35% marginal tax rate. You assumed a $30 million salvage value, $10 million above its adjusted tax basis. How much would the NPV change if you reduced your salvage assumption by $5 million?
Q16. Stock A has a beta of 1.30 and an expected return of 14%. Stock B has a beta of 0.80 and an expected return of 10%. If you construct a portfolio of stock A and Treasury Bills that has the same systematic risk as the market index, what will be your portfolio's expected return? Assume all stocks are fairly priced.
Q17. If you invest $17,000 you'll receive $6,000 annually forever. Alternatively, you could invest $12,000 and receive $5,000 annually forever. What discount rate would cause these two investments to have the same NPV?
Q18. Greene Inc. just paid its customary $6 annual dividend. You predict the dividend will increase 30% each year for the next 2 years, then grow 2% every year thereafter. If you require a 14% return, what is the most you would be willing to pay for one share of this company's stock?
Q19. A capital investment will produce cash flows of $150,000 annually, in arrears, over its 10-year life. This looks like a good deal since the IRR of 13.2% exceeds the 12.0% required return. To be sure, calculate its NPV.
Q20. An asset that originally cost $300,000 is sold for $50,000 after three years of use. The asset was classified as five- year property for tax purposes. If the company has a 35% marginal tax rate, what is the after-tax salvage value?
Q21. Suppose you are considering an investment that will generate equal annual cash flows of $120,000 for the next 8 years, in arrears. Using a discount rate of 12%, it has a NPV of $98,000. What's the IRR?
Q22. You invested $10,000 for four years. In the first year you gained $2,100. In the second year you gained $1,900. In the third year you lost $1,200. What must you earn in the fourth year to have a geometric mean return of 10% over the entire four-year period? (state your answer in dollars)
Q23. You just finished a capital investment analysis on a $150 million project that has a 6-year life. The resulting NPV is $3 million using a 12% required return and a 35% marginal tax rate. You assumed a $40 million salvage value, $20 million above its adjusted tax basis. However, your CFO disagrees with your salvage assumption and wants it reduced from $40 million to $32 million. What's the revised NPV?
Q24. A stock is presently trading for $36. It just paid a $4 annual dividend, and investors require an 18% return on this stock. According to the Dividend Growth Model, what should be the price of this stock one year from now?
Q25. You just finished analyzing a capital investment that will produce equal annual cash flows of $25 million of over its 5-year life. The resulting NPV is $8 million and the IRR is 15.13%. You assumed a $30 million salvage value, $20 million above its adjusted tax basis, and a 35% marginal tax rate. What discount rate did you use to value this investment?
Q26. Stock A has a beta of 1.25 and an expected return of 14%. Stock B has a beta of 0.75 and an expected return of 10%. Now, if you construct a portfolio of stock A and Treasury Bills that has the same risk as the market index, what will be your portfolio's expected return? Assume all stocks are fairly priced.
Q27. Suppose you just finished analyzing a 5-year capital investment, but you get a call from the CFO saying the initial cost of the equipment will be $1 million more than expected. How much will NPV change? The equipment is 3-year MACRS property. Assume a 35% marginal tax rate, 12% required return, and no change in salvage value.
Q28. You are considering the following two equally-risky investments. If you are indifferent between these two investments, what is the NPV of Project B?
|
|
t0
|
t1
|
t2
|
t3
|
t4
|
|
Project A
|
-40000
|
26000
|
20000
|
16000
|
10000
|
|
Project B
|
-40000
|
14000
|
18000
|
22000
|
26000
|
Q29. A capital investment will produce cash flows of $150,000 annually, in arrears, over its 10-year life. This looks like a good deal since the IRR of 13.2% exceeds the 12.0% required return. To be sure, calculate its Profitability Index.
Q30. Greene, Inc. stock is selling for $51. It just paid its annual dividend of $5 per share and investors require a 12% return. According to the Dividend Growth Model, what should be the stock price three years from now if the company could immediately double its growth rate?
Q31. Your company bought a $70,000 fork lift. It was depreciated as 5-year property for tax purposes. After three years of use the fork lift was sold for $50,000. If your company has a 35% marginal tax rate, what was the after-tax salvage value?
Q32. Suppose you are considering an investment that will generate equal annual cash flows of $100,000 for the next seven years, in arrears. Using a discount rate of 10%, it has a NPV of $90,000. What's the IRR?
Q33. Stock Y has a beta of 1.40, an expected return of 16%, and a Reward-to-Risk Ratio of 8%. If all stocks are fairly priced, what is the expected return on a stock with a beta of 0.9?
Q34. Suppose you just finished analyzing a 5-year capital investment, but you get a call from the CEO saying the initial cost of the equipment will be $1 million more than expected. How much will NPV change? The equipment is 3-year MACRS property. Assume a 35% marginal tax rate, 10% required return, and no change in salvage value.
Q35. You just finished a capital investment analysis on a $100 million project that has a 5-year life. The resulting NPV is $3 million using a 12% required return and a 35% marginal tax rate. You assumed a $16 million salvage value, $10 million above its adjusted tax basis. How much could the salvage value decline before the NPV equals zero?
Q36. Redd, Inc. is planning to cease operations in a few years. It will continue to pay an annual $10 dividend for the next 5 years, followed by a final one-time dividend of $80 one year later. Given a required return of 14% EAR, what is the current value of this company's stock?
Q37. You have a portfolio of two stocks, X and Y. Stock X has a beta of 1.15 and an expected return of 12%. Stock Y has a beta of 0.75 and an expected return of 10%. If this portfolio has the same risk as the market, what is the portfolio's expected return?
Q38. Suppose you are considering buying a Starbucks franchise. The initial investment would be $400,000. You expect the franchise will generate an operating cash flow of $60,000 in the first year, which would increase 2% every year thereafter. What is the IRR of this investment? For simplicity, assume the operating cash flows occur at the end of each year.
Q39. If you invest $25,000 today, you can receive $35,000 two years from now or $45,000 five years from now. If both options have the same value to you, what must be your required return?
Q40. A capital investment will produce cash flows of $15,000 annually, in arrears, over its 10-year life. This looks like a great opportunity since the IRR of 14.9% exceeds the 12.0% required return. Without being told the initial investment, calculate the NPV.
Q41. If you get an A+ in FIN302, generous Prof. Peterson might give you $10,000 three years from now, or $14,000 seven years from now. If you are indifferent between these two offers, what must be your required return?
Q42. Accenture stock has been trading for $72 per share. It just paid a $4 annual dividend, and investors require a 14% return. According to the Dividend Growth Model, what would be the stock price if Accenture reported revenue that disappointed the market causing growth expectations to be cut in half?
Q43. You are considering an investment that will generate equal annual cash flows of $100,000 for the next 7 years, in arrears. Using a discount rate of 12.9%, it has a NPV of $43,641. What is this investment's payback period?
Q44. Stock Y has a beta of 1.40 and an expected return of 16%. Stock Z has a beta of 0.7 and an expected return of 9.0%. If these two stocks are correctly priced, what is the expected return on the market index, E(Rm)?
Q45. You just finished analyzing a capital investment that will produce equal annual cash flows of $25 million of over its 5-year life. The resulting NPV is $4 million and the profitability index is 1.05. You assumed a $30 million salvage value, $20 million above its adjusted tax basis, and a 35% marginal tax rate. What discount rate did you use to value this investment?
Q46. You just finished a capital investment analysis on a $100 million project that has a 5-year life. You assumed a $30 million salvage value, $10 million above its adjusted tax basis, a 12% cost of capital, and a 35% marginal tax rate. Unfortunately, the resulting NPV is negative $2.0 million. How much must you increase your $30 million salvage value to make NPV = 0?
Q47. You are considering a portfolio of two stocks: X and Y. Stock X has an expected return of 12% and a beta if 1.2. Stock Y has a beta of 0.7, and Treasury Bills are yielding 3%. If all stocks are fairly priced, and you want your portfolio to have a beta equal to 0.9, what is the expected return of your portfolio?
Q48. Nole, Inc. will be going out of business because its only product is becoming obsolete, but it will continue to pay an $8 annual dividend for six more years. A final $50 dividend will be paid one year later, after the company is liquidated. Given a required return of 14% EAR, what is the current value of Nole stock?
Q49. Your company bought a $50,000 delivery truck. It was depreciated as 5-year property for tax purposes. After two years of use the truck was sold for $20,000. If your company has a 35% marginal tax rate, what was the after-tax salvage value?
Q50. Suppose you make a $10,000 investment for four years. In year 1 you gain $2,000. In year 2 you lose $2,400. In year 3 you gain $1,440. What dollar gain must you have in year 4 to cause your average annual geometric mean return to equal 5.0% over the entire four-year period?
Q51. A capital investment will produce cash flows of $10,000 annually, in arrears, over its 10-year life. This looks like a great investment since the IRR of 14.97% far exceeds the 10.00% required return. Without being told the initial investment, calculate the NPV.
Q52. An asset that originally cost $300,000 is sold for $50,000 after three years of use. The asset was classified as five- year property for tax purposes. If the company has a 35% marginal tax rate, what is the after-tax salvage value?
Q53. These projects are mutually exclusive. Over what range of discount rates is Project A preferred?
|
|
t0
|
t1
|
t2
|
t3
|
t4
|
|
Project A
|
-$30,000
|
16,000
|
13,000
|
8,000
|
8,000
|
|
Project B
|
-$30,000
|
6,000
|
11,000
|
12,000
|
19,000
|
Q54. Redd, Inc. will pay its customary $5 annual dividend for the next ten years, then pay a single liquidating dividend of $35 one year later. The company will then close its doors and go out of business. What is a fair price for this stock using a discount rate of 15% EAR?
Q55. You just finished a capital investment analysis on a $100 million project that has a 5-year life. The resulting NPV is $300,000 using a 12% WACC and a 35% marginal tax rate. You assumed a $16 million salvage value, $10 million above its adjusted tax basis. What would be the NPV if you increased your salvage value by $1 million, from $16 million to $17 million?
Q56. You are considering a portfolio of two stocks: X and Y. Stock X has a beta of 1.2 and an expected return of 12%. Stock Y has an expected return of 9% and Treasury Bills are yielding 3%. If all stocks are fairly priced, and you want your portfolio to have a beta of 0.90, what is the expected return of your portfolio?
Q57. Suppose you just finished a capital investment analysis on a $250 million project with the following results. What's the standard deviation of the project's IRR?
|
Scenario
|
Probability
|
IRR
|
|
Worst case
|
30%
|
-2%
|
|
Base case
|
50%
|
14%
|
|
Best base
|
20%
|
23%
|
Q58. You invested $100,000 of your client's money in a portfolio of stocks. At the end of the first year the portfolio was worth $115,000. At the end of the second year the portfolio was worth $138,000. Then the market crashed, and during the third year the portfolio lost 40% of its value. What was the annual geometric mean return over the entire three-year period?
Q59. If you invest $16,000 you'll receive $3,000 annually forever. Alternatively, you could invest $15,000 and receive $2,920 annually forever. If you're indifferent between these two investments, what's their NPV?
Q60. Greene, Inc. stock is selling for $38. Its current dividend is $2 per share and the market requires a 14% return. According to the Dividend Growth Model, what should this stock sell for three years from now?
Q61. You just finished a capital investment analysis on a $100 million project that has an 8-year life. The project will generate equal annual operating cash flows of $20 million. You assumed a $30 million salvage value, $20 million above its adjusted tax basis. The project required no net working capital investment. With a 35% marginal tax rate, the resulting NPV is $15 million. What discount rate did you use?
Q62. Suppose you think that XYZ stock is fairly priced at $72 per share. At that price you expect it will yield a 14% annual return. Also, you observe the stock's beta is 1.6 and Treasury Bills are yielding 3%. What's the Market Risk Premium?
Q63. An asset that originally cost $100,000 is sold for $50,000 after three years of use. Accumulated MACRS depreciation at the time of sale is 71.2% of original cost. If the company has a 35% marginal tax rate, what is the after-tax salvage value?
Q64. A capital project requiring an initial investment of $120 million will generate equal annual cash flows over its 8-year life. If the project's payback period is 5 years, what is its IRR?
Q65. You just finished analyzing a five-year capital investment proposal that has a NPV of $250,000. Suddenly, you get a frantic call from the VP of Operations saying the initial investment in equipment will be $275,000 more than first thought, but the change won't effect the salvage value estimate. What is your revised NPV? The equipment is 3-year MACRS property, your company has a 35% marginal tax rate, and a 7.7% cost of capital.
Q66. Black, Inc. just paid its $3 annual dividend. Its stock is presently trading for $45, and investors require a 12% return. According to the Dividend Growth Model, what should be the price of this stock four years from now?
Q67. Stock A has an expected return of 18% and a beta of 1.3. Stock B has an expected return of 9% and a beta of 0.4. If all stocks are fairly priced, what is the expected return of stock C with a beta of 1.8?
Q68. You invested $10,000. In the first year you gained $2,100. In the second year you gained $1,900. In the third year you lost $1,200. What rate of return (%) must you earn in the fourth year to have a geometric mean return of 10% over the entire four-year period?
Q69. If you invest $17,000 you'll receive $6,000 annually forever. Alternatively, you could invest $12,000 and receive $5,000 annually forever. If you're indifferent between these two investments, what's your required return?
Q70. You just finished a capital investment analysis on a $100 million project that has a 5-year life. You assumed a $30 million salvage value, $10 million above its adjusted tax basis, a 12% WACC, and a 35% marginal tax rate. Unfortunately, the resulting NPV is a negative $2.0 million. How much must you increase your $30 million salvage value assumption to make NPV = 0?
Q71. You are considering a portfolio of two stocks: X and Y. Stock X has an expected return of 12% and a beta if 1.2. Stock Y has a beta of 0.7, and Treasury Bills are yielding 3%. If all stocks are fairly priced, and you want your portfolio to have a beta equal to 0.9, what is the expected return of your portfolio?
Q72. Given the problem above, what percentage of the portfolio must be invested in Stock Y to achieve your target beta?
Q73. Redd, Inc. will pay an $8 dividend every year for the next 10 years. After the tenth dividend, you expect the dividend to grow by 2% per year forever. If you require a return of 10% EAR, what is this stock worth to you today?
Q74. You invested $100,000 of your client's money in a portfolio of stocks. At the end of the first year the portfolio was worth $115,000. At the end of the second year the portfolio was worth $138,000. Then the market crashed, and by the end of the third year the portfolio had lost half its current value. What was the annual geometric mean return on this investment?
Q75. Stock Z has a beta of 1.2, an expected return of 15%, and a reward-to-risk ratio of 8%. If all stocks are fairly valued, what is the expected return of a stock with a beta of 0.75?
Q76. You're considering two equally-risky investments: P and Q. P requires an initial investment of $10,000 then pays back $6,000 annually for two years. Q requires an initial investment of $12,000 then pays back $7,200 annually for two years. If you are indifferent between P and Q, what must be your required return?
Q77. You are considering a portfolio of two stocks: X and Y. Stock X has an expected return of 12% and a beta if 1.2. Stock Y has a beta of 0.7, and Treasury Bills are yielding 3%. If all stocks are fairly priced, and you want your portfolio to have a beta equal to the market, what is the expected return of your portfolio?
Q78. Black, Inc. just paid a $5.00 annual dividend. Analysts expect the dividend to grow 4% per year forever. If investors require a 14% return on this stock, what should the stock be worth three years from now?
Q79. You just finished a capital investment analysis on a $50 million project that has a 7-year life. The IRR is 12.8%, the profitability index is 1.05, and the payback period is 4.4 years. What's the NPV?
Q80. Your company bought a $50,000 truck, then sold it for $25,000 after three years of use. If it is was classified as five-year property for tax purposes, and the marginal tax rate is 35%, what's the after-tax salvage value?
Q81. Suppose you just finished a capital investment analysis with the following results. What's the standard deviation of the project's IRR? Scenario Probability IRR
|
Scenario
|
Probability
|
IRR
|
|
Worst case
|
18%
|
4%
|
|
Base case
|
64%
|
12%
|
|
Best case
|
18%
|
20%
|
Q82. You just finished a capital investment analysis on a $100 million project that has an 8-year life. The project will generate equal annual operating cash flows of $20 million. You assumed a $30 million salvage value, $20 million above its adjusted tax basis. The project has no effect on net working capital. With a 35% marginal tax rate, the resulting NPV is $7.82 million. What discount rate (WACC) did you use?
Q83. Stock A has an expected return of 18% and a beta of 1.3. Stock B has an expected return of 9% and a beta of 0.4. Assuming all stocks are fairly priced:
a. What's the expected return of the market, E(Rm)?
b. What's the risk-free rate, Rf?
Q84. A stock is presently trading for $36. It just paid a $4 dividend, and investors require an 18% return on this stock. According to the Dividend Growth Model, what should be the price of this stock two years from now?
Q85. Your company is considering a capital investment of $120 million. The project will produce equal annual operating cash flows over its five-year life. At the end of five years it will be sold for $40 million, $20 million above its adjusted tax basis. The project has no affect on working capital. Your company has a 35% marginal tax rate and a 15% WACC. What annual OCFs are needed to make the NPV = 0?
Q86. You are considering the following three equally-risky investments:
|
|
t0
|
t1
|
t2
|
t3
|
t4
|
|
Project A
|
-40000
|
26000
|
20000
|
16000
|
10000
|
|
Project B
|
-40000
|
14000
|
18000
|
22000
|
26000
|
|
Project C
|
-40000
|
18000
|
18000
|
18000
|
18000
|
If you are indifferent between projects A and B, what's the Profitability Index of project C?
Q87. Stock A has a beta of 1.2 and is fairly priced. The risk-free rate is 3%. The market risk premium is 6%. Construct a $100,000 portfolio of stock A and Treasury Bills that produces an expected return of 8.40%.
Q88. You just finished a capital investment analysis on a $100 million project that has a 5-year life. The resulting NPV is $3 million, using a 12% WACC and a 35% marginal tax rate. You assumed a $40 million salvage value, $20 million above its adjusted basis. However, your CFO disagrees with your salvage assumption and wants it reduced from $40 million to $30 million. What's the revised NPV?
Q89. You just completed a capital investment analysis on a project with an 8 year life. Using a WACC of 10%, you determined the NPV is $5 million. You suddenly realize that you forgot to include the initial Net Working Capital investment of $1 million (and its 75% recovery at the end of the project). What is the project's revised NPV, after adjusting for your error?
Q90. You are considering investing in a new technology company. It presently does not pay a dividend, but you think it will pay a $10 annual dividend five years from now and the dividend will grow 4% annually thereafter. If you require a 20% return, what is the most you would pay for one share of this stock?
Q91. Stock A has an expected return of 18% and a beta of 1.3. Stock B has an expected return of 9% and a beta of 0.4. If Treasury Bills are yielding 5%, and all stocks are fairly priced, what is the expected return of stock C with a beta of 1.8?
Q92. One year ago you paid $1093 for an 8% coupon bond which had a remaining maturity of 14 years. The coupons are paid semiannually. The current YTM on this bond is 6.2%. If you sold the bond today, what would be your holding-period return (%)?
Q93. Stock A has a beta of 1.2 and is fairly priced. The risk-free rate is 3%. The market risk premium is 6%. Construct a $100,000 portfolio of stock A and Treasury Bills that produces an expected return of 8.40%.
Q94. Your company is considering a capital investment of $120 million. The project will produce equal annual operating cash flows of $30 million over its six-year life. At the end of the six years it will be sold for $40 million, $20 million above net book value. The project will require a $10 million investment in net working capital, 60% of which will be recovered upon project termination. Your company has a 35% marginal tax rate and a WACC of 15%. What is this project's IRR?
Q95. The following projects are mutually exclusive:
|
|
t0
|
t1
|
t2
|
t3
|
t4
|
|
Project A
|
-4000
|
2400
|
2000
|
1600
|
1200
|
|
Project B
|
-4000
|
1400
|
1800
|
2200
|
2600
|
Over what range of discount rates should Project A be chosen?
Q96. A company just paid its $15 annual dividend and will continue doing so for the next 10 years, then cease paying a dividend forever. If investors require a 12% return, what is the stock worth today?
Q97. An asset that originally cost $175,000 is sold for $75,000 after three years of use. The asset is classified as five-year property for tax purposes. If the company has a 35% marginal tax rate, what is the after-tax salvage value using the MACRS table below?
Q98. Your client wants to invest $100,000 in a two-stock portfolio of stock A and stock B. Stock A has an expected return of 18% and a beta of 1.50. Stock B has an expected return of 8% and a beta of 0.70. How much money must be invested in each stock to make the portfolio beta equal 1.2?
Q99. If you are indifferent between Project A and Project B, what must be their NPV?
|
|
t0
|
t1
|
t2
|
t3
|
t4
|
|
Project A
|
-40000
|
14000
|
18000
|
22000
|
26000
|
|
Project B
|
-40000
|
26000
|
20000
|
16000
|
10000
|
Q100. From the following summary income statement, calculate the appropriate Operating Cash Flow (OCF) for capital budgeting purposes.
|
Revenue
|
$400,000
|
|
Cash Operating Costs
|
(200,000)
|
|
Depreciation
|
(60,000)
|
|
Interest
|
(50,000)
|
|
EBT
|
90,000
|
|
Tax Provision
|
(31,500)
|
|
Net Income
|
$58,500
|
Q101. You found a stock that you believe will provide a 12% annual return. The expected return on the market index is 10% and T-Bills are yielding 3%. If the stock is fairly valued, what's its beta?
Q102. A company just paid its annual $8 dividend. You believe the dividend will remain the same each year for the next 6 years, then decline 2% every year thereafter. If you require an 18% return, what is the most you would pay for one share of this company's stock?
Q103. Your company is considering a capital investment of $120 million. The project is expected to result in operating cash flows of $30 million annually for 8 years. The project will require $25 million of net working capital, all of which will be recovered at the end of the project. At termination, the project will be sold for $40 million, $20 million above book value. The company has a marginal tax rate of 35%. What is the project's NPV using a WACC of 12%? Answer: $27,454,420
Q104. Suppose you make a $1,000 investment for 4 years. In the first year you lose $160. In the second year you gain $250. In the third year you lose $200. What must you earn in the fourth year to make your average annual geometric mean return (%) equal 3.75%?
Q105. Your client wants to invest $100,000 in a two-asset portfolio composed of stock Z and Treasury Bills. Stock Z has an expected return of 17% and a beta of 1.60. How much money must be invested in each asset to make the portfolio beta equal to the market index?
Q106. Suppose you make a $1,000 investment. In the first year you lose $150. In the second year you gain $250. In the third year you lose $200. What is your annual geometric mean return (%)?
Q107. The following projects are mutually exclusive. Over what range of discount rates should Project A be undertaken?
|
|
t0
|
t1
|
t2
|
t3
|
t4
|
|
Project A
|
-50000
|
26000
|
20000
|
16000
|
15000
|
|
Project B
|
-50000
|
14000
|
18000
|
22000
|
30000
|
Q108. A stock is presently trading for $36. It just paid a $3 dividend, and investors require a 17% return on this stock. According to the Dividend Growth Model, what should the stock's price be one year from now?
Q109. An asset that originally cost $1,250,000 is sold for $300,000 after four years of use. The asset is classified as five- year property for tax purposes, and the company has a 35% marginal tax rate. What's the after-tax salvage value of this asset?
Q110. You know that stock K has a beta of 1.2 and an expected return of 14%. T-Bills are yielding 5%. If you believe that stock K is fairly priced, what is (a) the implied slope of the SML, and (b) the expected return on the market index?
Q111. Your company is considering a capital investment of $8 million. The project is expected to result in operating cash flows of $2 million annually for 8 years. The after-tax salvage value will be $1 million. The project will require $2 million of net working capital, 50% of which will be recovered at project termination. What is the NPV of this project using a WACC of 12%?
Q112. Stock A has an expected return of 18% and a beta of 1.3. Stock B has an expected return of 9% and a beta of 0.4. Assuming both stocks are fairly priced, what should be the expected return of stock C with a beta of 1.8?
113. What is the NPV of a capital investment project with the following projected free cash flows? Assume a required return of 14%:
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t0
|
t1
|
t2
|
t3
|
t4
|
|
(10,000)
|
6,000
|
5,000
|
4,000
|
(2,000)
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Q114. A company just paid its annual $5 dividend, but you believe it will increase $1 each year for the next 3 years, and then remain the same thereafter. If you require a 20% return, what is the most you would pay for one share of this company's stock?
Q115. Suppose you make an investment. In the first year you lose 14%. In the second year you gain 20%. In the third year you lose 25%. What is your annual mean geometric mean return (%)?
Q116. Stock Z has an expected return of 17% and a beta of 1.64. If you wanted to combine Stock Z and Treasury Bills into a two-asset portfolio with a beta equal to the market index, what percentage of your portfolio must be invested in each asset?
Q117. An asset that originally cost $250,000 is sold for $145,000 after two years of use. The asset is classified as five-year property for tax purposes, and the company has a 35% marginal tax rate. What's the tax consequence of this sale?
Q118. Your client wants to invest in Stock X, which has a beta of 1.25 and an expected return of 14%. By comparison, Treasury Bills are returning 4%. Assuming Stock X is fairly priced, what must be the expected return of the market index, E(RM)?
Q119. You've just invested in a company that pays no dividends. However, you estimate that the company will commence paying a $5 dividend eight years from now, and it will grow 3% every year thereafter. If you require a 10% return, what is one share of this stock worth to you today?
Q120. You are analyzing a capital investment project requiring an initial investment of $14 million. Its Profitability Index is 1.078. What is its NPV?
Q121. You are considering a portfolio of three stocks: X, Y, and Z. Stock X has an expected return of 12% and a beta if 1.2, while Treasury Bills are yielding 3%. If all stocks are fairly priced, and you want your portfolio to have a beta of 0.9, what is the expected return of your portfolio?
Q122. Consider a $7,500 investment that will pay $3,000 per month for 5 years, but will require an environmental cleanup costing $200,000 at the end of the 5 years. What is the investment's IRR? If the investment's required return is 8.5% EAR, what is the investment's NPV? Is this a good investment to make?
Q123. Consider a $5,000 investment that will pay $3,200 per month for 6 years, but will require an environmental cleanup costing $350,000 at the end of the 6 years. What is the investment's IRR? If the investment's required return is 8.5% EAR, what is the investment's NPV? Is this a good investment to make?
Q124. How many FSU sophomores does it take to change a light bulb?