FIN Final practice questions

You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 13 percent and Stock Y with an expected return of 8 percent. Your goal is to create a portfolio with an expected return of 12.4 percent. All money must be invested. How much will you invest in stock X?

$8800

A project will produce cash inflows of $3,100 a year for 3 years with a final cash inflow of $4,400 in year 4. The projects initial cost is $10,400. What is the net present value if the required rate of return is 16 percent?

-$1,007.66

what is the NPV of a project with the following cash flows and a required return of 12%? 0, -28900 1, 12450 2, 19630 3, 2750

-$177.62

Neighborhood bakers uses specialized ovens to bake its bread. One oven costs $689,000 and lasts about 4 years before it needs to be replaced. The annual operating cost per oven is $41,000. What is the equivalent annual cost of an oven if the required rate of return is 13 percent?

-$272,638

Rosa's uses specialized ovens to bake its bread. One oven costs $689,000 and lasts about 4 years before it needs to be replaced. The annual operating cost per oven is $41,000. What is the equivalent annual cost of an oven if the required rate of return is 13 percent?

-$272,638

A stock had annual returns of 11.3 percent, 9.8 percent, -7.3 percent, and 14.6 percent for the past four years. What is the 95 percent probability range of returns for a given year?

-12.5 to 26.7 percent

A portfolio contains two assets. The first asset represents 25 percent of the portfolio and has a beta of 1.4. If the portfolio beta is 1.25, what is the beta of the second asset?

1.20

Amon Amarth Co. has 24,500 shares of common stock outstanding at a market price of $19 a share. This stock was originally issued at $21 per share. The firm also has a bond issue outstanding with a total face value of $250,000 which is selling for 94% of par. The cost of equity is 12.6 percent while the after tax cost of debt is 5.8 percent. The firm has a bet of 1.33 and a tax rate of 23 percent. What is the weighted average cost of capital?

10.32 percent

Southern Home Cooking just paid its annual dividend of $.75 a share. The stock has a market price of $16.80 and a beta of 1.14. The return on the U.S. Treasury bill is 2.7 percent and the market risk premium is 7.1 percent. What is the cost of equity?

10.79 percent

What is the expected return of an equally-weighted portfolio comprised of the following three stocks?

10.96 percent

Kelso's has a debt-equity ratio of .62 and a tax rate of 21 percent. The firm does not issue preferred stock. The cost of equity is 16.3 percent and the aftertax cost of debt is 5.21 percent. What is the weighted average cost of capital?

12.06 percent

The risk-free rate of return is 3.5% and the market risk premium is 7.5%. According to CAPM, what is the expected rate of return on a stock with a beta of 1.28?

13.10%

Epicurean's stock has an expected return of 13 percent, its beta is 0.9, and the risk-free rate is 4.55 percent. What is the expected return of the market portfolio?

13.94

Dotson ltd. has preferred stock outstanding that pays $7 dividends per share and is currently selling for $49 a share. The market rate of return is 14 percent and the firm's tax rate is 37 percent. What is the firm's cost of preferred stock?

14.29 percent

You own a portfolio that has $1,750 invested in stock A and $3,800 invested in Stock B. If the expected returns on these stocks are 9 percent and 17 percent what is the expected return on the portfolio?

14.48

A project produces annual net income of $46,200, $51,800, and $62,900 over its 3-year life, respectively. The initial cost of the project is $675,000. This cost is depreciated straight-line to a zero book value over three years. What is the average accounting rate of return if the required discount rate is 14.5 percent?

15.89 percent

You are analyzing the following two mutually exclusive projects and have developed the following information. What is the incremental IRR?

17.90%

Your portfolio has a beta of 1.63. The portfolio consists of 16 percent US Treasury bills, 25 percent stock A, and 59 percent stock B. Stock A has a risk level equivalent to that of the overall market. US Treasury bill always has a beta of 0. What is the beta of stock B

2.34

What is the payback period for the following set of cash flows: 0, -6500 1, 2200 2, 2300 3, 1400 4, 2800

3.29 years

EVAC Ltd. is considering a project that will produce cash inflows of $2,100 a year for 4 years. The project has a 12 percent required rate of return and an initial cost of $6,000 to be paid at year 0. What is the discounted payback period of the project?

3.72 years

Scott is considering a project that will produce cash inflows of $2,100 a year for 4 years. The project has a 12 percent required rate of return and an initial cost of $6,000. What is the discounted payback period?

3.72 years

You recently purchased a stock that is expected to earn 12% in a booming economy, 8% in a normal economy and lose 5% in a recessionary economy. There is a 15% probability of a boom, a 75% chance of a normal economy, and a 10% chance of a recession. What is your expected rate of return on this stock?

7.30%

The Pet Market has $1,000 face value bonds outstanding with 18 years to maturity, a coupon rate of 9 percent, annual interest payments, and a current price of $835. What is the after-tax cost of debt if the tax rate is 34 percent?

7.37 percent

The Pet Market has $1,000 face value bonds outstanding with 18 years to maturity, a coupon rate of 9 percent, annual interest payments, and a current price of $835. What is the aftertax cost of debt if the tax rate is 34 percent?

7.37 percent

The market portfolio has an expected rate of return of 10.8%. The long-term AAA rated corporate bond is expected to yield 4.5% and the one-month US Treasury bill is expected to yield 3.4%. The inflation rate is 3.1%. What is the market risk premium?

7.4%

What are the arithmetic and geometric average returns for a stock with annual returns of 7 percent, 9 percent, -2 percent, and 16 percent?

7.5 percent, 7.31 percent

A stock had returns of 8 percent, -3 percent, 3 percent, and 15 percent over the past 4 years. What is the standard deviation of this stock for the past four years?

7.6 percent

Consider the following two mutually exclusive projects. What is the discount rate that would make these two projects have the same net present value (NPV)?

8.22 percent

Phillips Equipment has 75,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 7.5 percent. The company also has 750,000 shares of 6 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $64 a share. The common stock has a beta of 1.21 and sells for $44 a share. The U.S. Treasury bill is yielding 2.3 percent and the return on the market is 11.2 percent. The corporate tax rate is 34 percent. What is the firm's weighted average cost of capital?

9.69 percent

Christina purchased 200 shares of stock at a price of $62.30 a share and sold them for $70.25 a share. She also received $148 in dividends. If the inflation rate was 4.2 percent, What was her approximate real rate of return on this investment?

9.75 percent

Which one of the following statements concerning net present value (NPV) is most correct?

An investment should be accepted if the NPV is positive and rejected if it is negative

The internal rate of return is defined as the ______

Discount rate which causes the net present value of a project to equal zero

In actual practice, managers most frequently use which two types of investment criteria?

NPV and IRR

You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?

NPV profile

Based on the profitability index rule, should a project with the following cash flows be accepted if the discount rate is 8 percent? Why or why not? 0, -18600 1, 10000 2, 7300 3, 3700

No; because the PI is .992

Which one of the following statements is most correct?

One must know the discount rate to compute the NPV of a project, but one can compute the IRR without referring to the discount rate

Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return?

Risk premium

The ____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly.

Risk premium

Which one of the following stocks is correctly priced based on CAPM if the risk-free rate is 3.1 percent and the market risk premium is 7.6 percent?

Stock E

A project has a net present value (NPV) of zero. Which one of the following best describes this project?

The projects cash inflows equal its cash outflows in present dollar terms

Standard deviation of stock returns measures the _______ risk of the stock..

Total

Unsystematic risk ________

can be effectively eliminated by portfolio diversification

a syndicate can best be defined as a

group of underwriters sharing the risk of selling a new issue of securities

which one of the following will decrease the net present value (NPV) of a project?

increasing the projects initial cost at time zero

The dividend growth model (DGM) _______

is only as reliable as the estimated rate of growth

The slope of an asset's security market line (SML) is the __________

market-risk premium

What is the form called that is filed with the SEC and discloses the material information on a securities issuer when that issuer offers new securities to the general public?

registration statement

The U.S. Securities and Exchange commission (SEC) periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, one would be most likely to suggest that the stocks markets are less than _____ form efficient.

strong

You are considering an investment with the following cash flows. If the required rate of return for this investment is 13.5%, should you accept it based solely on the internal rate of return rule? Why or why not?

you should not apply the IRR rule in this case because there are multiple IRRs