Finance 8-13
Consider an asset that costs $899,500 and is depreciated straight-line to zero over its seven-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $140,000. If the relevant tax rate is 21 percent, what is the aftertax cash flow from the sale of this asset? (Do not round intermediate calculations.)
$164,570 (Answer) (899500/7)x5=642500 899500-642500=257000-140000= 117000 117000X0.21= 24570 140000+24570= 164570
The next dividend payment by Watson Corp. will be $2.50 per share. The dividends are anticipated to maintain a growth rate of 4.4 percent forever. If the stock currently sells for $36 per share, what is the required return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
$2.50/$36 + 0.044
Which one of the following is an example of a sunk cost?
$3,000 paid last year to rent equipment
One year ago, you purchased a stock at a price of $27.66. The stock pays quarterly dividends of $.60 per share. Today, the stock is selling for $31.04 per share. What is your capital gain on this investment?
$3.38
Cardi B, Inc., has an issue of preferred stock outstanding that pays a $4.20 dividend every year in perpetuity. If this issue currently sells for $69 per share, what is the required return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
$4.20/$69= 6.09%
RVs-R-Us currently sells 18,000 motor homes per year at $87,000 each and 16,000 luxury motor coaches per year at $135,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 25,000 of these campers per year at $23,000 each. An independent consultant has determined that if the company introduces the new campers, it should boost the sales of its existing motor homes by 2,200 units per year and reduce the sales of its motor coaches by 1,500 units per year. What is the amount to use as the annual sales figure when evaluating this project? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
$563,900,000 (answer) (25,000*23,000)+(2,200*87,000)-(1,500*135,000)
Using the method of your choice, calculate the Net Present Value of the following cash flows. Assume that the required return on this project is 15% Project A Initial Cost: -$150 Year 1: $175 Year 2: $100
$77.78827977 or $78 (Answer) Using formula: Net present value=-150+175/1.15+100/1.15^2=77.78827977 Using excel:=NPV(15%,{-150,175,100})=77.78827977
Freight Train Construction is analyzing a proposed project. The company expects to sell 1,500 units, ±2 percent. The expected variable cost per unit is $210 and the expected fixed costs are $428,000. Cost estimates are considered accurate within a ±2 percent range. The depreciation expense is $64,000. The sales price is estimated at $647 per unit, ±2 percent. What is the sales revenue under the worst-case scenario?
((1500x(1-0.02))X ((647X(1-0.02))=$932,068.20 (answer)
Suppose a stock had an initial price of $53 per share, paid a dividend of $1.45 per share during the year, and had an ending share price of $55. Compute the percentage total return
((55-53+1.45)/53)x100 6.51(answer)
Jerryworld, Inc., is looking at setting up a new manufacturing plant in Dallas to produce footballs. The company bought some land six years ago for $5.2 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company would net $4.6 million. The company wants to build its new manufacturing plant on this land; the plant will cost $10.4 million to build, and the site requires $840,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
(4.6+10.4+0.84)*10^6 4,600,000+10,400,00+840,000= 15,840,000
A project has cash flows of -$139,000, $56,500, $99,300, and $75,500 for Years 0 to 3, respectively. The required payback period is two years. Based on the payback period of _____ years for this project, you should _____ the project.
1.83; accept
Calculate the geometric average return for the returns in the following table: 10.25 37.80 45.07 (8.10) (20.16)
10.09%
KCP Inc. is expected to maintain a constant 4.1 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 6.3 percent, what is the required return on the company's stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
4.4%+6.3%=10.4%(Answer)
Daring Design is expected to maintain a constant 6.4 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 8.2 percent, what is the required return on the company's stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
= 6.4%+8.2% 14.6% (answer)
Woods Bogeys Inc., has an issue of preferred stock outstanding that pays a $4.35 dividend every year in perpetuity. What is the required return if this issue currently sells for $95 per share? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
=$4.35/$95 =4.58%
The next dividend payment by Rory Corp. will be $1.76 per share. The dividends are anticipated to maintain a growth rate of 7 percent forever. If the stock currently sells for $34 per share, what is the required return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
=1.76/34+7% =12.18% (answer)
A company has earnings per share (EPS) of $3.64. The benchmark PE for the company is 18. A.What stock price would you consider appropriate? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) B. What if the benchmark PE were 21? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
A= 18*3.64= 65.52 B=21*3.64 = 76.44
A stock had returns of 19 percent, 14 percent, 12 percent, -4 percent, 10 percent, and 4 percent over the last six years. What is the arithmetic return for the stock? What is the geometric return for the stock?
AAR=[19+14+12(-4)+10+4]/6 AAR=9.17% GAR== [(1+0.19) * (1+0.14) * (1+0.12) * (1+ (-0.04)) * (1+0.1) * (1+0.04)] 1/6 − 1 GAR= 8.91% (answer) Arithmetic Return = 9.17%, Geometric Return = 8.91%
Which of the following statements is true based on the historical record for 1926-2019?
Bonds are generally a safer, or less risky, investment than are stocks.
Which one of following is the rate at which a stock's price is expected to appreciate?
Capital gains yield
A type of stock that receives no preferential treatment in respect to either dividends or bankruptcy proceedings:
Common
Suppose a stock had an initial price of $52 per share, paid a dividend of $1.50 per share during the year, and had an ending share price of $55. What was the dividend yield and the capital gains yield? (
Dividend Yield = 2.88%; Capital Gains Yield = 5.77%
How much will the dividend be at Time 5 (D5) if the current dividend (D0) is $3.00 and the growth rate is 6%?
Dividend payment in year 5 = Current dividend*( 1 + growth rate )^5 = $3*( 1 + 0.06 )^5 = $3*1.34 = $4.015
What are the distributions of either cash or stock to shareholders by a corporation called?
Dividends
A project that provides annual cash flows of $16,700 for ten years costs $73,000 today. What is the NPV for the project if the required return is 9 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) At a required return of 9 percent, should the firm accept this project? multiple choice 1AcceptReject What is the NPV for the project if the required return is 21 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) At a required return of 21 percent, should the firm accept this project?
EXCEL (A project that provides annual cash flows of $16,700 for ten years costs $73,000 today.) 9% NPV = $ 3417.88 accept 21% NPV = $ -5296.90 reject Discount rate= 18.79%
A proposed new project has projected sales of $215,000, costs of $104,000, and depreciation of $25,300. The tax rate is 23 percent. Calculate operating cash flow using the four different approaches. (Do not round intermediate calculations.)
EXCEL (Calculate operating cash flow using the four different approaches.) $91,289 (Answer)
Fill in the missing numbers for the following income statement. (Do not round intermediate calculations.) a.Calculate the OCF. (Do not round intermediate calculations.)b.What is the depreciation tax shield? (Do not round intermediate calculations.)
EXCEL (Calculate the missing numbers)
Suppose a stock had an initial price of $52 per share, paid a dividend of $1.00 per share during the year, and had an ending share price of $46. Compute the percentage total return, dividend yield, and capital gains yield. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
EXCEL (Compute the percentage total return, dividend yield, and capital gains yield.)
Odell's One-Handed Grabs will pay a dividend of $4.10 per share next year. The company pledges to increase its dividend by 3.40 percent per year indefinitely. If you require a return of 9 percent on your investment, how much will you pay for the company's stock today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
EXCEL (How much will you pay for the company's stock today)
Perez Inc. will pay a dividend of $2.82 per share next year. The company pledges to increase its dividend by 3 percent per year indefinitely. If you require a return of 10 percent on your investment, how much will you pay for the company's stock today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
EXCEL (How much will you pay for the company's stock today) =2.82/(10-3) =$40.29 (Answer)
Assume an investment has cash flows of −$42,700, $22,100, $16,200, and $17,500 for Years 0 to 3, respectively. What is the NPV if the required return is 13 percent? Should the project be accepted or rejected?
EXCEL (If the required return is 10 and 26 percent, what is the NPV for this project) $1,672.88 & accept (answer)
A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: YearCash Flow Yr 0: −$ 28,400 Yr 1: $12,400 Yr 2: $15,400 Yr 3: 11,400 If the required return is 15 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) and Should the firm accept the project?
EXCEL (If the required return is 15 percent, what is the IRR for this project) 18.24% & Yes (answer)
What was the average annual return on large-company stocks from 1926 through 2019 in nominal terms? What was the average annual return on large-company stocks from 1926 through 2019 in real terms?
EXCEL (Nominal return & Real return)
A piece of newly purchased industrial equipment costs $1.475 million and is classified as seven-year property under MACRS. The MACRS depreciation schedule is shown in Table 10.7. Calculate the annual depreciation allowances and end-of-the-year book values for this equipment. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to 2 decimal places e.g., 1,234,567.89.)
EXCEL (The MACRS depreciation schedule is shown in Table 10.7. Calculate the annual depreciation allowances and end-of-the-year book values for this equipment)
We are evaluating a project that costs $749,000, has a life of fifteen years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 107,000 units per year. Price per unit is $40, variable cost per unit is $25, and fixed costs are $756,490 per year. The tax rate is 25 percent, and we require a return of 12 percent on this project. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 16 percent.
EXCEL (The tax rate is 25 percent, and we require a return of 12 percent on this project. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 16 percent.)
Consider the following information: You buy a bond one year ago for $1,010. The bond sells for $1,025 today. The annual coupon of the bond is 6 percent. a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? b.What was your total nominal rate of return on this investment over the past year? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)c.If the inflation rate last year was 3 percent, what was your total real rate of return on this investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
EXCEL (Total dollar return, nominal rate, real rate)
Using the returns shown above, calculate the arithmetic average returns, the variances, and the standard deviations for X and Y. (Do not round intermediate calculations. Enter your average return and standard deviation answers as a percent rounded to 2 decimal places, e.g., 32.16, and round the variance answers to 5 decimal places, e.g., .16161.)
EXCEL (Using the returns shown above, calculate the arithmetic average returns, the variances, and the standard deviations for X and Y)
What is the IRR of the following set of cash flows? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Year Cash Flow Yr:0 −$ 17,300 Yr: 1 $8,000 Yr: 2 $9,300 Yr:3 $7,800
EXCEL (What is the IRR of the following set of cash flows? 21.25% (answer)
You are evaluating a company that is growing quickly. Dividends are expected to grow at a rate of 30 percent for the next three years, with the growth rate falling off to a constant 4 percent thereafter. If the company just paid a dividend of $2.65 and the required return is ten percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
EXCEL (What is the current share price)
What is the payback period for the following set of cash flows? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Year Cash Flow Yr 0: −$ 5,500 Yr 1: $1,550 Yr 2: 41,750 Yr 3: $2,150 Yr 4: $1,650
EXCEL (What is the payback period for this) 3.03 (Answer)
YearCash Flow Yr 0: −$ 18,400 Yr 1: 10,700 Yr 2: 9,600 Yr 3: 6,100 a. What is the profitability index for the set of cash flows if the relevant discount rate is 11 percent? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) b.What is the profitability index for the set of cash flows if the relevant discount rate is 16 percent? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)c.What is the profitability index for the set of cash flows if the relevant discount rate is 23 percent? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)
EXCEL (What is the profitability index for the set of cash flows if the relevant discount rate is 11 percent?) A=1.190 B=1.101 C=0.996
Bobcat Depot has the following estimates for its new gear assembly project: Price = $1,200 per unit; variable costs = $240 per unit; fixed costs = $2.6 million; quantity = 70,000 units. Suppose the company believes all of its estimates are accurate only to within ±10 percent. What values should the company use for the four variables given here when it performs its best-case scenario analysis? What about the worst-case scenario? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
EXCEL (What values should the company use for the four variables given here when it performs its best-case scenario analysis? What about the worst-case scenario?)
When evaluating international investment projects, Checks Inc. imposes a payback cutoff of three years. Year Cash Flow (A) Cash Flow (B) Yr 0: $-40,000 $-55,000 Yr 1: $14,000 $11,000 Yr 2: $18,000 $13,000 Yr 3: $17,000 $16,000 Yr 4: $11,000 $255,000 What is the payback period for both projects? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Which project should the company accept?
EXCEL (When evaluating international investment projects, Checks Inc. imposes a payback cutoff of three years) (Answer) Project A= 2.47 (accept) Project B= 3.06 (reject)
Jimbob Corp. just paid a dividend of $2.00 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year indefinitely. Investors require a return of 12 percent on the company's stock. A. What is the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) B. What will the stock price be in 3 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) C. What will the stock price be in 12 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
EXCEL (what is the current price? What will it be in)
Suppose we are interested in the price of a stock in five years, P5. The stock just paid a dividend of $2.20 and the growth rate is 4%. The required return is 12%. Based on this information, what is the price of the stock in five years?
EXCEL (what is the current price? What will it be in) 34.80(Answer)
Juniper Corporation has a share of common stock that pays a constant $9.45 dividend. Management has stated that it wishes to maintain this dividend for the next thirteen years and then will stop paying dividends forever. If the required return on this stock is 10.7 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Hint: Notice that dividends do NOT continue forever.
EXCEL: =PV(10.7%,13,$-9.45) $64.76 (answer)
Over the next four years, Mug Inc. is expected to pay the following dividends: $15, $11, $9, and $2.95. Afterward, the company pledges to maintain a constant 4 percent growth rate in dividends forever. If the required return on the stock is 10.3 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
EXcel (What is the current share price) $64.24(Answer)
What is the first step in the Net Present Value (NPV) process?
Estimate the future cash flows.
The next dividend payment by Golden Bear Inc. will be $1.80 per share. The dividends are anticipated to maintain a growth rate of 5 percent forever. The stock currently sells for $35 per share. a. What is the dividend yield? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b.What is the expected capital gains yield? (Enter your answer as a percent.)
Excel What is the expected capital gains yield A= 1.8/35= 5.14% B= 5%
A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: YearCash Flow Yr 0; −$ 27,300 Yr 1: 11,300 Yr 2: 14,300 Yr 3: 10,300 A: What is the NPV for the project if the required return is 10 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) At a required return of 10 percent, should the firm accept this project? B: What is the NPV for the project if the required return is 26 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) At a required return of 26 percent, should the firm accept this project?
Excel (If the required return is 10 and 26 percent, what is the NPV for this project) A: $2529.45 (yes) B: $-4175.41 (no)
A proposed new investment has projected sales of $515,000. Variable costs are 36 percent of sales, and fixed costs are $173,000; depreciation is $46,000. Prepare a pro forma income statement assuming a tax rate of 21 percent. What is the projected net income? (Do not round intermediate calculations.)
Excel (Prepare a pro forma income statement assuming a tax rate of 21 percent. What is the projected net income?)
An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $5,000,000 and will be sold for $1,500,000 at the end of the project. If the tax rate is 24 percent, what is the aftertax salvage value of the asset? Refer to Table 10.7. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)
Excel (what is the aftertax salvage value of the asset? Refer to Table 10.7.) $1,347,360 (answer)
According the video, one of the biggest challenges for the Net Present Value method is:
Identifying the appropriate discount rate to use.
When analyzing a project, scenario analysis is best suited to accomplishing which one of the following?
Identifying the potential range of reasonable outcomes
In actual practice, managers most frequently use which two types of investment criteria?
Internal rate of return and net present value
Based on the chart below, which is the correct order in terms of volatility of returns? Rank from most volatile to least.
Long-term government bonds, long-term corporate bonds, intermediate-term government bonds
When considering the dividend yield, which of the following correctly describes this yield?
Next year's annual dividend divided by today's stock price
The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following?
Opportunity cost
Lamp Inc. has the following dividend forecasts for the next three years: Expected Dividend Yr 1 $.25 Yr 2 $.50 Yr 3 $1.25 After the third year, the dividend will grow at a constant rate of 5% per year. The required return is 10%. What is the price of the stock today?
P= D1/(1+ke) + D2/(1+ke)2 + D3/(1+ke)3 + TV/ (1+ke)3 D1 = $ 0.25 D2 = $ 0.50 D3 = $ 1.25 D4 = D3+g = $ 1.35+ 5% = $ 1.3125 g = 5% Ke = 10% Terminal value = D4 / Ke - g = 1.3125/0.05 = 26.25 P = 0.25 / (1+0.10) + 0.50/ (1+0.10)2 + 1.25/ (1+0.10)3+ 26.25/(1+0.10)3 = 0.25* 0.9091+ 0.50*0.8264+ 1.25*0.7513+26.25* 0.7513 Rounded off to 4 decimals) = 0.2273+0.4132+0.9391+19.7216 = $ 21.3012 (answer)
Which one of the following transactions occurs in the primary market?
Purchase of newly issued stock from the issuer
Suppose a stock had an initial price of $85 per share, paid a dividend of $2.00 per share during the year, and had an ending share price of $83. Compute the percentage total return
Return = ( 83 - 85 ) * 1 + 2 / 68 Return = - 2+ 2 / 68 Return = 0 % Total Return = 0.00%
Diggers R Us, Inc. is analyzing a proposed project. The company expects to sell 1,400 units, ±2 percent. The expected variable cost per unit is $200 and the expected fixed costs are $406,000. Cost estimates are considered accurate within a ±2 percent range. The depreciation expense is $55,000. The sales price is estimated at $755 per unit, ±2 percent. What is the revenue (i.e. sales) projection under the worst-case scenario?
Revenue projected = (1400 *(1-2%) )*(755 *(1-2%)) = 1,372*739.90 =1,015,142.80 (answer)
Salas Swings is analyzing a project with anticipated sales of 11,000 units, ±2 percent. The variable cost per unit is $12, ± 2 percent, and the expected fixed costs are $210,000, ±1 percent. The sales price is estimated at $60 a unit, ±3 percent. The depreciation expense is $65,000 and the tax rate is 21 percent. What is the earnings before interest and taxes (EBIT) under the base-case scenario?
SP = Selling Price = $60 UP + Units produced = 11000 VC = Variable Cost =$12 FC = Fixed Costs = $210,000 D = Depreciation = $65,000 Putting values in the equation we get: EBIT = 60*11000-12*11000-210000-65000 = $253,000 (answer)
Mason Manufacturing is analyzing a project with anticipated sales of 12,500 units, ±2 percent. The variable cost per unit is $15, ± 2 percent, and the expected fixed costs are $227,000, ±1 percent. The sales price is estimated at $70 a unit, ±3 percent. The depreciation expense is $72,000 and the tax rate is 21 percent. What is the earnings before interest and taxes under the base-case scenario?
Sales (12500 X 70) = $875000 Variable cost (12500 X 15) = $187500 Fixed cost = $227000 Depreciation= $720000 $875000 - = $187500 - $227000- $720000 = $388500 (answer)
When analyzing the best-case scenario, which of the following variables will be forecast at their highest expected level?
Salvage value and units sold
Which one of the following best illustrates erosion as it relates to a snack stand located on the beach?
Selling fewer cookies because ice cream was added to the menu
For the period 1926-2019, which of the following categories of securities had the highest average annual return?
Small-company stocks
Which one of the following types of costs was incurred in the past and cannot be recouped?
Sunk
Which one of the following best defines the variance of an investment's annual returns over a number of years?
The average squared difference between the actual returns and the arithmetic average return
Suppose you buy a stock one year ago. Over this one-year period, you received a total of $2.60 per share in dividends. Today, you sell the stock for $3.15 per share more than your purchase price. Which one of the following statements is correct in relation to this investment?
The capital gains yield is positive.
Which one of the following best describes the concept of erosion?
The cash flows of a new project that come at the expense of a firm's existing cash flows
Which of the following best describes the Internal Rate of Return (IRR)?
The discount rate that makes the net present value equal to zero.
Which one of the following does standard deviation measure?
Volatility
You cannot attend the shareholder's meeting for Reindeer Corp. so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?
Voting by proxy
After navigating the Mint application through the link provided on McGraw-Hill Connect (you will need to create a free account), identify which of the following tools is NOT provided through the use of this application.
Ways to Save, Investment Goals, Spending Habits, and Account Monitoring (All of the above tools are provided through this application)
You decided to purchase Dips Inc. stock five years ago. The stock has had annual returns of 9 percent, 7 percent, -2 percent, 7 percent, and 3 percent for the past five years, respectively. What is the standard deviation of returns for this stock?
What is the standard deviation of returns for this stock? EXCEL (4.38%)
The geometric average return answers the question,
What was your average compounded return per year over a particular period?
You have put your boat up for sale and have received offers from two prospective buyers. The first offer is for $74,500 today in cash. The second offer is the payment of $26,000 today and an additional guaranteed $58,000 two years from today. If the applicable discount rate is 11 percent, which offer should you accept and why? (Hint: Whenever comparing projects, you want to make sure that you are comparing cash flows in the same time period.)
You should accept the $74,500 today because it has the higher net present value.
An investment costs $144,000 and has projected cash inflows of $75,300, $82,100, and -$16,400 for Years 1-3, respectively. If the required rate of return is 12.2 percent, should you accept the investment based solely on the internal rate of return rule? Why or why not?
You should not apply the IRR in this case.
What are non-conventional cash flows?
a combination of cash outflows and inflows
A firm is evaluating several independent projects. Each of the independent projects have positive NPVs. However, due to a lack of financing, the firm cannot initiate any of the projects. This situation is referred to as:
capital rationing.
Suppose R is 10%, D0 is $5.70, and g is 5%. What is the price per share today?
current stock price= (($5.70)(1+0.05))/0.05= $119.7
An agent who maintains an inventory from which he or she buys and sells securities is called a:
dealer.
The most important reason to diversify a portfolio is to:
eliminate asset-specific risk.
Memorial Inc.'s CFO receives frequent capital funding requests from the firm's division managers. These requests are seeking funding for positive net present value projects. The CFO continues to deny all funding requests due to the financial situation of the company. Apparently, the company is:
facing hard rationing.
In the dividend growth model (i.e. the constant growth model), which one of the following represents the capital gains yield?
g = Dividends Growth rate
The ______ average return represents the average compound return earned per year over a multiyear period.
geometric
Forecasting risk is defined as the possibility that:
incorrect decisions will be made due to erroneous cash flow projections.
The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's:
incremental cash flows.
The profitability index is the present value of an investment's future cash flows divided by the:
initial cost of the investment.
Which of the following best describes Net Present Value?
is the best method of analyzing mutually exclusive projects.
If a firm accepts Project One it will not be feasible to also accept Project Two because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:
mutually exclusive.
The annual dividend yield is computed by dividing _____ annual dividend by the current stock price.
next year's
The length of time a firm must wait to recoup the money it has invested in a project is called the:
payback period.
According to the video, short-run projected wealth levels calculated using geometric averages are probably ______________.
pessimistic
An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis.
sensitivity
Porter Automotive has three divisions. The CFO requested that each division submit its capital budgeting proposals for next year. These proposals represent positive net present value projects that fall within the long-range plans of the firm. The requests from the divisions are $3.3 million, $4.7 million, and $5.1 million. For the firm as a whole, management has limited spending to $10 million for new projects next year even though the firm could afford additional investments. This is an example of:
soft rationing.
Most financial securities have some level of ________ risk.
systematic
The secondary market is best defined as the market:
where outstanding shares of stock are resold
When you assign the lowest anticipated sales price and the highest anticipated costs to a project, you are analyzing the project under the condition known as:
worst-case scenario analysis.
