Corporate Finance Final

You are planning to produce a new action figure called "Nia". However, you are very uncertain about the demand for the product. If it is a hit, you will have net cash flows of $50 million per year for three years (starting next year [i.e., at t = 1]). If it fails, you will only have net cash flows of $10 million per year for two years (also starting next year). There is an equal chance that it will be a hit or failure (probability = 50 percent). You will not know whether it is a hit or a failure until after the first year's cash flows are in (i.e., at t = 1). You must spend $80 million immediately for equipment and the rights to produce the figure. If the discount rate is 10 percent, calculate Nia's NPV.

$-9.15 million

A project has an expected risky cash flow of $500 in year 3. The risk-free rate is 4 percent, the expected market rate of return is 14 percent, and the project's beta is 1.20. Calculate the certainty equivalent cash flow for year 3, CEQ3.

$360.33

A new grocery store requires $50 million in initial investment. You estimate that the store will generate $5 million of after-tax cash flow each year for five years. At the end of five years, it can be sold for $60 million (ignore taxes). What is the NPV of the project at a discount rate of 10 percent?

$6.21 million

You have a $15,000 portfolio which is invested in Stocks A and B, and a risk-free asset. $6,000 is invested in Stock A. Stock A has a beta of 1.5, and Stock B has a beta of .75. How much needs to be invested in Stock B if you want a portfolio beta that is the same risk as the market?

$8,000

The manufacture of herbal health tonic is a competitive industry. The manufacturing facilities have an annual output of 100,000 gallons. Operating costs are $2 per gallon. A 100,000-gallon capacity plant costs $500,000 to build and has an indefinite life, with no salvage value. The cost of capital is 20 percent (assume no taxes). Your company has discovered a new process that lowers the operating cost per gallon to $1.50. Assuming that the competition will never catch up and the market demand is sufficiently high, what is the net present value of building a new plant with new technology?

+$250,000

EZCUBE Corporation is 50% financed with long-term bonds and 50% with common equity. The debt securities have a beta of 0.15. The company's equity beta is 1.25. What is EZCUBE's asset beta? (Do not round intermediate calculations. Round your answer to 1 decimal place.)

0.7

Assume the following data for a stock: risk-free rate = 5 percent; beta (market) = 1.5; beta (size) = 0.3; beta (book-to-market) = 1.1; market risk premium = 7 percent; size risk premium = 3.7 percent; and book-to-market risk premium = 5.2 percent. Calculate the expected return on the stock using the Fama-French three-factor model.

22.3%

Suppose you observe the following situation: Security A: Beta- 1.25, Expected Return- 10% Security B: Beta- 0.75, Expected Return- 8% Assume these securities are correctly priced. Based on the CAPM, what is the return on the market?

9%

OSIM Co. has 20,000 shares of common stock outstanding at a market price of $20 per 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 90 percent of par. The cost of equity is 12 percent while the after-tax cost of debt is 6 percent. The firm has a beta of 1.25 and a tax rate of 21 percent. What is the weighted average cost of capital?

9.84%

Assume the following data for a stock: beta = 1.5; risk-free rate = 4 percent; market rate of return = 12 percent; and expected rate of return on the stock = 15 percent. Then the stock is:

Overpriced

You calculate the following estimates of project cash flows (there are no taxes): Investment: Pessimistic- $80, Most Likely- $80, Optimistic- $80 Revenues: Pessimistic- 40, Most Likely- 40, Optimistic- 40 Costs: Pessimistic- 20, Most Likely- 15, Optimistic- 10 The revenues and costs occur in perpetuity. The cost of capital is 8 percent. Conduct a sensitivity analysis of the project's NPV to variations in costs. (Answers appear in order: [Pessimistic, Most Likely, Optimistic].)

Pessimistic: $170.00, Most Likely: $232.50, Optimistic: $295.00

A project has a forecasted cash flow of $110 in year 1 and $121 in year 2. The interest rate is 5%, the estimated risk premium on the market is 10%, and the project has a beta of 0.5. If you use a constant risk-adjusted discount rate, answer the following: a. What is the PV of the project? b. What is the certainty-equivalent cash flow in year 1 and year 2? c. What is the ratio of the certainty-equivalent cash flows to the expected cash?

a. $200 b. year 1: $105.00, year 2: $110.25 c. year 1: 0.95, year 2: 0.91

Suppose the standard deviation of the market return is 20%. a. What is the standard deviation of returns on a well-diversified portfolio with a beta of 1.3? (Enter your answer as a percent rounded to the nearest whole number.) b. What is the standard deviation of returns on a well-diversified portfolio with a beta of 0? (Enter your answer as a percent rounded to the nearest whole number.) c. A well-diversified portfolio has a standard deviation of 15%. What is its beta? (Round your answer to 2 decimal places.) d. A poorly diversified portfolio has a standard deviation of 20%. What can you say about it's beta?

a. 26% b. 0% c. 0.75 d. less than 1.0

The following table shows the expected cash flows from a project. There are no cash flows beyond year 4. The cost of capital is 7%. a. Calculate the project's NPV. Note: Do not round your intermediate calculations. Enter your answer in thousands rounded to nearest whole number. b. Calculate the economic rent in year 1. Note: Do not round your intermediate calculations. Enter your answer in thousands rounded to 2 decimal places. Cash flows ($000s): C0- $-200, C1- $80, C2- $75, C3- $70, C4- $65

a. 47 b.

Dime-a-Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for $100. The materials cost for a synthetic diamond is $40. The fixed costs incurred each year for factory upkeep and administrative expenses are $200,000. The machinery costs $1 million and is depreciated straight-line over 10 years to a salvage value of zero. a. What is the accounting break-even level of sales in terms of number of diamonds sold? b. What is the NPV break-even level of sales assuming a tax rate of 35%, a 10-year project life, and a discount rate of 12%?

a. 5000 b. 6974

The Treasury bill rate is 4%, and the expected return on the market portfolio is 12%. Use the CAPM: a. What is the risk premium on the market? b. What is the required return on an investment with a beta of 1.5?Note: Do not round intermediate calculations. c. If an investment with a beta of 0.8 offers an expected return of 9.8%, does it have a positive NPV? d. If the market expects a return of 11.2% from stock X, what is its beta?

a. 8% b. 16% c. no d. 0.9

You estimate that your cattle farm will generate $1 million of profits on sales of $4 million under normal economic conditions and that the degree of operating leverage is 8. a. What will profits be if sales turn out to be $3.5 million? (Negative amount should be indicated by a minus sign.) b. What if they are $4.5 million?

a. profits will decline by -100% b. profits will increase by 100%

The semistrong form of efficiency focuses on the economic ineffectiveness of the following type of information:

publicly available information.