FIN 301 Exam #3

Consider the following information: State of Economy Probability of State of Economy Rate of Return if State Occurs Recession .11 -.06 Normal .35 .12 Boom .54 .32 Calculate the expected return.

(0.11 X -0.06) + (0.35 X 0.12) + (0.54 X 0.32)= X 100= 20.82%

Consider the following information: Rate of Return if State Occurs State of Economy Probability of State of Economy Stock A Stock B Stock C Boom 0.76 0.19 0.29 0.21 Bust 0.24 0.13 0.05 0.09 What is the expected return on an equally weighted portfolio of these three stocks?

(0.76 X 0.19) + (0.24 X 0.13)= 0.1756 (0.76 X 0.29) + (0.24 X 0.05)= 0.2324 (0.76 X 0.21) + (0.24 X 0.09)= 0.1812 (0.1756/3)+(0.2324/3)+(0.1812/3)= 19.64%

A stock has an expected return of 10 percent, its beta is 0.85, and the risk-free rate is 5.5 percent. What must the expected return on the market be?

(10%-5.5%) ------------ + 5.5% = 10.79% 0.85

A project has annual depreciation of $21,100, costs of $95,300, and sales of $139,500. The applicable tax rate is 35 percent. What is the operating cash flow?

(139,500-95,300)(1-0.35)+(21,100X0.35) $36,115

An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $18,000,000 and will be sold for $4,000,000 at the end of the project. If the tax rate is 22 percent, what is the aftertax salvage value of the asset?

18,000,000(0.2+0.32+0.192+0.1152)= 14,889,600 18,000,000- 14,889,600= 3,110,400 3,110,400- 4,000,000= -889.600 -889.600 X 0.22= 195,712 4,000,000- 195,712= $3,804,288

A stock has an expected return of 16 percent, its beta is 1.3, and the expected return on the market is 13 percent. What must the risk-free rate be?

0.16= X + 1.3 (0.13- X) 0.16= X + 0.169 - 1.3X 0.16= 0.169- 0.3X 0.3X= 0.169- 0.16 0.3X= 0.009 X= 0.03 or 3%

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.15 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?

1 = [(0.3333 X 1.15) + 0.3333b2 + 0] 1= 0.38 + 0.3333b2 0.62/0.3333 b2=1.85

The Lumber Yard is considering adding a new product line that is expected to increase annual sales by $357,000 and expenses by $248,000. The project will require $157,000 in fixed assets that will be depreciated using the straight-line method to a zero book value over the 6-year life of the project. The company has a marginal tax rate of 35 percent. What is the depreciation tax shield?

157,000/6 26166,67 X 0.35 $9,158

An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $17,460,000 and will be sold for $3,880,000 at the end of the project. If the tax rate is 23 percent, what is the aftertax salvage value of the asset?

17,460,000 - 17,460,000 (0.20+ 0.32+ 0.1920 + 0.1152) (these numbers are from five-year) 3,017,088 3,017,088- 3,880,000= -862912 -862912 X 0.23 3,880,000- 198,469.76 $3,681,530

You own a portfolio that has $2,400 invested in Stock A and $3,850 invested in Stock B. If the expected returns on these stocks are 12 percent and 16 percent, respectively, what is the expected return on the portfolio?

2,400+3,850=6250 2400/6250= 0.384 3850/6250= 0.616 (0.384 X 0.12) + (0.616 X 0.16) X 100 = 14.46%

McCanless Co. recently purchased an asset for $2,500,000 that will be used in a 3-year project. The asset is in the 4-year MACRS class. The depreciation percentage each year is 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. What is the amount of depreciation in Year 2?

2,500,000 X 0.4445 $1,111,250

Brummitt Corp., is evaluating a new 4-year project. The equipment necessary for the project will cost $2,600,000 and can be sold for $305,000 at the end of the project. The asset is in the 5-year MACRS class. The depreciation percentage each year is 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company's tax rate is 34 percent. What is the aftertax salvage value of the equipment?

2,600,000(1-0.2-0.32-0.192-0.1152) 449280-305000= 144,280 305,000 +(0.34 X 144,280) $354,055

A company purchased an asset for $3,700,000 that will be used in a 3-year project. The asset is in the 3-year MACRS class. The depreciation percentage each year is 33.33 percent, 44.45 percent, and 14.81 percent, respectively. What is the book value of the equipment at the end of the project?

3,700,000(1-0.3333- 0.4445- 0.1481) = $274,170

Bi-Lo Traders is considering a project that will produce sales of $34,450 and have costs of $20,300. Taxes will be $3,600 and the depreciation expense will be $1,975. An initial cash outlay of $1,650 is required for net working capital. What is the project's operating cash flow?

34,450 -20,300 -1,975 =12,175 -3,600 =8,575 +1,975 =$10,550

A cost-cutting project will decrease costs by $66,900 a year. The annual depreciation will be $16,350 and the tax rate is 40 percent. What is the operating cash flow for this project?

66,900 X (1-0.4) + 16,350 X 0.4 =$46,680

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 $70. Compute the percentage total return.

70-53= 17 17 +1.45 --------- X 100 = 34.81% 53

Suppose a stock had an initial price of $66 per share, paid a dividend of $1.60 per share during the year, and had an ending share price of $80. Compute the percentage total return.

80-66= 14 14 + 1.60= 15.60 15.60/66 X 100= 23.64%

Suppose a stock had an initial price of $75 per share, paid a dividend of $1.90 per share during the year, and had an ending share price of $93. Compute the percentage total return.

93- 75+1.90 ------------- X 100= 26.53% 75

A project with a life of 10 has an initial fixed asset investment of $34,440, an initial NWC investment of $3,280, and an annual OCF of -$52,480. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required return is 17 percent, what is the project's equivalent annual cost, or EAC?

First step: N=10 I/Y= 17 PV= ? solved for -243,801 PMT=-52,480 FV= 3,280 -243,801-34,440-3,280 -281,521 Second step: N=10 I/Y=17 FV= leave blank PV= 281,521 PMT=? -60,430 $-60,430

You bought one of Great White Shark Repellant Co.'s 10 percent coupon bonds one year ago for $800. These bonds make annual payments and mature 6 years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 11 percent. If the inflation rate was 3.7 percent over the past year, what was your total real return on investment?

First step: N=6 PMT=100 FV= 1,000 PV= ? which is-957 I/Y=11 957-800+100= 257 257/800= 32.2% (1 + 0.322)= (1 +r)(1 + 0.037) 1.322 ------ -1 X 100 = 27.48% . 1.037 (be careful that he puts something other than 10% coupon bond, it affects the payment and amount you add)

A portfolio is invested 15 percent in Stock G, 65 percent in Stock J, and 20 percent in Stock K. The expected returns on these stocks are 7 percent, 21 percent, and 28 percent, respectively. What is the portfolio's expected return?

G 15% 7% J 65% 21% K 20% 28% (0.15 X 0.07) + (0.65 X 0.21) + (0.2 X 0.28) X 100= 20.3%

Shelton Co. purchased a parcel of land six years ago for $869,500. At that time, the firm invested $141,000 in grading the site so that it would be usable. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $52,000 a year. The company is now considering building a warehouse on the site as the rental lease is expiring. The current value of the land is $921,000. What value should be included in the initial cost of the warehouse project for the use of this land?

It is just $921,000

Bruno's Lunch Counter is expanding and expects operating cash flows of $28,500 a year for 6 years as a result. This expansion requires $95,800 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $7,000 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 10 percent?

N=6 I/Y= 10% PMT= 28,500 FV= 7,000 PV= ? solve to get 128,076 128,076- 95,800 - 7,000 $25,276

You own a stock portfolio invested 25 percent in Stock Q, 25 percent in Stock R, 15 percent in Stock S, and 35 percent in Stock T. The betas for these four stocks are 0.62, 1.05, 1.79, and 1.34, respectively. What is the portfolio beta?

Q 25% (0.25) X 0.62= 0.155 R 25% (0.25) X 1.05= 0.2625 S 15% (0.15) X 1.79= 0.2685 T 35% (0.35) X 1.34= 0.469 (0.155 + 0.2625 + 0.2685 + 0.469)= 1.155

Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $3.996 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will be worthless. The project is estimated to generate $3,552,000 in annual sales, with costs of $1,420,800. If the tax rate is 23 percent, what is the OCF for this project?

Sales= 3,552,000 Cost= 1,420,800 Depreciation 3,996,000/3= 1,332,000 Profit (1-2-3)= 799,200 Taxes= 799,200 X 0.23= 183,816 Profit-Taxes= 615,384 Cash flow= 615,384+ 1,332,000= $1,947,384

A stock has a beta of 0.95, the expected return on the market is 9 percent, and the risk-free rate is 5.85 percent. What must the expected return on this stock be?

[(0.09-0.0585) X 0.95] +0.0585 X 100 8.84%

A portfolio has 55 shares of Stock A that sell for $44 per share and 125 shares of Stock B that sell for $19 per share. a. What is the portfolio weight of Stock A? b. What is the portfolio weight of Stock B?

a. 55 X $44= 2420 125 X $19= 2375 = 4795 =2420/4795= 0.5047 b. 2375/4795= 0.4953

A stock had returns of 11 percent, 13 percent, 18 percent, 17 percent, 11 percent, and 17 percent over the last six years. a. What is the arithmetic return for the stock? b. What is the geometric return for the stock?

a. (0.11 + 0.13 + 0.18 + 0.17 + 0.11 + 0.17)/6 X 100 = 14.50% b. (1.11 X 1.13 X 1.18 X 1.17 X 1.11 X 1.17)^1/6 -1 X 100= 14.46%

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 3 percent, -9 percent, 29 percent, 19 percent, and 15 percent. The average inflation rate over this period was 3.4 percent and the average T-bill rate was 3.8 percent. a. What was the average real return on the company's stock? b. What was the average nominal risk premium on the company's stock?

a. (3-9+29+19+15)/5= 11.4% (1 + 0.114)/(1 + 0.034) -1 X 100 = 7.74% b. 11.4-3.8= 7.6%

You have $15,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14 percent and Stock Y with an expected return of 7 percent. a. If your goal is to create a portfolio with an expected return of 10.4 percent, how much money will you invest in Stock X? b. If your goal is to create a portfolio with an expected return of 10.4 percent, how much money will you invest in Stock Y?

a. 3.4=14w + 7 -7w 3.4/7= 0.4857 15,000 X 0.4857= $7,286 15,000 X (1-0.4857)= $7,714

Suppose you bought a bond with an annual coupon of 4 percent one year ago for $1,090. The bond sells for $1,145 today. 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? c. If the inflation rate last year was 5 percent, what was your total real rate of return on this investment?

a. 4 ---- X $1,000= 40 100 1,145- 1,090 + 40= $95 b. [(1,154-1,090) + 40] -------------------- X 100 1,090 = 8.72% c. (1+0.0872) ----------- - 1 . X 100 (1 + 0.05) = 3.54%