finance questionChapters 4,5,6,7
1. You are narrowing down your house choices. You have saved $20.000 to apply toward a down payment. You can afford a monthly payment of $1,200 per month. You can qualify for a 30- year loan at 5% APR, compounded monthly. What home price can you afford? (Ignore any other purchasing fees)
2. Your goal is to retire 30 years from now and have investment worth $2.5 million at that time. Today, you have $211 in your investment account and plan on adding an additional %10.000 to that account at the end of each year. What annual rate of return must you earn on average to achieve goal?
3. What is the equivalent taxable yield if an investor’s taxable income is in the 28% marginal tax-free municipal bond yields 5%?
4. A 5% coupon bond has a face value of $1000, pays interest semi-annually, has 5 years to maturity, and is currently selling for $1,033. What is the yield-to-maturity?
5. Furniture and More just paid an annual dividend of $2.60 a share. The company plans on increasing its dividend by 2%, 3%, and 4% a year for the next 3 years, respectively. After that, the growth rate will be held constant at 2.5% per year. What is one share of this stock worth to you today if you require a 16% rate of return?
6. The Global Market paid an annual dividend of $1.00 per share last year. The stock has a current market price is $xxxx and a dividend growth rate of 3%. What is the rate of return on this stock?
1. Winter wear is considering a 5-year project with an initial cost of $211,000. The project will produce cash inflows of %56,500 a year over the life of the project. What is the NPV, if the required rate of return is 15.8%?
2. consider the following two mutually exclusive projects. Both projects require a 13.5% a return on your investment.
Year Cash Flow (A) Cash Flow (B)
0 -$54.000 -$23.000
1 12.700 11,600
2 23.300 11,200
3 27,600 12,500
4 46,500 6,000
a. calculate the payback period for both projects. Using the payback criterion, which investment will you choose?
b. Calculate NPV for both projects. Using the NPV criterion, which will you choose?
c. calculate the IRR for both projects. Using the IRR criterion, which investment will you choose?
d. Calculate the profitability Index (PI) for both projects. Using the PI criterion, which investment will you choose?
e. Based on your first four answers, which project will you finally choose? Why?
3. Ed has to choose between Project A and Project B, which are mutually exclusive. Project A has an initial cost of $28.000 and an IRR of 16%. Project B has an initial cost of $47,000 and an IRR of 12%. Explain why the selection project with the higher IRR could be a faulty decision.
1. which one of the following is the best example of a sunk cost?
a. Angelo’s decided to accept project A rather than project B.
b. Burt’s spent $18,000 last year patching potholes in its parking lot caused by a severe winter frost.
c. Lester’s added deserts to its menu, which caused its sandwich sales to increase.
d. A new fish sandwich was added to a menu as a result hamburger sales decline.
2. adding which of the following to the analysis of a proposed project will increase the NPV of that project?
a. Option expand
b. Option wait
c. Option abandon
d. Option to expand, wait, and abandon
3. The 3-year MACRS depreciation allowances are 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. What is the depreciation expense in year 2 for an asset with an initial cost of $87,000?
4. A 6-year project requires the initial purchases of a $345,000 machine. This machine has a 6 year life and will be depreciated straight line to zero. At the end of the project, the equipment can be sold for $79,000. The tax rate is 35 percent what is the after tax salvage value?
5. primary is considering a new 4 year expansion project that requires an initial investment of $2,000,000. The fixed asset will be depreciated straight line to zero over its 4 year tax life, after which time it will be worthless. The project is estimated to generate $1,900,000 in annual sales with annual costs of $900,000. If the tas rate is 34%, what is the operating cash flow for the project?
6. in the previous problem, suppose the required rate of return is 15%. What is the project NPV? What is the project’s IRR?
7. What are 2 major weaknesses of IRR, which are addressed by MIRR? Explain how MIRR is able to resolve one of weaknesses you have identified.
1. Which of the following is an example of diversifiable risk?
a. Income tax rates are revised by the federal government
b. The unemployment rate rises to 10.5%
c. The fed lowers its discount rate
d. A CEO is fired for conduct unbecoming a corporate officer
2. Stock A has a beta of 1.2 and is “observed” to have an expected 13.4% rate of return. The market risk premium is 8.2% and the risk-free rate is 2.4%. Is stock A correctly priced? Explain your answer and show your work. (Hint: use the CAPM equation to calculate the CAPM expected return and compare to the “observed” expected return.)
3. Using the information from question 2, draw a diagram of risk and return showing the security market line and stock A.
4. Stock X has a beta of 1.2 and Stock Z has a beta of 0.85. You have a portfolio of $45,000 invested in Stock X and $60,000 invested in Stock Z. What is your portfolio beta?
5. You own a portfolio that has $1,900 invested in Stock A and $2,700 invested in Stock B. If the expected returns on these stocks are 9% and 15% respectively, what is the expected return on the portfolio?
6. Explain the differences between total risk, unsystematic risk and systematic risk. Identify which risk is measured by standard deviation and which is measured by beta.
7. How does diversification help lower portfolio risk? Briefly explain how correlation influences the diversification benefit?