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Finance: Capital Asset pricing and Portfolio analysis.

1. Taggart Inc.'s stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return. What is the firm's expected rate of return?
a. 9.41%
b. 9.65%
c. 9.90%
d. 10 .15%
e. 10.40%

2. Cheng Inc. is considering a capital budgeting project that has an expected return of 25% and a standard deviation of 30%. What is the project's coefficient of variation?
a. 1.20
b. 1.26
c. 1.32
d. 1.39
e. 1.46

3. Tom O'Brien has a 2-stock portfolio with a total value of $100,000. $37,500 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42. What is his portfolio's beta?
a. 1.17
b. 1.23
c. 1.29
d. 1.35
e. 1.42

4. Cooley Company's stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return?
a. 11 .36%
b. 11.65%
c. 11.95%
d. 12.25%
e. 12. 55 %

5. A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?
a. $17.39
b. $17.84
c. $18.29
d. $18.75
e. $19.22

6. If D1 = $1.25, g (which is constant ) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?
a. 4.12%
b. 4.34%
c. 4.57%
d. 4.81%
e. 5.05%

7. If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return for the coming year?
a. 8.37%
b. 8.59%
c. 8.81%
d. 9.03%
e. 9.27%

8. Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?
a. $40.17
b. $41.20
c. $42.26
d. $43.34
e. $44.46

9. Bosio Inc.'s perpetual preferred stock sells for $97.50 per share, and it pays an $8.50 annual dividend . If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company's cost of preferred stock for use in calculating the WACC?
a. 8.72%
b. 9.08%
c. 9.44%
d. 9.82%
e. 10.22%

10. O'Brien Inc. has the following data: rRF = 5.00%; RPM = 6.00%; and b = 1.05. What is the firm's cost of equity from retained earnings based on the CAPM?
a. 11.30%
b. 11.64%
c. 11.99%
d. 12.35% e. 12.72%

11. Assume that you are a consultant to Broske Inc., and you have been provided with the following data: D1 = $0.67; P0 = $27.50; and g = 8.00% (constant). What is the cost of equity from retained earnings based on the DCF approach?
a. 9.42%
b. 9.91%
c. 10.44%
d. 10.96%
e. 11.51%

12. You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after -tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 12.75%. The firm will not be issuing any new stock. What is its WACC?
a. 8.98%
b. 9.26%
c. 9.54%
d. 9.83%
e. 10.12%

13. Anderson Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected.
WACC: 9.00%
Year 0 1 2 3
Cash flows -$1,000 $500 $500 $500
a. $265.65
b. $278.93
c. $292.88
d. $307.52
e. $322.90

14. Simms Corp. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC or negative, in both cases it will be rejected.
Year 0 1 2 3
Cash flows -$1,000 $425 $425 $425
a. 12.55%
b. 13.21%
c. 13.87%
d. 14.56%
e. 15.29%

15. Taggart Inc. is considering a project that has the following cash flow data. What is the project's payback?
Year 0 1 2 3
Cash flows -$1,150 $500 $500 $500
a. 1.86 years
b. 2.07 years
c. 2.30 years
d. 2.53 years
e. 2.78 years

16. Susmel Inc. is considering a project that has the following cash flow data. What is the project's payback?
Year 0 1 2 3
Cash flows -$500 $150 $200 $300
a. 2.03 years
b. 2.25 years
c. 2.50 years
d. 2.75 years
e. 3.03 years

17. As assistant to the CFO of Boulder Inc., you must estimate the Year 1 cash flow for a project with the following data. What is the Year 1 cash flow?
Sales revenues $13,000
Depreciation $4,000
Other operating costs $6,000
Tax rate 35.0%
a. $5,950
b. $6,099
c. $6,251
d. $6,407
e. $6,568

18. Fool Proof Software is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project's 10-year expected life. What is the Year 1 cash flow?
Equipment cost (depreciable basis) $65,000
Sales revenues, each year $60,000
Operating costs (excl. deprec.) $25,000
Tax rate 35.0%
a. $30,258
b. $31,770
c. $33,359
d. $35,027
e. $36,778

19. Temple Corp. is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV?
Risk-adjusted WACC 10.0%
Net investment cost (depreciable basis) $65,000
Straight-line deprec. rate 33.3333%
Sales revenues, each year $65,500
Operating costs (excl. deprec.), each year $25,000
Tax rate 35.0%
a. $15,740
b. $16,569
c. $17,441
d. $18,359
e. $19,325

20. Liberty Services is now at the end of the final year of a project. The equipment originally cost $22,500, of which 75% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. What is the equipment's after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment's final market value is less than its book value, the firm will receive a tax credit as a result of the sale.
a. $5,558
b. $5,850
c. $6,143
d. $6,450
e. $6,772

21. Chrustuba Inc. is evaluating a new project that would cost $9 million at t = 0. There is a 50% chance that the project would be highly successful and generate annual after-tax cash flows of $6 million during Years 1, 2, and 3. However, there is a 50% chance that it would be less successful and would generate only $1 million for each of the 3 years. If the project is highly successful, it would open the door for another investment of $10 million at the end of Year 2, and this new investment could be sold for $20 million at the end of Year 3. Assuming a WACC of 10.0%, what is the project's expected NPV (in thousands) after taking this growth option into account?
a. $2,776
b. $3,085
c. $3,393
d. $3,733
e. $4,106

22. Lindley Corp. is considering a new product that would require an investment of $10 million now, at t = 0. If the new product is well received, then the project would produce after-tax cash flows of $5 million at the end of each of the next 3 years (t = 1, 2, 3), but if the market did not like the product, then the cash flows would be only $2 million per year. There is a 50% probability that the market will be good. The firm could delay the project for a year while it conducts a test to determine if demand is likely to be strong or weak. The project's cost and expected annual cash flows would be the same whether the project is delayed or not. The project's WACC is 10.0%. What is the value (in thousands) of the project after considering the investment timing option?
a. $726
b. $807
c. $896
d. $996
e. $1,106

23. Longstreet Inc. has fixed operating costs of $470,000, variable costs of $2.80 per unit produced, and its product sells for $4.00 per unit. What is the company's breakeven point, i.e., at what unit sales volume would income equal costs?
a. 391,667
b. 411,250
c. 431,813
d. 453,403
e. 476,073

24. Southwest U's campus book store sells course packs for $16 each. The variable cost per pack is $10, and at current annual sales of 50,000 packs, the store earns $75,000 before taxes on course packs. How much are the fixed costs of producing the course packs?
a. $164,025
b. $182,250
c. $202,500
d. $225,000
e. $247,500

25. Senate Inc. is considering two alternative methods for producing playing cards. Method 1 involves using a machine with a fixed cost (mainly depreciation) of $12,000 and variable costs of $1.00 per deck of cards. Method 2 would use a less expensive machine with a fixed cost of only $5,000, but it would require a variable cost of $1.50 per deck. The sale price per deck would be the same under each method. At what unit output level would the two methods provide the same operating income (EBIT)?
a. 12,600
b. 14,000
c. 15,400
d. 16,940
e. 18,634

26. A group of venture investors is considering putting money into Lemma Books, which wants to produce a new reader for electronic books. The variable cost per unit is estimated at $250, the sales price would be set at twice the VC/unit, or $500, and fixed costs are estimated at $750,000. The investors will put up the funds if the project is likely to have an operating income of $500,000 or more. What sales volume would be required in order to meet the minimum profit goal? (Hint: Use the breakeven formula, but include the required profit in the numerator.)
a. 4,513
b. 4,750
c. 5,000
d. 5,250
e. 5,513

27. Becker Financial recently declared a 2-for-1 stock split. Prior to the split, the stock sold for $80 per share. If the firm's total market value is unchanged by the split, what will the stock price be following the split?
a. $36.10
b. $38.00
c. $40.00
d. $42.00
e. $44.10

28. Fauver Industries plans to have a capital budget of $650,000. It wants to maintain a target capital structure of 40% debt and 60% equity, and it also wants to pay a dividend of $225,000. If the company follows the residual dividend policy, how much net income must it earn to meet its investment requirements, pay the dividend, and keep the capital structure in balance?
a. $584,250
b. $615,000
c. $645,750
d. $678,038
e. $711,939

29. Mid-State BankCorp recently declared a 7-for-2 stock split. Prior to the split, the stock sold for $80 per share. If the firm's total market value is unchanged by the split, what will the stock price be following the split?
a. $20.63
b. $21.71
c. $22.86
d. $24.00
e. $25.20

30. D. Paul Inc. forecasts a capital budget of $725,000. The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and she also wants to pay a dividend of $500,000. If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be?
a. $898,750; 55.63%
b. $943,688; 58.41%
c. $990,872; 61.34%
d. $1,040,415; 64.40%
e. $1,092,436; 67.62%

Solution Summary

The problem set deal with issues under finance: Portfolio analysis, capital budgeting, beta analysis etc.

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