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Finance Problem Set: Net Present Value, Expected Return, Sharpe Ratio etc.

Please show all work.

1. (Chp. 9)If the risk-free rate of return is 2.1% and the expected return on the market is 8.6%, calculate the expected return for Co A with a beta of 1.55
[#5 page 231 Quiz]

2. (Chp. 9)Co. B's return on its portfolio is 10% with a standard deviation of 4. The risk-free rate of interest is 2%. What is the Sharpe ratio? Page 213

3. (Chp 10) Co. D is considering a project. The project is expected to produce a cash flow of $50 million for five years (the first cash flow one year from today). The risk-free interest rate is 2.5%, the market-risk premium is 7.1% and the project's beta is 1.2. Calculate the present value of the project.

Page 252-253
4. (Chp 11) Co. G is contemplating a project with the cash flows given below. The cost of capital is 12%. Unfortunately, you suspect that the cash flow revenues for the project (C1- C4) are overstated by 8%. What are the project's true NPVs?

Cash Flows for the project
C0 C1 C2 C3 C4
-18,000 +12,000 +10,000 +7,000 +5,000

Problem #9 page 297
5. (Chp 12) Co. Q is considering opening a platinum mine in Russia. It is estimated that the mine will cost $100 million to develop this year. Experts suggest that the mine will produce .5 million ounces per year for the next three years at a cost of $200 an ounce. Co. Q expects that the price of platinum will rise 10% per year from its current level of $1,400 per ounce. The rate of discount is 15%. Find the net present value of the mine. [hint: the first .5 million ounces of platinum is extracted at the end of this year and the value should be discounted at 15%]

Solution Summary

The problem set deal with issues in finance including expected return under CAPM, portfolio return etc. Solutions are included in an attached Word document.