The overall goal of capital budgeting projects should be to:
Increase the wealth of the firm's shareholders
Which of the following would not be considered a financial asset?
A patent
One common reason for partnerships to convert to a corporate form of organization is that the partnership:
Faces rapidly growing financing requirements
A financial analyst in a corporation may be involved in:
Managing investment of the company's cash
How much will accumulate in an account with an initial deposit of $100, and which earns 10% interest compounded quarterly for 3 years?
FV= PV (1+r)^t
$100(1.025)^12 = $134.49
What is the discount factor for $1 to be received in 5 years at a discount rate of 8%?
Discount factor = 1/(1.08)^5 = 1/1.4693 = 0.6806
How much must be deposited today in an account earning 6% annually to accumulate a 20% down payment to use in purchasing a car one year from now, assuming that the car's current price is $20,000, and inflation will be 4%?
Need 20,800 x .2 = $4,160
Pv = $4,160/ (1.06) = $3,924.53
A cash-strapped young professional offers to buy your car with four, equal annual payments of $3,000, beginning 2 years from today. Assuming you're indifferent to cash versus credit, that you can invest at 10%, and that you want to receive $9,000 for the
No; present value is $8,645
PV= $3,000[1/.1- 1/.1(1.1)^4]/1.1
= $3,000 (10 - 6.8301)/1.1
= $3,000 x 3.1699/1.1
= $9,509.60/1.1
= $8,645.09
A stream of equal cash payments lasting forever is termed:
A perpetuity
What is the approximate maximum amount that a firm should consider paying for a project that will return $15,000 annually for 5 years if the opportunity cost is 10%?
PV = $15,000 [(1/.1) - (1/(.1)(1.1)^5)]
= $15,000 [10-6.2092]
= $15,000 [3.7908]
= $56,861.80
What is the NPV for the following project cash flows at a discount rate of 15%?
Co= ($1,000), C1= $700, C2= $700.
NVP = $700 [(1/.15)- (1)/((.15)(1.15))^2] -$1,000
= $700 [6.6667-5.0410] - $1,000
= $700[1.6257] - $1,000
= $138.00
What is the IRR of a project that costs $100,000 and provides cash inflows of $17,000 annually for 6 years?
$100,000 = $17,000 [(1)/(i) - (1)/((i)(1+i)^6)]
i = 0.5687%
The variance of an investment's returns is a measure of the:
Volatility of the rates of return
Which of the following statements is correct for an investor starting with $1,000 in common stocks over a 20-year investment horizon in which stocks averaged 11% in nominal terms and 4% in real terms? The portfolio value is now approximately:
FV = $1,000 (1.11)^20
= $1,000(8.06231)
=$8,062.31
FV = $1,000 (1.04)^20
1,000(2.19112)
= $2,191.12
What is the approximate variance of returns if over the past 3 years an investment returned 8.0%, -12.0% and 15.0%?
Mean = (8-12+15)/(3) = 3.67%
Variance = [(8-3.67)^2 + (-12-3.76)^2 + (15-3.76)^ 2 / (3)]
= [(18.75 + 245.55 + 128.37) / (3)]
= 130.89
What is the approximate standard deviation of returns if over the past 4 years an investment returned 8.0%,-12.0%, and 15.0%?
Mean = (8 -12 -12 + 15) / 4 = -0.25%
Variance = [(8+0.25)^2 + 2(-12+0.25)^2) + (15 +0.25)^2 / 4] = 68.0625 + 276.125 + 232.5625 / 4 = 144.1874 (%x%)
Standard deviation = 12.01%
Which of the following risks would be classified as a unique risk for an auto manufacturer?
Steel prices
If when a coin is tossed the observance of a head rewards you with a dollar and the observance of a tail costs you fifty cents, how much would you expect to gain after 20 tosses?
Expected return = 20 x [($1.00 x .5) - (.50 x .5)] = 20 x ($.25)= $5.00
What nominal return was received by an investor when inflation averaged 8.0% and the real rate of return was a negative 2.5%?
1 + real rate of return = (1 +nominal rate of return)/ (1 + inflation rate)
= 1 -2.5% = (1 nominal rate of return) / (1.08)
1.0530 = 1 + nominal rate of return
5.30% = nominal rate of return
The risk premium that is offered on common stock is equal to the:
Excess of expected return over a risk-free return
What is the variance of return of a three-stock portfolio (with unequal weights 25%, 50%, and 25%) that produced returns of 20%, 25%, and 30%, respectively?
Mean = .25 x 20% + .50 x 25% + .25 x 30% = 25%
Variance = [.25 x (20-25)^2 + .50x(25-25)^2 + .25 x (30=25)^2] = 12.5 percent squared
If a project's expected return is 15%, which represents a 35% return in a booming economy and a 5% return in a stagnant economy, what is the probability of a booming economy?
15% = 35%(x) + 5%(1-x)
10% = 30%x
33.33% = x
A stock's beta measures the:
Variability in the stock's returns compared to that of the market portfolio
If the line measuring a stock's historic returns against the market's historic returns has a slope greater than 1.0, then the:
Stock has a beta exceeding 1.0
What is the beta of a three-stock portfolio including 25% of stock A with a beta of .90, 40% of stock B with a beta of 1.05, and 35% of stock C with a beta of 1.73?
Portfolio beta = (.25 x 0.9) + (.4 x 1.05) + (.35 x 1.73) = .225 + .42 + .06 =
1.25
If Treasury bills are yielding 10% at a time when the market risk premium is 6%, then the:
Market portfolio should yield 16%
What rate of return should an investor expect for a stock that has a beta of 0.8 when the market is expected to yield 14% and Treasury bills offer 6%?
r = rf + B (rm - rf) = 6% + .8(14% - 6%) = 6% + 6.4% =
12.4%
What return should be expected from investing in the market portfolio that is expected to yield 18% if the investment includes all of the investor's funds plus 30% of additional funds borrowed at the risk-free rate of 6%?
Beta = (1.3 x Bmarket) + (-0.3 x Bloan) = (1.3 x 1) + 0 = 1.3
Expected return = 6% + 1.3(18% - 6%) = 6% + 15.6% =
21.6%
An investor divides her portfolio into thirds, with one part Treasury bills, one part in a market index, and on e part in a diversified portfolio with beta of 1.50. What is the beta of the investor's overall portfolio?
Bportfolio = .33 x 0 + .33 x 1 + .33 x 1.5 =
0.833
Marco events only are reflected in the performance of the market portfolio because:
Unique risks have been diversified away