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Questions and Answers of Finance

Calculate the average return of the U.S. Treasury bills, long-term government bonds, and large company stocks for 1990–1998 from Table 8.1. Which had the highest and which had the lowest return?
Calculate the average return of the U.S. Treasury bills, long-term government bonds, and large company stocks for the 1950 to 1959, 1960 to 1969, 1970 to 1979, and 1980 to 1989 from Table 8.1. Which
Calculate the standard deviation of the U.S. Treasury bills, long-term government bonds, and large company stocks for 1990 to 1999 from Table 8.1. Which had the highest variance? Which had the lowest
Calculate the variance and standard deviation of the U.S. Treasury bills, long-term government bonds, and small-company stocks for the 1950 to 1959, 1960 to 1969, 1970 to 1979, and 1980 to 1989 from
Find the thirteen-week Treasury bill rates for the years 2000 to present. Go to Treasury Direct (www.treasurydirect.gov) and in the “Institutions” section, click “Find Historical Auction
Find the Standard & Poor's 500 annual returns for 2000 to the present. Go to Yahoo! Finance (www.finance.yahoo.com), and in the "Get Quotes" search field, enter SPY (the ticker symbol for the
Hull Consultants, a famous think tank in the Midwest, has provided probability estimates for the four potential economic states for the coming year. The probability of a boom economy is 10%, the
Using the data from Problem 15, calculate the variance and standard deviation of the three investments, stock, corporate bond, and government bond. If the estimates for both the probabilities of the
Bacon and Associates, a famous Northwest think tank, has provided probability estimates for the four potential economic states for the coming year. The probability of a boom economy is 20%, the
Using the data from Problem 17, calculate the variance and standard deviation of the three investments, stock: corporate bond, and government bond. If the estimates for both the probabilities of the
Use the information in the following to answer the questions below.a. What is the expected return of each asset?b. What is the variance of each asset?c. What is the standard deviation of eachasset?
Use the information in the following to answer the questions below.a. What is the expected returns of each asset?b. What is the variance of each asset?c. What is the standard deviation of eachasset?
Use the information in the following to answer the questions below.a. What is the expected return of each asset?b. What is the variance and standard deviation of each asset?c. What is the expected
Use the information in the following to answer the questions below.a. What is the expected return of each asset?b. What are the variances and standard deviations of each asset?c. What is the
Sally Rogers has decided to invest her wealth equally across the three following assets. What are her expected returns and the risk by investing in the three assets? How does this compare to
Use the same assets in Problem 23. Could Sally reduce her total risk even more by using Assets M and N only, Assets M and O only, or Assets N and O only? Use a 50/50 split between the asset pairs and
The beta of four stocks—G, H, I, and J—are 0.45, 0.8, 1.15, and 1.6, respectively. What is the beta of a portfolio with the following weights in each asset?
Use the same four assets from Problem 25 in the same three portfolios. What are the expected returns of the four individual assets and the three portfolios, if the current SML is plotting with an
The beta of four stocks€”P, Q, R, and S€”are respectively 0.6, 0.85, 1.2, and 1.35. What is the beta of a portfolio with the following weights in eachasset?
Use the same four assets from Problem 27 in the same three portfolios. What are the expected returns of the four individual assets and the three portfolios, if the current SML is plotting with an
Mr. Malone wants to change the overall risk of his portfolio. Currently his portfolio is a combination of risky assets with a beta of 1.25 and an expected return of 14%. Mr. Malone will add a
Ms. Chambers wants to change the expected return of her portfolio. Currently Ms. Chambers has all her money in U.S. Treasury Bills with a return of 3%. She can switch some of her money into a risky
Royal Seattle Investment Club has $100,000 to invest in the equity market. Frasier advocates investing the funds in KSEA Radio with a beta of 1.3 and an expected return of 16%. Niles advocates
Uptown Investment Club has $50,000 to invest in the equity market. Chandler advocates investing the funds in Monica’s restaurant with a beta of 1.8 and an expected return of 22%. Ross advocates
Two risky portfolios exist for investing: one is a bond portfolio with a beta of 0.5 and an expected return of 8%, and the other is an equity portfolio with a beta of 1.2 and an expected return of
Two risky portfolios exist for investing: one is a bond portfolio with a beta of 0.7 and an expected return of 9%, and another is an equity portfolio with a beta of 1.5 and an expected return of
1. How do we measure the returns on our portfolio?2. How can we assess the risk of an individual stock?3. What kinds of investments are safe and earn a high rate of return?4. Google seems to be a
Two years ago, Jim bought 100 shares of IBM stock at $50 per share, and just sold them for $65 per share after receiving dividends worth $3 per share over the two year holding period. Mary, bought 5
Listed below are the annual rates of return earned on Stock Ã— and Stock Y over the past 6 years. Which stock was riskier andwhy?
Using the probability distribution shown below, calculate the expected risk and return estimates of each stock and of a portfolio comprised of 40% of Stock A and 60% of StockB.
Annie is curious to know what her portfolio’s CAPM-based expected rate of return should be. After doing some research she figures out the market values and betas of each of her 5 stocks (shown
a. Annie is curious to know whether the following 5 stocks are appropriately valued in the market. Accordingly, she creates a table (shown below) listing the betas of each stock along with their
When does the internal rate of return model give an inappropriate decision when comparing two mutually exclusive projects?
The Profitability Index produces a ratio between the present value of the benefits and present value of the costs of a project. Is there a time when PI and NPV do not agree on the ranking of
Given the cash flows of the four projects, A, B, C, and D, and using the payback period decision model, which projects do you accept and which projects do you reject with a three-year cutoff period
What are the payback periods of Projects E, F, G and H? Assume all the cash flows are evenly spread throughout the year. If the cutoff period is three years, which projects do youaccept?
Given the following four projects and their cash flows, calculate the discounted payback period with a 5% discount rate, 10% discount rate, and 20% discount rate. What do you notice about the
Becker Inc. uses discounted payback period for projects under $25,000 and has a cut off period of 4 years for these small value projects. Two projects, R and S, are under consideration. The
Mathew Inc. is debating using the payback period versus the discounted payback period for small-dollar projects. The company's information officer has submitted a new computer project with a
Nielsen Inc. is switching from the payback period to the discounted payback period for small-dollar projects. The cutoff period will remain at three years. Given the following four projects' cash
Quark Industries has a project with the following projected cash flows:Initial Cost, Year 0: $240,000Cash flow year one: $25,000Cash flow year two: $75,000Cash flow year three: $150,000Cash flow year
Lepton Industries has a project with the following projected cash flows:Initial Cost, Year 0: $468,000Cash flow year one: $135,000Cash flow year two: $240,000Cash flow year three: $185,000Cash flow
Quark Industries has four potential projects, all with an initial cost of $2,000,000. The capital budget for the year will allow Quark Industries to accept only one of the four projects. Given the
Lepton Industries has four potential projects, all with an initial cost of $1,500,000. The capital budget for the year will allow Lepton to accept only one of the four projects. Given the discount
Grady Enterprises is looking at two project opportunities for a parcel of land that the company currently owns. The first project is a restaurant, and the second project is a sports facility. The
Singing Fish Fine Foods has $2,000,000 for capital investments this year and is considering two potential projects for the funds. Project one is updating the deli section of the store for additional
What are the IRRs and MIRRs of the four projects for Quark Industries in Problem 9?
What are the IRRs and MIRRs of the four projects for Lepton Industries in Problem 10?
What is the MIRR for Grady Enterprises in Problem 11? What is the MIRR when you adjust for the unequal lives? Does the adjusted MIRR for unequal lives change the decision based onMIRR?
What is the MIRR for Singing Fish Fine Foods in Problem 12? What is the MIRR when you adjust for the unequal lives? Does the adjusted MIRR for unequal lives change the decision based onMIRR?
Chandler and Joey were having a discussion about which financial model to use for their new business. Chandler supports NPV and Joey supports IRR. The discussion starts to get heated when Ross steps
Monica and Rachel are having a discussion about IRR and NPV as a decision model for Monica’s new restaurant. Monica wants to use IRR because it gives a very simple and intuitive answer. Rachel
Given the discount rates and the future cash flows of each project, which projects should they accept using profitabilityindex?
Given the discount rates and the future cash flow of each project listed, use the PI to determine which projects the company shouldaccept.
Given the following after-tax cash flows on a new toy for Tyler's Toys, find the project's payback period, NPV, and IRR. The appropriate discount rate for the project is 12%. If the cutoff period is
Risky Business is looking at a project with the estimated cash flows as follows:Initial Investment at start of project: $3,600,000Cash Flow at end of Year 1: $500,000Cash Flow at end of Years 2
Given the following cash flows of Project L-2, draw the NPV profile.Cash flows:Year 0 = -$250,000Year 1 = $45,000Year 2 = $75,000Year 3 = $115,000Year 4 = $135,000
Moulton Industries has two potential projects for the coming year, Project B-12 and Project F-4. The two projects are mutually exclusive. The cash flows are listed below. Draw the NPV profile of each
1. Compute the payback period for each project.a. Explain the rationale behind the payback method.b. State and explain the decision rule for the payback method.c. Explain how the payback method
Regions Bank is debating between two the purchase of two software systems; the initial costs and annual savings of which are listed below. Most of the directors are convinced that given the short
KLS Excavating needs a new crane. It has received two proposals from suppliers. Proposal A costs $ 900,000 and generates cost savings of $325,000 per year for 3 years, followed by savings of $200,000
The New Performance Studio is looking to put on a new opera. They figure that the set-up and publicity will cost $400,000. The show will go on for 3 years and bring in after-tax net cash flows of
The Upstart Corporation is looking to invest one of 2 mutually exclusive projects, the cash flows for which are listed below. Their director is really not sure about the hurdle rate that he should
Why are sunk cost excluded from the incremental cash flow of a project? Does this mean that they were wasted expenses? Why or why not?
Give an example of an erosion cost. Explain why this cost is part of the incremental cash flow of a project. Is there a case when a new product should get credit for additional revenue of another
Give an example of an opportunity cost and explain how you would estimate the cost as it applies to a particular project.
Why must a company typically invest in working capital when starting a new project? Why is this investment in working capital recovered at the completion of the project?
How does depreciation spread the capital expenditure of a project over the life of the capital asset? Why is using MACRS usually beneficial to a company versus using straight-line depreciation?
Fat Tire Bicycle Company currently sells 40,000 bicycles per year. The current bike is a standard balloon tire bike, selling for $90 with a production and shipping cost of $35. The company is
Heavenly Cookie Company has the following annual sales and costs for its current product line:Heavenly is thinking of adding Mississippi Mud brownies to the product line. The ultra-rich brownies
Revolution Records will build a new recording studio on a vacant lot next to the operations center. The land was purchased five years ago for $450,000. Today the value of the land has appreciated to
Cool Water Inc. sells bottled water. The firm keeps in inventory plastic bottles at 10% of the monthly projected sales. These plastic bottles cost $0.005 each. The monthly sales for the coming year
Tires for Less is a franchise of tire stores throughout the greater Northwest. It has projected the following unit sales per tire and costs of tires for the coming year:The company policy is to have
Brock Florist Company buys a new delivery truck for $29,000. It is classified as a light-duty truck.a. Calculate the depreciation schedule using a five-year life, straight-line depreciation, and the
Richards Tree Farm, Inc. has just purchased a new aerial tree trimmer for $91,000. Calculate the depreciation schedule using the property class category of a single-purpose agricultural and
Brock Florist Company sold their delivery truck in problem (see Problem 7) after three years of service. If MACRS was used for the depreciation schedule, what is the after tax cash flow from the sale
Jake Richards sold the tree trimmer (see Problem 8) after four years of service. If MACRS was used for the depreciation schedule, what is the after-tax cash flow from the sale of the trimmer
Grady Precision Measurement Tools has forecasted the following sales and costs for a new GPS system: annual sales of 48,000 units at $18 a unit, production costs at 37% of sales price, annual fixed
Huffman Systems has forecasted the following sales for home alarm systems to be 63,000 units per year at $38.50 per unit. The cost to produce each unit is expected to be about 42% of the sales price.
Using the operating cash flow information in Problem 11, determine whether Grady Precision Measurement Tools should add the GPS system to its set of products. The initial investment is $1,440,000 and
Using the operating cash flow information in Problem 12, determine whether Huffman Systems add the home alarm system to their set of products. The manufacturing equipment will be sold off at the end
Mathews Mining Company is looking at a project that has the following forecasted sales: first-year sales are 6,800 units and will grow at 15% over the next four years (a five-year project). The price
Miglietti Restaurants is looking at a project with the following forecasted sales: first-year sales quantity of 31,000 with an annual growth rate of 3.5% over the next ten years. The sales price per
Using the operating cash flow information from Problem 15, find the NPV of the project for Mathews Mining if the manufacturing equipment can be sold for $80,000 at the end of the five-year project
Using the operating cash flow information from Problem 16, find the NPV of the project for Miglietti Restaurants if the manufacturing equipment can be sold for $140,000 at the end of the ten-year
The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds (1957 replicas). The necessary foundry equipment will cost a total of $4,000,000 and will be depreciated using a
The sales manager has a new estimate for the sale of the Classic Thunderbirds in Problem 19. The annual sales volume will be as follows:Year 1: 240Year 2: 280Year 3: 340Year 4: 360Year 5: 280.Rework
This case is designed to integrate the student’s understanding of incremental cash flows for capital budgeting decisions and touches on all major topics: investment, operating cash flows, working
Volvo is looking to introduce a new “hybrid” car in the US. Their analysts estimate that they will sell 20,000 of these new cars per year. The unit cost per car is $18,000 and they plan on
R.K. Boats Inc. has just installed a new hydraulic lift system which is being categorized as a 5-year class-life asset under MACRS. The total purchase cost plus installation amounted to $750,000. RKB
Reddy Laboratories had purchased some manufacturing equipment five years ago for a total cost of $3,000,000, and has been depreciating it using the MACRS – 7 year class-life rates. Currently,
Balik Ventures is looking at a project with the following forecasted sales: first-year sales quantity of 20,000 with an annual growth rate of 4% over the next 5 years. The sales price per unit is
Let’s say that Balik Ventures has forecasted the operating cash flows over the 5 year project life as shown in Problem 4 above. The project will entail an investment of 10% of the first year’s
What are the two different ways to estimate the cost of equity for a firm?
When calculating the cost of capital, why is it that the company only adjusts the cost of debt for taxes?
Eric has another get-rich-quick idea but needs funding to support it. He chooses an all-debt funding scenario. Eric will borrow $2,000 from Wendy, who will charge Eric 6% on the loan. He will also
Grey€™s Pharmaceuticals has a new project that will require funding of $4 million. The company has decided to pursue an all-debt scenario. Grey€™s has made an agreement with four
Kenny Enterprises has just issued a bond with a par value of $1000, twenty years to maturity, and an 8% coupon rate with semiannual payments. What is the cost of debt for Kenny Enterprises if the
Dunder-Mifflin, Inc. (DMI) is selling 600,000 bonds to raise money for the publication of new magazines in the coming year. The bonds will pay a coupon rate of 12% on semiannual payments. The bond's
Kenny Enterprises will issue the same debt in Problem 3 but now will use an investment banker that charges $25 per bond for their services. What is the new cost of debt for Kenny Enterprises at a

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