FIN220 SEM 191 1. Jerome is considering investing $10,000 in a security that has the following distribution of possible one-year returns 0.10 0.20 0.30 0.30 0.10 Probability of Occurrence Possible Return -10% 10% 20% 30% a) What is the expected return in associated with the investment? b) Calculate the expected return in DOLLAR AMOUNT for the investment. c) What is the standard deviation associated with the investment? FIN220 SEM 191 2. Selena invests the following sum of money in common stock having expected returns as follows: Beta of Stock Common Stock Amount Invested in Expected Return 0.6 WOOPS KBOOM JUDY UPDWN SPROUT RINGG7 EIEIO 5.000 10.000 6 000 8 000 4,500 ,500 9.000 0.14 0.16 017 0.13 0.20 0.15 0.18 0.8 0.85 05 1.1 0.65 a) What is the expected return on her portfolio based on the amount invested above? b) Calculate the systematic risk, B of the portfolio c) Does the portfolio have more or less systematic risk compared to the average market portfolio? d) If return on the market (Rm) is 14% and the risk free rate (R) is 4%, what would be the return of the portfolio according to Capital Asset Pricing Model (CAPM)? e) If Selena wants to get 12% return from this portfolio, is this the appropriate portfolio for her? Explain your reason using your answer in (A) and (D). If she still wants to invest in this portfolio, what should she do in terms of adjusting the weight of the stock? Give your answer based on the amount invested in UPDWN and SPROUT stocks FIN220 SEM 191 QUESTION 1 ants to issue bonds whiceriod. Meacham Corporation costs of $3 per sota constant Meacham Corp. wants to issue bonds which can be sold at a market price of $540.27 for each bond. The bond will have 8 years maturity period. Meacham Corp. common stock currently sells for $30 per share. Meacham can sell additional shares by incurring flotation costs of $3 per share. Meacham paid a dividend yesterday of $4.00 per share and expects the dividend to grow at a constant rate of 5% per year. Meacham also expects to have $12 million of retained earnings available for use in capital budgeting projects during the coming year. Meacham's capital structure is 40% debt and 60% common equity. Meacham's marginal tax rate is 35%. a. Calculate the cost of debt before tax and after-tax cost of debt assuming Meacham's bonds are its only debt. b. Calculate the cost of retained earnings. C. Calculate the cost of new common stock d. Calculate the weighted average cost of capital assuming Meacham's total capital budget is $30 million. QUESTION 2 The following market information was gathered for the Blender Corporation. The firm has 1.000 bonds outstanding, each selling for $1,100.00 with a required rate of return of 8.00%. Blender Corporation has 5,000 shares of preferred stock outstanding, selling for $40.00 per share and 50,000 shares of common stock outstanding, selling for $18.00 per share. If the preferred stock has a required rate of return of 11.00% and the common stock requires a 14.00% return, and the firm has a corporate tax rate of 30%, then calculate the firm's WACC adjusted for taxes. QUESTION 3 Company RH is considering two investments with 1-year lives. The more expensive of the two is the better and will produce more savings. Assume these projects are mutually exclusive and that the required rate of return is 10 percent. Given the following free cash flows: Initial outlay Inflow year 1 PROJECT A -5195,000 2 40,000 PROJECT -$1.200,000 1,650,000 A. Calculate the NPV for each project. B. Calculate the PI for each project. C. Calculate the IRR for each project. D. If there is no capital-rationing constraint, which project should be selected? If there is a capital- rationing constraint, how should the decision be made? FIN220 SEM 191 QUESTION 4 The Safa Corporation is considering purchasing one of two new equipment for the upcoming year. The more expensive of the two is better and will produce a higher yield. Assume these projects are mutually exclusive and that the required rate of return is 10 percent. Given the following free cash flows: PROJECT A PROJECTE Initial outlay Inflow year -$500 200 -$5.000 6,000 a. Calculate the NPV of each project b. Calculate the Pl of each project. c. If there is no capital-rationing constraint, which project should be selected? If there is a capital rationing constraint, how should the decision be made? QUESTION 5 Abu Luqman must determine what investment opportunities to undertake for his business Al Aldhal Corporation. He is limited to a maximum expenditure of SR17.500 only for this capital budgeting period. The available projects with their respective IRR, NPV and Pl for Al-Afdhal Corporation are listed below: Project Initial Capital Outlay in SR IRR 500L B C D 5000 5000 7500 12500 25% 37% 20% 26% NPV 50 6500 5500 5000 500 1.10 2.30 2.10 1.67 1.04 a ACCORDING TO IRR CRITERIA, which projects would be selected base on the capital rationing constraint above? CALCULATE THE TOTAL NPV VALUE for the selected projects according to this ranking b. ACCORDING TO PROFITABILITY INDEX (PI) CRITERIA which projects would be selected base on the capital rationing constraint above? CALCULATE THE TOTAL NPV VALUE for the selected projects according to this ranking. c. From you calculation in A and B. Which set of projects would you choose under this capital constraint and explain why. Page 5 of 6 MODULE 6 - WORKING CAPITAL MANAGEMENT. Answer the following questions in a separate answer sheets. 1. Define and contrast the terms working capital and networking capital 2. Discuss the risk return relationship involved in the firm's asset-investment decisions as that relationship pertains to its working-capital management. 3. What advantages and disadvantages are generally associated with the use of short-term debt? Discuss 4. Explain what is meant by the statement The use of current liabilities as opposed to long- term debt subjects the firm to a greater risk of illiquidity." 5. Define the hedging principle. How can this principle be used in the management of working capital? 6. Define the following terms: a) Permanent asset investments b) Temporary asset investments c) Permanent sources of financing d) Temporary sources of financing e) Spontaneous sources of financing