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6. Required: What is a sunk cost? Should it be included in the incremental cash flows for a project? Why or why not? (4 marks) 7. Consider the following realized annual returns: Market Realized Return Microsoft Realized Return 1996 21.2% 88.3% 1997 30.3% 56.4% 1998 22.3% 114.6% 1999 25.3% 68.4% 2000 -11.0% -62.8% 2001 -11.3% 52.7% 2002 -20.8% -22.0% 2003 33.1% 6.9% 2004 13.0% 9.2% 2005 7.3% -0.9% Year End Required: Using the data provided in the table, calculate the average annual return, the variance of the annual returns, and the standard deviation of the average returns for the market from 1996 to 2005. (4 marks) 8. Consider the following returns: Year End Lowes Realized Home Depot IBM Realized 2000 2001 2002 2003 2004 2005 Return 20.1% 72.7% -25.7% 56.9% 6.7% 17.9% Realized Return -14.6% 4.3% -58.1% 71.1% 17.3% 0.9% Return 0.2% -3.2% -27.0% 27.9% -5.1% -11.3% Required: Calculate the variance on a portfolio that is made up of equal investments in Home Depot and IBM stock. (6 marks) 9. The Aardvark Corporation is considering launching a new product and is trying to determine an appropriate discount rate for evaluating this new product. Aardvark has identified the following information for three single division firms that offer products similar to the one Aardvark is interested in launching: Comparable Firm Anteater Enterprises Armadillo Industries Antelope Inc. Equity Cost of Debt Cost Debt-to-Value Capital of Capital Ratio 12.50% 6.50% 50% 13% 6.10% 40% 14% 7.10% 60% Required: Based upon the three comparable firms, calculate the most appropriate unlevered cost of capital for Aardvark to use on this new product. (4 marks) 10. Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%. Sisyphean Bolder Movers Incorporated has no debt, a total equity capitalization of $50 billion, and a beta of 2.0. Included in Sisyphean's assets are $12 billion in cash and risk-free securities. Required: Calculate Sisyphean's enterprise value and unlevered beta considering the fact that Sisyphean's cash is risk-free. (4 marks) 6. Required: What is a sunk cost? Should it be included in the incremental cash flows for a project? Why or why not? (4 marks) 7. Consider the following realized annual returns: Market Realized Return Microsoft Realized Return 1996 21.2% 88.3% 1997 30.3% 56.4% 1998 22.3% 114.6% 1999 25.3% 68.4% 2000 -11.0% -62.8% 2001 -11.3% 52.7% 2002 -20.8% -22.0% 2003 33.1% 6.9% 2004 13.0% 9.2% 2005 7.3% -0.9% Year End Required: Using the data provided in the table, calculate the average annual return, the variance of the annual returns, and the standard deviation of the average returns for the market from 1996 to 2005. (4 marks) 8. Consider the following returns: Year End Lowes Realized Home Depot IBM Realized 2000 2001 2002 2003 2004 2005 Return 20.1% 72.7% -25.7% 56.9% 6.7% 17.9% Realized Return -14.6% 4.3% -58.1% 71.1% 17.3% 0.9% Return 0.2% -3.2% -27.0% 27.9% -5.1% -11.3% Required: Calculate the variance on a portfolio that is made up of equal investments in Home Depot and IBM stock. (6 marks) 9. The Aardvark Corporation is considering launching a new product and is trying to determine an appropriate discount rate for evaluating this new product. Aardvark has identified the following information for three single division firms that offer products similar to the one Aardvark is interested in launching: Comparable Firm Anteater Enterprises Armadillo Industries Antelope Inc. Equity Cost of Debt Cost Debt-to-Value Capital of Capital Ratio 12.50% 6.50% 50% 13% 6.10% 40% 14% 7.10% 60% Required: Based upon the three comparable firms, calculate the most appropriate unlevered cost of capital for Aardvark to use on this new product. (4 marks) 10. Sisyphean Bolder Movers Incorporated has no debt, a total equity capitalization of $50 billion, and a beta of 2.0. Included in Sisyphean's assets are $12 billion in cash and risk-free securities. Required: Calculate Sisyphean's enterprise value and unlevered beta considering the fact that Sisyphean's cash is risk-free. (4 marks)