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1.You are reviewing a new project and have estimated the following cash flows:

Year 0: CF = -165,000

Year 1: CF = 63,120; NI = 13,620

Year 2: CF = 70,800; NI = 3,300

Year 3: CF = 91,080; NI = 29,100

Average Book Value = 72,000

Your required return for assets of this risk level is 12%.

a. Please calculate the NPV of the project.

b.IRR of this project is( )

c.Please calculate payback periods: solution Year 1

d.Please calculate AAR.

e.Calculate PI=?

2. An investment project has the following cash flows: CF0 = -1,000,000; C01 C08 = 200,000 each

If the required rate of return is 12%, what decision should be made using NPV?

How would the IRR decision rule be used for this project, and what decision would be reached?

How are the above two decisions related?

3.You bought a stock for $35, and you received dividends of $1.25. The stock is now selling for $40. What is your percentage return?

4.The risk free rate is 4%, and the required return on the market is 12%.

5. What is the required return on an asset with a beta of 1.5?

Consider an asset with a beta of 1.2, a risk-free rate of 5%, and a market return of 13%.

What is the reward-to-risk ratio in equilibrium?

6. Consider the following information on returns and probabilities:

State Probability X Z

Boom .25 15% 10%

Normal .60 10% 9%

Recession .15 5% 10%

What are the expected return and standard deviation for a portfolio with an investment of $6,000 in asset X and $4,000 in asset Z?

7. Suppose we have a bond issue currently outstanding that has 25 years left to maturity.

The coupon rate is 9%, and coupons are paid semiannually.

The bond is currently selling for $908.72 per $1,000 bond.

What is the cost of debt?

8. Your company has preferred stock that has an annual dividend of $3.

If the current price is $25, what is the cost of preferred stock?