Question 1

A stock has an expected return of 17.5% and a beta of 1.65. Another asset which is risk free is earning 3.25%

a)What is the expected return on a portfolio that is comprised of 1/2 the high risk stock and 1/2 the risk free asset?

b)Calculate the weights of each of these if they are the only 2 holdings in a portfolio which has a beta of 1.00.

c)If the portfolio of these two holdings earned 10%, what would be the beta of the portfolio?

1a

1b

1c

Question 2

If a company has the following:

Common Stock:7,500,000 shares outstanding, selling at $35 per share, beta 1.3

Preferred Stock:200,000 shares outstanding, 5% yield, selling at $100 per share

Debt:125,000 6% semiannual bonds outstanding, par value $1000 each with 15 years to maturity, selling at 112% of par Tax Rate:30%

a)Calculate the company`s market value

b)Calculate the percentage of the market value capital structure that is debt

c)Calculate the percentage of the market value capital structure that is common shares

d)Calculate the percentage of the market value capital structure that is preferred shares

e)Discuss how the matter of risk relates to capital structure

2a

2b

2c

2d

2e

Question 3

There are two projects.One has an outflow of cash of $40,000 in years 0 and 1, followed by an inflow of $55,000 in each of the years 2 and 3.The other has a cash outflow of $80,000 in year 0, followed by an inflow of $34,000 in years 1, 2, and 3.

a)If the profitability index decision rule applies and the required return is 8%, which project should be selected?

b)If the NPV decision rule applies then which project should be selected?

3a

3b

Show calculations:

Question 4

Machine 1 has a 3 year life, costs $350,000 with pre-tax operating costs of $75,000 per year.

Machine 2 has a 5 year life, costs $500.000 with pre-tax operating costs of $37,500 per year.

Both machines have a salvage value of $25,000 and are classed with a CCA rate of 20% per year.The company tax rate is 32% and the discount rate is 12%.

a)What is the EAC?

b)Which machine would you select as an investment?

4a

4b

Question 5

A project has a 7 year life and costs $400,000.Depreciation is straight line to zero over the life of the project and there is no salvage value.The tax rate is 30% and a 12% return on this project. Sales are expected to be 75,000 units per year.

If the fixed cost per unit is $600,000 per year, the variable cost is $40 per unit and the revenue for each unit is $50:

a)What is the base-case cash flow

b)What is the NPV

5a

5b

Question 6

Given the following information for Magpie Auto Parts Inc., find the WACC. Assume the company's tax rate is 35 percent.

Debt: 8,000 6.5 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 106 percent of par; the bonds make semiannual payments.

Common stock: 310,000 shares outstanding, selling for $57 per share; the beta is 1.05.

Preferred stock: 15,000 shares of 4 percent preferred stock outstanding, currently selling for $72 per share. Market: 7 percent market risk premium and 4.5 percent risk-free rate.

WACC?