Question 1

Please calculate the risk of the Norman Company's assets A and B using the table Asset A

Probabilities of outcomes Probability Returns

Pessimistic 25% 13%

Most Likely 50% 15%

Optimistic 25% 17%

Total 100%

Asset B

Probabilities of outcomes Probability Returns

Pessimistic 25% 7%

Most Likely 50% 15%

Optimistic 25% 23%

Total 100%

Question 2

Benjamin Corporation, a growing computer software developer wishes to determine the required return on an asset Z, which has a beta of 1.5. The risk free rate of return is 7%; the return on the market portfolio of assets is 11%. Substitution Bz, Rf=7% and Km=11% in to the CAPM calculate the required rate of return.

Question 3

Mills Company, a large defense contractor, on January 1st, 2004, issued a 10% coupon interest rate , 10 year bond with a $1000par value that pays interests semi-annually. Investors who buy this bond receive the contractual right to two cash flows: (1) $100 annual interest (2) $1000 par value at the end of the tenth year. Calculate the value of the bond.

Question 4

Lamar Company, a small cosmetics company, from January 1998 through 2003 paid the following per share dividends:

Year Dividends per Share

2003 $1.40

2002 1.29

2001 1.2

2000 1.12

1999 1.05

1998 1

The historical compound annual growth rate of Lamar Company dividends equals 7%. The company estimates that its dividend in 2004 D1, will equal $1.5. The required return ks is assumed to be 15%. Find the value of the stock.

Question 5

A firm can purchase a fixed asset for a $13000 initial investment. The asset generates an annual after tax cash inflow of $4000 for 4 years.

(A) Determine the net present value (NPV) of the asset, assuming that the firm has a 10% cost of capital, Is the Project acceptable-explain.

(B)Determine the maximum required rate of return that the firm can have and still accept the asset. Describe this finding in light of your response in part A.

Question 6

Calculate the WACC (weighted average cost of capital) for the three ranges are summarized in the table.

Range of total new financing Source of Capital Weight Cost

$0-$60,000 Debt 0.4 5.60%

Preferred Stock 0.1 10.60%

Common Stock 0.5 13.00%

$600,000-$1000,000 Debt 0.4 5.60%

Preferred Stock 0.1 10.60%

Common Stock 0.5 14%

$1000,000 and above Debt 0.4 8.40%

Preferred Stock 0.1 10.60%

Common Stock 0.5 14%

Question 7

As a part of your financial planning, you wish to purchase a new car exactly 5 years from today. The car you wish to purchase costs $14,000 today and your research indicates that its price will increase by 2% to 4% per year over the next 5 years.

(A) Estimate the price of the car at the end of 5 years if inflation is (A) 2%

(B) 4% per year

(B) How much more expensive will the car be if the rate of inflation is 4% rather than 2%? Question 8

Calculate the DOL, DFL and DTL using the data from the following table.

Sales(in units) 20,000 30,000

Sales revenue $100,000 $150,000

Less: Variable cost 40,000 60,000

Less: Fixed cost 10,000 10,000

EBIT 50,000 80,000

Less: Interest 20,000 20,000

Net profit before tax 30,000 60,000

Less: Tax (T=0.40) 12,000 24,000

Net profit after tax 18,000 36,000

Less: PS Dividend 12,000 12,000

Earnings available to

CS stock holder 6,000 24,000

EPS $1,2=(6000/5000) $4.8=(24000/5000)

Sales revenue=$5 per unit sales in units

Variable operating costs=$2/unit sales in unit

-Detail calculation.