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1. The probability distribution for the returns on Grey stock is as follows

State of Nature Probability Return

1 .20 10%

2 .35 20%

3 .45 15%

Calculate: a. The expected rate of return and

1. The standard deviation of the returns

2. Murray Company's bonds mature in 25 years, have a par value of $1,000, and pay an interest rate (coupon rate) of 5.5 percent annually. The market requires an interest rate of 6.2% on these bonds. What is the bond's price?

3. An investor bought 400 shares of Zeta International when it was selling for $150 a share and sold the shares one year later for $210.23. Zeta paid $2.3 per share in dividends. Calculate the investors rate of return.

4. A stock just paid a dividend of D₀ = $4.50. The required rate of return is r_s = 8.1%, and the constant growth rate is g = 4.3%. What is the stocks intrinsic value?

5. Suppose you are buying your first condo for $345,000, and you will make a $55,000 down payment. You have arranged to finance the remainder with a 30-year, monthly payment, amortized mortgage at a 4.5% nominal interest rate, with the first payment due in one month. What will your monthly payments be?

6. Suppose you just won the state lottery, and you have a choice between receiving $3,550,000 today or a 20-year annuity of $310,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.

7. You have a chance to buy an annuity that pays $750 at the beginning of each year for 5 years. You could earn 8.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

8. Cooley Company's stock has a beta of 1.40, the risk-free rate is 1.85%, and the market risk premium is 9.50%. What is the firm's required rate of return?

Use the information below for questions 9-13

Alpha Corporation is considering a project that costs $10,000,000 and will increase the after-tax cash flows by $3,000,000 per year for five years. The company has total assets of $860,000,000 and total debt of $258,000,000. The borrowing rate is 10 percent, the corporate tax rate is 21%, the risk-free rate is 2%, the beta of the stock is 1.5, and the return on the market is 16 percent.

9. The percent of debt in the capital structure is ________

10. The cost of equity is __________

11. The weighted average cost of capital is __________

12. The NPV of the project is _________

13. Should Alpha undertake the project? Explain

Use the information below for questions 14-15

Eisenhower Communications is trying to estimate the first-year net operating cash flow (at year 1) for a proposed project. The financial staff has collected the following information on the project:

Sales revenues $10 million

Operating costs (excluding depreciation) 7 million

Depreciation 2 million

Interest expense 2 million

The company has a 40% tax rate, and its WACC is 10%.

14. What is the projects operating cash flow for the first year (t=1)?

15. If this project above would cannibalize Eisenhowers other projects by $1 million of cash flow before taxes per year, explain how would this change your answer to question 14.

16. Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 18.00%, with interest paid monthly, what is the card's EFF% (effective rate)?

17. Wilson Co. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project X has an expected life of 2 years with after-tax cash inflows of $7,000 and $7,500 at the end of Years 1 and 2, respectively. In addition, Project X can be repeated at the end of Year 2 with no changes in its cash flows. Project Y has an expected life of 4 years with after-tax cash inflows of $5,600 at the end of each of the next 4 years. Each project has a WACC of 13%. What is the equivalent annual annuity of the most profitable project?

18. You work for Rosen Inc., which is considering a new project whose data are shown below. What is the project's Year 1 cash flow?

Sales revenues, each year $62,500

Depreciation $8,000

Other operating costs $25,000

Interest expense $10,000

Tax rate 21%

19. If one U.S. dollar buys 1.31 Canadian dollars, how many U.S. dollars can you purchase for one Canadian dollar?

20. Suppose that currently, 1 British pound equals 1.31 U.S. dollars and 1 U.S. dollar equals .97 Swiss francs. How many Swiss francs are needed to purchase 1 pound?