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BFIN 3321 Final Exam Summer 2014

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Question;PROBLEMS;1.(4 points)Aparticularsecurity'sdefault;risk;premium;is5 percent.Forall securities,theinflation;riskpremium is4 percentand;the;real interest rateis2 percent.;Thesecurity's liquidity riskpremium is;1percent and maturity riskpremium is3;percent.Thesecurity hasnospecialcovenants. Whatisthesecurity's;equilibrium rateofreturn?;2.(4 points);Supposethatthecurrentone-year rate(one-year;spot rate) andexpectedone-yearT-;bill ratesoverthefollowingthreeyears;(i.e.,years2,3, and4,respectively)areasfollows;1R1= 2.0%,E(2R1)= 3.0%,E(3R1)= 13.0%,E(4R1)= 15.0%;Usingtheunbiasedexpectationstheory, whatisthecurrent(long-term);rateforfour-year-maturity;Treasurysecurities(1R4)?;3.(4 points)HydroTechCorpstockwas $100per;share;ayearagowhen itwaspurchased.Sincethen, itpaida $4;per sharedividend. Thestockpriceis currently$97.Ifyouowned200sharesof;MedTech,whatwasyourpercent return?;4.(4;points)PortfolioReturnYear-to-date,CompanyX;had;earneda-2percent return.;Duringthesametimeperiod,CompanyY;earned10;percent and CompanyZ;earned 5 percent.Ifyou have;a portfoliomade upof60percent Company X,30percent CompanyY, and;10;percent CompanyZ;whatis yourportfolioreturn?;5.(8 points)You hold thepositionsinthetable;below.;COMPANY;PRICE;# SHARES;BETA;Goodmonth;$60.00;200;2.0;Icestone;$40.00;150;2.5;Bridgerock;$70.00;100;?1.5;A.Whatisthebeta ofyour;portfolio?;B.Ifyou;expectthemarkettoearn8 percent;andtherisk-freerateis3;percent, whatisthe;requiredreturnof;the;portfolio?;6.(4 points);TABInc.hasa$1,000(face value),10yearbond issueselling for$1,184that paysanannual;couponof8.5percent.;WhatwouldbeTAB'sbefore-taxcomponentcost;ofdebt?;7. (4points)Team;Sportshas4 million;sharesof;common stockoutstanding;2 millionsharesof preferredstock;outstanding,and20thousandbonds($1,000par).If thecommon sharesareselling;for$4.50 per share, thepreferredsharearesellingfor$20;per share, and;the;bondsaresellingfor;110percentofpar,whatwouldbetheweightusedforequity inthecomputation;of;Team'sWACC?;8.(4;points)Supposethat;TipsNToes,Inc.'scapital structurefeatures40percentequity;60;percent debt,andthatitsbefore-taxcostofdebtis 9percent,whileitscostofequity;is15percent.If;theappropriateweightedaverage;taxrateis25 percent, what willbeTipsNToes's;WACC?;9.(4;points)Supposeyou sell;afixed assetfor $110,000whenits;book;valueis $125,000.Ifyour;company'smarginaltaxrateis 39%;what willbetheeffect on;cashflowsofthissale(i.e.,what will betheafter-taxcash;flow;ofthissale)?;10.(7;points)Your companyhasspent$500,000on researchtodevelopanew;computergame.;The;firm isplanningtospend$100,000on a;machinetoproducethenewgame.Shippingand installationcostsof;the;machinewillbecapitalized;and depreciated,theytotal $5,000.Themachine hasan;expectedlifeof 3 years,a$100,000estimatedresalevalue,and;fallsundertheMACRS;5-Year;classlife.Revenuefromthenewgameis expected tobe$500,000 per;year;withcostsof$200,000;per year.Thefirm hasataxrateof35percent, anopportunity cost ofcapitalof10percent, andit;expectsnetworking capitaltoincreaseby$100,000atthebeginning of;theproject.Whatwill;be;the net cash flow for;yearoneof;thisproject?;11.(4;points)ComputetheNPV;forProject Yandaccept orrejecttheproject;withthecash flows;shown;below;iftheappropriatecostofcapital is12percent.;TIME;0;1;2;3;4;5;CASHFLOW;-500;-1,000;1,000;0;2,000;2,000;12.(5;points)ComputethePayback;statisticforProjectX;and;recommend whether;the;firmshouldaccept orrejecttheproject withthecash;flows shownbelow iftheappropriatecostofcapital;is10 percent andthe maximumallowablepayback is5;years.;TIME;0;1;2;3;4;5;CASHFLOW;-75;-75;0;100;75;90;13.(4;points)ComputetheIRRstatistic;forProject Xand;notewhether;the;firmshouldaccept;or rejecttheprojectwiththecash flowsshown below iftheappropriatecostofcapital is10percent.;TIME;0;1;2;3;4;5;CASHFLOW;-75;-75;0;100;75;90;14.(8;points)Supposeyour;firm isconsideringtwomutuallyexclusive,requiredprojectswiththe;cash;flowsshown below. Therequiredrate of;returnonprojectsofboth;of;their risk classis;8 percent,andthatthemaximumallowablepaybackanddiscountedpaybackstatistic;fortheprojects;are;2and 3years,respectively.;TIME;0;1;2;3;Project ACF;$ -10,000;$10,000;$30,000;$3,000;Project BCF;$ -30,000;$10,000;$20,000;$ 50,000;UsetheProfitability;Index(PI)decision;ruletoevaluatetheseprojects,whatis;the;PIforeach project,andwhich;one(s)should;itbeacceptedor;rejected?

 

Paper#49569 | Written in 18-Jul-2015

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