FM Assignment - 01

Chapter-05
1. Suppose you want to invest in a new project. For this calculate the riskiness of the investment:
Probability Rate of Return

.15 .20
.15 -.20
.70 .10
Calculate:
 Expected rate of return
 Standard Deviation
 Coefficient of Variation ‘
2. A stock’s expected return has the following distribution:

DEMAND FOR THE PROBABILITY OF THIS RATE OF RETOCCURS URN
COMPANY’S PRODUCTS DEMAND OCCURRING IF THIS DEMAND
Weak 0.1 (50%)
Below average 0.2 ( 5)
Average 0.4 16
Above average 0.2 25
Strong 0.1 60
1.0
Calculate the stock’s expected return, standard deviation, and coefficient of variation.
3. Assume that the risk-free rate is 5 percent and the market risk premium is 6 percent.
What is the expected return for the overall stock market? What is the required rate of return on a
stock that has a beta of 1.2?
4. Assume that the risk-free rate is 6 percent and the expected return on the market is 13 percent.
What is the required rate of return on a stock that has a beta of 0.7?
4. Suppose you are the financial manager of a $4 million investment fund. The fund consists of
four stocks with the following investments and betas:
Stock Investment Beta

A $400,000 1.50
B 600,000 (0.50)
C 1,000,000 1.25
D 2,000,000 0.75
If the market’s required rate of return is 14 percent and the risk-free rate is 6 percent, what is the
fund’s required rate of return?
Chapter-07
1. Kaufman Enterprises has bonds outstanding with a $1000 face value and 10 years left until
maturity. The bonds have 11 percent annual coupon payments. The current price of these bonds
is $1,175. The bonds may be called in 5 years at 109 percent of face value.
i. What is the yield to maturity of these bonds?
ii. What is yield to call for these bonds, if called in 5 years?
2. Suppose a bond that matures in 10 years sells for $985. The bond has a face value of $1000
and a 7 percent annual coupon.
i. What is the bond’s yield to maturity?
ii. Assume that the yield to maturity remains constant for the next 3 years. What will be the
price of the bond three years from today?
3. Callaghan Motors’ bonds have 10 years remaining to maturity. Interest is paid annually, the
bonds have a $1,000 par value, and the coupon interest rate is 8 percent. The bonds have a yield
to maturity of 9 percent. What is the current market price of these bonds?
4. Wilson Wonders’ bonds have 12 years remaining to maturity. Interest is paid annually, the
bonds have a $1,000 par value, and the coupon interest rate is 10 percent. The bonds sell at a
price of $850. What is their yield to maturity?
5. Heath Foods’ bonds have 7 years remaining to maturity. The bonds have a face value of
$1,000 and a yield to maturity of 8 percent. They pay interest annually and have a 9 percent
coupon rate. What is their current yield?
Chapter-10
1. You are a financial analyst for Damon Electronics Company. The director of capital budgeting
has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a
cost of $10,000, and the cost of capital for each project is 12 percent. The projects’ expected net
cash flows are as follows:
EXPECTED NET CASH FLOWS
YEAR PROJECT X PROJECT Y
0 ($10,000) ($10,000)
1 6,500 3,500
2 3,000 3,500
3 3,000 3,500
4 1,000 3,500
a. Calculate each project’s payback period, net present value (NPV), internal rate of return (IRR),
b. Which project or projects should be accepted if they are independent?
c. Which project should be accepted if they are mutually exclusive?
2. Your division is considering two investment projects, each of which requires an up-front
expenditure of $15 million. You estimate that the investments will produce the following net
cash flows:
YEAR PROJECT A PROJECT B
1 $ 5,000,000 $20,000,000
2 10,000,000 10,000,000
3 20,000,000 6,000,000
What are the two projects’ net present values, assuming the cost of capital is 10 percent? 5
percent? 15 percent?
3. Cummings Products Company is considering two mutually exclusive investments. The

projects’ expected net cash flows are as follows:
EXPECTED NET CASH FLOWS

YEAR PROJECT A PROJECT B
0 ($300) ($405)
1 (387) 134
2 (193) 134
3 (100) 134
4 600 134
5 600 134
6 850 134
7 (180) 0
a. If you were told that each project’s cost of capital was 12 percent, which project should be
selected? If the cost of capital was 18 percent, what would be the proper choice?
b. Construct NPV profiles for Projects A and B.
c. What is each project’s IRR?

FM Assignment - 01

Uploaded by

Copyright:

Available Formats

FM Assignment - 01

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

FM Assignment - 01

Uploaded by

Copyright:

Available Formats

Chapter-05

Probability Rate of Return

2. A stock’s expected return has the following distribution:

Stock Investment Beta

i. What is the bond’s yield to maturity?

3. Cummings Products Company is considering two mutually exclusive investments. The

EXPECTED NET CASH FLOWS

You might also like