Multiple choice

1. You are planning to produce a new action figure called "Hillary". However, you are very uncertain about the demand for the product. If it is a hit, you will have net cash flows of $50 million per year for 3 years (starting next year). If it fails, you will only have net cash flows of $10 million per year for 2 years (starting next year). There is an equal chance that it will be a hit or failure (probability = 50%) You will not know whether it is a hit or a failure until the first year's cash flows are in. You have to spend $80 million immediately for equipment and the rights to produce the figure. .If you can sell your equipment for $60 million once the first year's cash flows are received, calculate the value of the abandonment option. (The discount rate is 10%)  

a. -9.15 

b. +13.99 

c. +23.14 

d. None of the above 

2. Given the following net future values for harvesting trees: (one time harvest):    If the cost of capital is 15%, calculate the optimal year to harvest:  

a. Year 1 

b. Year 2 

c. Year 3 

d. Year 4 

3. The Consumer-Mart Company is going to introduce a new consumer product. If brought to market without research about consumer tastes the firm believes that there is a 60% chance that the product will be successful. If successful, the project has a NPV = $500,000. If the product is a failure (40%) and withdrawn from the market, then NPV = -$100,000. A consumer survey will cost $60,000 and delay the introduction by one year. If the survey is successful, then there is an 80% chance of consumer acceptance, in which case the NPV = $500,000. If, on the other hand the survey is a failure, then NPV = -$100,000. The discount rate is 10%. By how much does the marketing survey change the expected net present value of the project? (Approximately)  

a. Increase the NPV by $25,455 

b. Decrease the NPV by $5950 

c. Decrease the NPV by $8955 

d. Decrease the NPV by $25,455 

4.  Which of the following portfolios have the least risk?  

a. A portfolio of Treasury bills 

b. A portfolio of long-term United States Government bonds 

c. Portfolio of U.S. common stocks of small firms 

d. None of the above 

5.  If the average annual rate of return for common stocks is 11.7%, and for treasury bills it is 4.0%, what is the market risk premium?  

a. 15.8% 

b. 4.1% 

c. 7.7% 

d. None of the above 

6.  Spill Oil Company's stocks had -8%, 11% and 24% rates of return during the last three years respectively; calculate the average rate of return for the stock.  

a. 8% per year 

b. 9% per year 

c. 11% per year 

d. None of the above 

7.  Given the following data: risk-free rate = 4%, average risk premium = 7.7%. Calculate the required rate of return:  

a. 5.6% 

b. 7.6% 

c. 11.7% 

d. None of the given answers 

8.  Mega Corporation has the following returns for the past three years: 8%, 12% and 10%. Calculate the variance of the return and the standard deviation of the returns.  

a. 64 and 8% 

b. 124 and 11.1% 

c. 4 and 2% 

d. None of the above 

9.  Macro Corporation has had the following returns for the past three years, -10%, 10%, and 30%. Calculate the standard deviation of the returns.  

a. 10% 

b. 20% 

c. 30% 

d. None of the above 

10.  Sun Corporation has had returns of -6%, 16%, 18%, and 28% for the past four years. Calculate the standard deviation of the returns.  

a. 11.6% 

b. 14.3% 

c. 13.4 %