BFIN 3321 Final Exam Summer 2014
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PROBLEMS
1.(4 points) A particularsecurity'sdefault risk premium is5 percent.Forall securities,theinflation risk premium is4 percentand thereal interest rateis2 percent. Thesecurity's liquidity risk premium is1percent and maturity riskpremium is3 percent.Thesecurity hasno special covenants. Whatis thesecurity's equilibrium rateofreturn?
2.(4 points) Supposethatthecurrentone-year rate(one-year spot rate) andexpectedone-year T- bill ratesover thefollowing threeyears (i.e.,years2,3, and 4,respectively) areasfollows:
1R1= 2.0%, E(2R1)= 3.0%, E(3R1)= 13.0%, E(4R1)= 15.0%,
Using theunbiasedexpectationstheory, whatis thecurrent(long-term) rateforfour-year-maturity
Treasurysecurities(1R4)?
3.(4 points) HydroTech Corpstock was $100per share ayearagowhen it waspurchased.Since then, itpaida $4 per sharedividend. Thestock priceis currently $97.Ifyou owned200sharesof MedTech,whatwasyour percent return?
4.(4 points)Portfolio ReturnYear-to-date,CompanyX hadearneda -2percent return. During thesametimeperiod,CompanyY earned 10 percent and CompanyZ earned 5 percent.Ifyou have a portfoliomade up of60percent Company X,30percent CompanyY, and 10percent CompanyZ, whatis your portfolioreturn?
5.(8 points) You hold thepositionsin thetable below.
COMPANY | PRICE | # SHARES | BETA |
Goodmonth | $60.00 | 200 | 2.0 |
Icestone | $40.00 | 150 | 2.5 |
Bridgerock | $70.00 | 100 | –1.5 |
A.Whatis thebeta ofyour portfolio?
B.Ifyou expect themarkettoearn8 percentand therisk-freerateis3 percent, whatisthe requiredreturnof theportfolio?
6.(4 points) TAB Inc.hasa$1,000(face value),10yearbond issueselling for$1,184that paysan annual couponof8.5 percent. WhatwouldbeTAB'sbefore-taxcomponentcost ofdebt?
7. (4points) Team Sportshas4 millionsharesof common stockoutstanding, 2 millionsharesof preferredstock outstanding, and 20thousandbonds($1,000par).If thecommon sharesareselling for$4.50 per share, thepreferredsharearesellingfor$20 per share, and the bondsaresellingfor
110percentofpar, whatwouldbe theweightusedforequity in thecomputation ofTeam'sWACC?
8.(4 points)Supposethat TipsNToes,Inc.'scapital structurefeatures40percentequity, 60percent debt,and thatitsbefore-taxcostofdebtis 9 percent,whileitscostofequity is15percent. If the appropriateweightedaverage taxrateis25 percent, what willbe TipsNToes's WACC?
9.(4 points)Supposeyou sell afixed assetfor $110,000whenits book valueis $125,000.Ifyour company's marginal taxrateis 39%, what will betheeffect on cashflowsof thissale(i.e.,what will be theafter-taxcash flow ofthissale)?
10. (7 points)Your companyhasspent$500,000on research todevelopanew computergame. Thefirm isplanning tospend$100,000on a machinetoproducethenew game. Shippingand installation costsof themachinewill becapitalized and depreciated; they total $5,000. Themachine hasan expectedlifeof 3 years,a$100,000estimatedresalevalue,and fallsunder theMACRS 5-Year classlife.Revenuefrom thenew gameis expected tobe$500,000 per year, withcosts of$200,000 per year. Thefirm hasataxrateof35percent, anopportunity cost ofcapitalof10percent, andit expectsnetworking capitaltoincreaseby $100,000atthebeginning of theproject. Whatwill bethe net cash flow for yearone of thisproject?
11. (4 points)ComputetheNPV forProject Yandaccept or reject theproject withthecash flows shown below if theappropriatecostofcapital is12percent.
TIME: | 0 | 1 | 2 | 3 | 4 | 5 |
CASHFLOW: | -500 | -1,000 | 1,000 | 0 | 2,000 | 2,000 |
12. (5 points)ComputethePayback statisticforProjectX andrecommend whether thefirm should accept or reject theproject withthecash flows shown below if theappropriatecostofcapital is10 percent and the maximum allowablepayback is5 years.
TIME: | 0 | 1 | 2 | 3 | 4 | 5 |
CASHFLOW: | -75 | -75 | 0 | 100 | 75 | 90 |
13. (4 points)ComputetheIRRstatistic forProject Xand notewhether thefirm should accept or reject theprojectwiththecash flowsshown below if theappropriatecostofcapital is10percent.
TIME: | 0 | 1 | 2 | 3 | 4 | 5 |
CASHFLOW: | -75 | -75 | 0 | 100 | 75 | 90 |
14. (8 points)Supposeyour firm isconsidering twomutuallyexclusive,requiredprojectswith the cash flowsshown below. Therequiredrate of returnon projectsofboth oftheir risk classis 8 percent,andthatthemaximum allowable payback anddiscountedpaybackstatistic fortheprojects are2 and 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 thePIforeach project,andwhich one(s)should itbeacceptedor rejected?
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