Quiz 3: Fin 819
Use the following to answer questions 1-3.
A new project will generate sales of $74 million, costs of $42 million, and depreciation expense of $10 million in the coming year. The firm’s tax rate is 35%.
1. What is the tax payment in the coming year?
A)$10 million
B)$7.7 million
C) $12 million
D) None of the above
Answer: B
2. What is the net profit (or net income or accounting profit) in the coming year ?
A)$10 million
B)$15 million
C) $14.3 million
D) None of the above
Answer: C
3. What is the cash flow in the coming year?
A)$24.3 million
B)$30 million
C) $19 million
D) None of the above
Answer: A
Use the following to answer questions 4-10
Revenues generated by a new product are forecasted as follows:
Year Revenues
______
1$40,000
230,000
320,000
410,000
thereafter 0
______
Expenses are expected to be 40 percent of revenues, and working capital required in each year is expected to be 20 percent of revenues in the following year. The product requires an immediate investment of $50,000 in plant and equipment. Suppose the plant and equipment are depreciated over-four years to a salvage value of zero using straight-line depreciation. The tax rate is 40%.
4. What is the initial (year 0) investment in working capital ?
A)$8,000
B)$10,000
C) $5,000
D) None of the above
Answer: A
5. What is the initial (year 0) total investment in product ?
A)$48,000
B)$58,000
C) $50,000
D) None of the above
Answer: B
6. What is depreciation in each year ?
A)$8,000
B)$10,000
C) $12,500
D) None of the above
Answer: C
7. What is the cash flow in year 1?
A)$28,000
B)$30,000
C) $21,400
D) None of the above
Answer: C
8. What is the cash flow in year 4 ?
A)$18,000
B)$10,600
C) $11,000
D) None of the above
Answer: B
9. What is the cash flow in year 5 ?
A)$800
B)0
C) $500
D) None of the above
Answer: B
10. What is the cash flow in year 2 ?
A)$1,6800
B)$16,600
C) $15,600
D) None of the above
Answer: D
11. Efficient frontier portfolios are those, which offer:
A)Maximum expected returns for a given level of risk
B)highestrisk for a given level of expected return
C)The maximum risk and the lowest expected return
D)All of the above
E) None of the above
Answer: A
12.The minimum variance portfolio
A)is also an efficient frontier portfolio
B) is not an efficient frontier portfolio
C)may or may not be an efficient frontier portfolio
D) all of the above
E) none of the above
Answer: A
13.Beta measures:
A)the systematic risk of a security return
B)the risk of a security return
C)the total risk of a security return
D)the firm-level risk of a security return
E) none of the above
Answer: A
14.If the beta of Microsoft is 1.26, risk-free rate is 6.5% and the market risk premium is 8%, calculate the expected return for Microsoft.
A)12.6%
B)15.6%
C)13.9%
D)11.3%
E) none of the above
Answer: E
Response: E(r) = 6.5 + 1.26*8 = 16.6
15. The capital asset pricing model (CAPM) establishes the relation
A)between the expected return of a security and its risk
B)between the expected return of a security and its market risk
C)between the expected return of a security and its firm-level risk
D)all the above
E) none of the above
Answer: B
16.The security market line (SML) is the graph of:
A)Expected rate of return on investment (Y-axis) vs. variance of return (X-axis)
B)Expected rate of return on investment (Y-axis) vs. standard deviation of return (X-axis)
C)Realized rate of return on investment (Y-axis) vs. beta (X-axis)
D)A and B
E) None of the above
Answer: E
17.Cost of capital is the same as cost of equity for firms that are
A)financed entirely by debt
B)financed entirely by equity
C)financed by both debt and equity
D)all of the above
Answer: B
18.Cost of equity can be estimated using:
A)Discounted cash flow (DCF) approach
B)Capital Asset Pricing Model (CAPM)
C) A and B
D)none of the above
Answer: C
19.The market value of Charter Cruise Company's equity is $15 million, and the market value of its risk-free debt is $5 million. If the required rate of return on the equity is 20% and that on the debt is 8%, calculate the company's cost of capital. (Assume no taxes.)
A)17%
B)20%
C)8.1%
D)None of the above
Answer: A
Company cost of capital = (15/20)*(20) + (5/20)*(8) = 17%
20.The market value of Charcoal Corporation's common stock is $20 million, and the market value of its risk-free debt is $5 million. The beta of the company's common stock is 1.25, and the expected rate of return on the market portfoliois 13%. If the treasury bill rate is 5%, what is the company's cost of capital. (Assume no taxes.)
A)13%
B)14.6%
C)17%
D)None of the above
Answer: A
rc = 5+1.25(8) = 15 ; rd = 5%
Company Cost of capital = 5 *(5/25) + 15*(20/25) = 1 + 12 = 13%