A firm has a total debt of 10 million, and equity of 15 million. The company pays 8% interest on the debt and return on equity is 14%. If the tax rate of the company is 35%, calculate the cost of capital for the company?

You are considering a project with an opportunity cost of 10% and that offers up the following two possible payouts based on your ability to market the product:

In the optimistic state you expect the following payouts, -$4,795, $8,000, $8,000. Based on your pessimistic expectations you expect the following -$4,795, -$500, -$10,000. The cash flows fall at time period 0, 1 and 2.

Your sense is that there is a 40% chance things will turn out well and a 60% chance things will turn out poorly. What is your expected NPV if you are able to abandon the project after year one?

How are MNCs subject to political risk? Stated differently, in what manner are MNCs exposed when it comes to political risk?

I. Transfer Risk
II. Operational Risk
III. Control Risk
IV. Presidential Narcissism

Group of answer choices

I, II, III, IV

II & III only

I, II, & III only

I & II only

I, II & IV only

H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,350,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,290,000 in annual sales, with costs of $1,310,000. Assume the tax rate is 21 percent and the required return on the project is 10 percent.

What is the project’s NPV?

Corporate bonds are classified as “structured” investments; explain their importance to asset portfolios and what is the value of a warrant that is issued with a corporate bond to investors and to the issuing corporation?

Explain with examples.

Crete Logistics is thinking of opening a new warehouse, and the key data are shown below. The company will be leasing the building at a cost of $2,000 per month. The equipment for the project would be depreciated by the straight-line method over the project's 4-year life to a salvage value of zero, but you estimate the equipment's true salvage value is $10,000. New working capital of $15,000 would be required, and revenues and other operating costs would be constant over the project's 4-year life.

What is the project's NPV?  

1. Megan Berry is a freshman at University of Minnesota. She has some financial questions for the next three years of school and beyond. (4 pts)
   1. If Megan’s tuition, fees and expenses for books this year total $12,000, what will they be during her senior year (three years from now), assuming costs rise 4% annually? (Use Appendix A or one of the links below) _____________________
      

      Equation 1.4 Future Value of a Lump Sum
      Present Value	$1,000.00
      i = Interest Rate	8.00%
      n = Number of Periods	4
      Future Value	$1,360.49
      *For monthly compounding; n = number of months, i = the annual interest rate divided by 12

2. Megan is applying for a scholarship currently valued at $5,000. If she is awarded it at the end of next year, how much is the scholarship worth in today’s dollars, assuming inflation of 3%. (Use Appendix A or one of the link in part a) __________________

3. Megan is already looking ahead to graduation and a job and she wants to buy a new car not long after graduation (1-3 years). If after graduation, she begins an investment program of $2400 per year in an investment yielding 6%, what will be the value of the fund after 4 years? (Use Appendix A or one of the links in part a)______________ After 6 years? ____________

4. Megan’s Aunt Carol told her she would give Megan $1,000 at the end of each year for the next 3 years to help with her expenses. Assuming an interest rate of 2%, what is the present value of that stream of payments? (Use Appendix A or one of the links in part a) __________________

Kruger, Inc. has a $10,000 pure discount bond that comes due in one year. The risk-free rate of return is 3 percent. The firm's assets are expected to be worth either $9,900 or $12,100 in one year. Currently, these assets are worth $11,000. What is the current value of the firm's debt?

You own a lot in Lowell, Massachusetts that is currently unused. Similar lots have recently sold for $0.7 million. Over the past five years, the price of land in the area has increased 8 percent per year, with an annual standard deviation of 12 percent. A buyer has recently approached you and wants an option to buy the land in the next 12 months for $0.77 million. The risk-free rate of interest is 3 percent per year, compounded continuously. How much should you charge for the option?

Stocks A and B have the following probability distributions of expected future returns:

1. Calculate the expected rate of return, r B, for Stock B (r A = 11.80%.) Do not round intermediate calculations. Round your answer to two decimal places.

     %

2. Calculate the standard deviation of expected returns, σ_A, for Stock A (σ_B = 18.66%.) Do not round intermediate calculations. Round your answer to two decimal places.

     %

   Now calculate the coefficient of variation for Stock B. Do not round intermediate calculations. Round your answer to two decimal places.

   ________

   Is it possible that most investors might regard Stock B as being less risky than Stock A?

   1. If Stock B is more highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.
   2. If Stock B is more highly correlated with the market than A, then it might have the same beta as Stock A, and hence be just as risky in a portfolio sense.
   3. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.
   4. If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense.
   5. If Stock B is more highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be less risky in a portfolio sense.

   -Select-IIIIIIIVVItem 4

3. Assume the risk-free rate is 4.5%. What are the Sharpe ratios for Stocks A and B? Do not round intermediate calculations. Round your answers to four decimal places.

   Stock A:

   Stock B:

   Are these calculations consistent with the information obtained from the coefficient of variation calculations in Part b?

   1. In a stand-alone risk sense A is less risky than B. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.
   2. In a stand-alone risk sense A is less risky than B. If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense.
   3. In a stand-alone risk sense A is more risky than B. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.
   4. In a stand-alone risk sense A is more risky than B. If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense.
   5. In a stand-alone risk sense A is less risky than B. If Stock B is more highly correlated with the market than A, then it might have the same beta as Stock A, and hence be just as risky in a portfolio sense.

   -Select-IIIIIIIVV

Stock X has a 9.0% expected return, a beta coefficient of 0.7, and a 40% standard deviation of expected returns. Stock Y has a 13.0% expected return, a beta coefficient of 1.3, and a 20% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%.

1. Calculate each stock's coefficient of variation. Do not round intermediate calculations. Round your answers to two decimal places.

   CV_x =

   CV_y =

2. Which stock is riskier for a diversified investor?
   1. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the lower beta is riskier. Stock X has the lower beta so it is riskier than Stock Y.
   2. For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the lower standard deviation of expected returns is riskier. Stock Y has the lower standard deviation so it is riskier than Stock X.
   3. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is less risky. Stock Y has the higher beta so it is less risky than Stock X.
   4. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is riskier. Stock Y has the higher beta so it is riskier than Stock X.
   5. For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the higher standard deviation of expected returns is riskier. Stock X has the higher standard deviation so it is riskier than Stock Y.

   Calculate each stock's required rate of return. Round your answers to one decimal place.

3. r_x =   %

   r_y =   %

4. On the basis of the two stocks' expected and required returns, which stock would be more attractive to a diversified investor?

   Stock X or Stock Y?

5. Calculate the required return of a portfolio that has $7,500 invested in Stock X and $2,500 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places.

   r_p =   %

6. If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?

   Stock X or Stock Y?