Question

1.   You purchased 10 shares of Resorts, Inc. stock at a price of $40 a share exactly one year ago. You have received dividends totaling $2 a share. Today, you sold your shares at a price of $50 a share. What is your total dollar return on this investment?
       (a) $10       (b) $12       (c) $50       (d) $80 (e) $120
2.   Big Boy Equipment, Inc. is expected to pay an annual dividend in the amount of $1.5 a share next year. This dividend is expected to increase by 2 percent annually. The company’s stock is currently selling for $30 per share. What is the cost of equity?   (a) 6.50 percent   (b) 7 percent   (c) 7.5 percent   (d)8.0 percent (e)8.5 percent
3.   The Goodie Barn has a 6 percent coupon bond outstanding that matures in 2 years. The bond pays interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 4 percent?
   (a)$1000     (b)$1023.31    (c)$1038.08    (d)$1054.24 (e)$1066.51

Use the following information to answer questions 4 through 5.
You are analyzing a proposed project and have compiled the following information:
                                   Year   Cash flow
                                  0   -$1200
                                  1   $ 800
                                   2   $ 200
                                   3   $ 300
                       IRR: 5.1%
                       Required return:10%  

4.   Should the project be accepted based on the internal rate of return (IRR)? Why or why not?
   (a) yes; The project IRR is smaller than the required return.
       (b) yes; The project IRR is different from the required return.
   (c) yes; The required return is positive.
       (d) no; The project IRR is less than the required return.
   (e) no; The project IRR is greater than zero.

5.   What is the profitability index (PI)?
               (a) 0.93 (b) 0.97 (c) 0.99 (d) 1 (e)1.03

Answer 1

(1) Return on Share = Sale value + Dividend received - Purchase cost = 50*10 + 2*10 - 40*10 = 500+20-400

= 520-400 = $120 (e)

(2) Dividend expected to be paid (D1) = 1.5 ; Growth rate (g) = 2% ; Current Price (P0) = 30 ; Cost of Equity (Ke) = ?

Using Gordon Model/Dividend discount Model,

P0 = D1 / (Ke - g)

30 = 1.5 / Ke - 2%

Ke - 2% = 1.5/30

Ke = 7% (b)

(3) Coupon Rate = 6% ; n = 2 years ; Interest paid semi-annually ; Face Value = $1,000 ; YTM = 4%

Coupun Amount = 1000*6% = 60

Changes to be made in case of semiannual payment

Coupon amount/2 = 60/2 = 30

n*2 = 2*2 = 4

YTM/2 = 4/2 = 2%

Assuming it to be a Par Value Bond

Price of the Bond = interest * PVAF ( YTM,n periods) + Maturity Value * PVF (YTM,nth period)

= 30 * PVAF(2%,4) + 1000 * PVF(2%,4th period)

= 30 * 3.8077 + 1000 * 0.9238

= 1038.031 (c)

please ignore rounding off error

(4)

Year	Cash Flow	10% discount factor	Present Value
0 (Outflow)	1200	1	1200
1	800	0.909	727.2
2	200	0.826	165.2
3	300	0.751	225.3

IRR = 5.1%

Project should be accepted, if Internal Rate of return > Required Return because we get a positive NPV in this case

(d) no; The project IRR is less than the required return.

(5) Profitability Index = Present value of all Cash Inflow / Present value of cash outflow

= 727.2 + 165.2 + 225.3 / 1200 = 1117.7 / 1200 = 0.93 (a)

(if any query, please comment. I will reply in the comments)