Question

PLEASE SHOW WORK FOR ALL, IF YOU'RE ONLY GOING TO DO ONE OF THESE AND NOT ALL, DONT ANSWER

1. Assume that the risk-free rate is 5 percent and that the market risk premium is 7 percent. If a stock has a required rate of return of 13.75 percent, what must its beta be?

a.	1.25
b.	1.35
c.	1.37
d.	1.60
e.	1.96

2. Your family recently obtained a 30-year $100,000 fixed-rate mortgage. Which of the following statements is most correct? (Ignore all taxes and transactions costs.)

a.	The remaining balance after three years will be $100,000 less the total amount of interest paid during the first 36 months.
b.	The proportion of the monthly payment that goes towards repayment of principal will be higher 10 years from now than it will be this year.
c.	The monthly payment on the mortgage will steadily decline over time.
d.	All of the statements above are correct.
e.	None of the statements above is correct.

3. What is the present value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15 percent interest rate?

a.	$   670.43
b.	$   842.91
c.	$1,169.56
d.	$1,348.48
e.	$1,522.64

4. You are considering buying a new car. The sticker price is $15,000 and you have $2,000 to put toward a down payment. If you can negotiate a nominal annual interest rate of 10 percent and you wish to pay for the car over a 5-year period, what are your monthly car payments?

a.	$216.67
b.	$252.34
c.	$276.21
d.	$285.78
e.	$318.71

6. You are deciding on purchasing a house for $175,000. In order to secure a 30 year mortgage at a 6% interest rate, your finance company is requiring a 15% down payment. If you accepted the terms, how much would you pay in interest over the life of the loan?

a.	$12,060.85
b.	$124,565.82
c.	$12,000.00
d.	$172,309.31
e.	$148,746.95

7. You were recently able to secure financing on the purchase of a new home. Your finance company has offered you a 30 year loan with a 5.5% interest rate. If you have saved $25,500.00 to use as a down payment and plan to keep your mortgage payments no more than $1,475.00, what is the most you can afford to spend on your new home?

a. $175,000.00

b. $249,550.25

c. $168,850.35

d. $285,279.60

e. $209,779.60

8. Johnston Corporation is growing at a constant rate of 6 percent per year. It has both common stock and non-participating preferred stock outstanding. The cost of preferred stock is 8 percent. The par value of the preferred stock is $120, and the stock has a stated dividend of 10 percent of par. What is the market value of the preferred stock?

a.	$125
b.	$120
c.	$175
d.	$150
e.	$200

          9. A project has an up-front cost of $100,000. The project's WACC is 12 percent and its net present value is $10,000. Which of the following statements is most correct?

a.	The project should be rejected since its return is less than the WACC.
b.	The project's internal rate of return is greater than 12 percent.
c.	The project's modified internal rate of return is less than 12 percent.
d.	All of the statements above are correct.
e.	None of the statements above is correct.

10. The Seattle Corporation has been presented with an investment opportunity that will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day. What is the payback period for this investment?

a.	5.23 years
b.	4.86 years
c.	4.00 years
d.	6.12 years
e.	4.35 years

11. Braun Industries is considering an investment project that has the following cash flows:

Year	Cash Flow
0	-$1,000
1	400
2	300
3	500
4	400

The company's WACC is 10 percent. What is the project's payback, internal rate of return (IRR), and net present value (NPV)?

a.	Payback = 2.4, IRR = 10.00%, NPV = $600.
b.	Payback = 2.4, IRR = 21.22%, NPV = $260.
c.	Payback = 2.6, IRR = 21.22%, NPV = $300.
d.	Payback = 2.6, IRR = 21.22%, NPV = $260.
e.	Payback = 2.6, IRR = 24.12%, NPV = $300.

Answer 1

1. Assume that the risk-free rate is 5 percent and that the market risk premium is 7 percent. If a stock has a required rate of return of 13.75 percent, what must its beta be?

a. 1.25

Work
Re= Rf + MRP*Beta
13.75= 5 + 7Beta
Beta = 8.75/7= 1.25

2. Your family recently obtained a 30-year $100,000 fixed-rate mortgage. Which of the following statements is most correct? (Ignore all taxes and transactions costs.)

c. The monthly payment on the mortgage will steadily decline over time.

Work
Since the principal payments will decrease the loan amount, the interest amount would fall leading to decline in monthly mortgage payments.

3. What is the present value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15 percent interest rate?

a. $ 670.43

Work

Present Value = Annuity amount* pvaf(r,n)
= 200* PVAF(15%,5)
= 200* 3.352155
= $ 670.43

4. You are considering buying a new car. The sticker price is $15,000 and you have $2,000 to put toward a down payment. If you can negotiate a nominal annual interest rate of 10 percent and you wish to pay for the car over a 5-year period, what are your monthly car payments?

c. $276.21

Work
Loan amount = 15000-2000= $13,000
let monthly installement be "x"

so, x*PVAF[(10/12)%, 60] = $13,000
x*47.0654= $13,000
so, x= $276.21

period = 12*5 years = 60
interest rate monthly = 10/12. i.e. 0.83333%

6. You are deciding on purchasing a house for $175,000. In order to secure a 30 year mortgage at a 6% interest rate, your finance company is requiring a 15% down payment. If you accepted the terms, how much would you pay in interest over the life of the loan?

d.$172,309.31

Work
loan amount= 175000*75%= 148750
installement amount = x (say)
x*pvaf(0.5%,360)=148750
x= 891.83
So, total amount paid=321059.31
interest = total payment- principal
=321059.31-148750
= $172,309.31

7. You were recently able to secure financing on the purchase of a new home. Your finance company has offered you a 30 year loan with a 5.5% interest rate. If you have saved $25,500.00 to use as a down payment and plan to keep your mortgage payments no more than $1,475.00, what is the most you can afford to spend on your new home?

d. $285,279.60

Work
Maximum amount=
1475*PVAF[(5.5/12)%,360] + 25,500
= 1475*176.1217 + 25,500
= $285,279.60

8. Johnston Corporation is growing at a constant rate of 6 percent per year. It has both common stock and non-participating preferred stock outstanding. The cost of preferred stock is 8 percent. The par value of the preferred stock is $120, and the stock has a stated dividend of 10 percent of par. What is the market value of the preferred stock?

d. $150

Work
Market value= par value* dividend rate/ cost
120*10/8= 150

9. A project has an up-front cost of $100,000. The project's WACC is 12 percent and its net present value is $10,000. Which of the following statements is most correct?

b. The project's internal rate of return is greater than 12 percent.

Work
NPV can be positive(as given here) if and only if the internal rate of return of a project is higher than the cost of capital which is 12% in this case.

10. The Seattle Corporation has been presented with an investment opportunity that will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day. What is the payback period for this investment?

b. 4.86 years

Work
Cashflow till 4th year = 30,000*4= 120,000
Cashflow in 5th year = 35,000
since occuring evenly all year
Payback period = 4 + (30000/35000) years
= 4.86 years

30000 figure used above as total investment was 150,000 and 120,000 was recovered till 4th year.So, remaining was 30,000

11. Braun Industries is considering an investment project that has the following cash flows:

Year

Cash Flow

0 -$1,000   

1 400

2 300

3 500

4 400

The company's WACC is 10 percent. What is the project's payback, internal rate of return (IRR), and net present value (NPV)?

d.Payback = 2.6, IRR = 21.22%, NPV = $260.

Work
Amount recovered till 2nd year = 400+300=700
amount unrecovered after 2 years= 1000-700=300
Cashflow in 3rd year =500 assumed evenly
so payback period = 2 + (300/500)
= 2.6 years

years. cashflow present value
1. 400 363.36
2. 300 247.93
3. 500 375.66
4. 400 273.21
TOTAL. 1,260.16
INITIAL OUTFLOW= 1,000.00

So, NPV = 260 (approximately)