2020 First Fall BADM 7090

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Question 1

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My broker just called and offered to sell me a stock with an expected return of 30% annually. If the risk-free rate is 2% and the expected return on the market is 16%, then how much riskier is this stock than the average stock in the market?

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Question 2

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If the appropriate discount rate is equal to the project’s IRR, then the NPV of the project is zero.

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Started on Saturday, October 10, 2020, 6:40 AM
State Finished
Completed on Saturday, October 10, 2020, 8:28 AM
Time taken 1 hour 48 mins
Grade 24.00 out of 60.00 (40%)

Question 1

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My broker just called and offered to sell me a stock with an expected return of 30% annually. If the risk-free rate is 2% and the expected return on the market is 16%, then how much riskier is this stock than the average stock in the market?

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Question 2

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If the appropriate discount rate is equal to the project’s IRR, then the NPV of the project is zero.

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Question 3

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Farah’s Factory Furniture (FFF) maintains a constant debt-to-equity ratio of 0.80. FFF has debt outstanding with a YTM of 6.1% and stock with a required rate of return 11.2%. If the tax rate is 25%, then what is FFF’s WACC?

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Question 4

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Cliff Corp. stock currently sells for $50 per share and just paid a dividend of $2.00. If dividends are expected to grow at a constant rate of 4% annually, Treasury Bills have a return of 3% and the return on the S&P 500 (market return) is expected to be 15%, then what is the beta of Cliff Corp. stock?

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Question 5

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The long-term debt of your firm is currently selling for 94% of its face value. The issue matures in 10 years and pays an annual coupon of 6.0%. If the tax rate is 30%, then what is the after-tax cost of debt?

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Question 6

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Cliff Corp is considering a $120,000 machine that will reduce pretax operating costs by $50,000 per year over a 3-year period. Assume no changes in net working capital and a salvage value of zero. Further assume straight-line depreciation to zero, a marginal tax rate of 40%, and a required return of 12%. The project NPV is (round to nearest dollar):

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Question 7

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Cliff’s Cancer Sticks, Inc (CCSI) makes cigarettes with unusually high nicotine content.  Due to the short life expectancy of its customers, CCSI only expects to be in business for 5 more years.  CCSI sock currently sells for $40 per share and CCSI expects to pay a $15 annual dividend for each of the next five years.  What is CCSI’s cost of equity?

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Question 8

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Long-term government bonds generally offer a lower expected return than long-term corporate bonds because they are considered to be more risky.

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Question 9

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The long-term debt of your firm is currently selling for 109% of its face value. The issue matures in 12 years and pays an annual coupon of 7.5%. What is the cost of debt?

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Question 10

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Daisy Corp. stock has a beta (β) of 1.2.  The expected rate of return on the S&P 500 is 14% and the return on Treasury bills is 2.5%. What is the expected return of Daisy Corp. stock?

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Question 11

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Small firm stocks generally have a higher expected return than large firm stocks because they are considered less risky.

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Question 12

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I am considering investing in a stock with a beta of 1.6. The stock just paid a $3.00 per share dividend and dividends are expected to grow at 5% annually. I estimate the risk-free rate to be 2% and the expected return on the market be 11%.  What is the stock’s dividend yield?

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Question 13

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Charlie’s Computer Correction Connection (C4) runs a chain of computer repair franchises. C4’s stock sells for $50 per share and has 1,000,000 shares outstanding. C4 just paid annual dividend of $2 per share and expects the growth rate to be 3% annually. C4 also has 10,000 bonds outstanding, maturing in 8 years with a face value of $1,000 each.  The bonds have a 7% coupon rate (make semi-annual coupon payments) and currently sell for $1,000.  The tax rate is 30%.  What is C4’s weighted-average cost of capital (WACC)?

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Question 14

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Stephens Inc. is consider a project with the following information and assuming straight-line depreciation to zero, what is the IRR of this project? Initial investment = $6,000; life = 4 years; cost savings = $2,500 per year; salvage value = $2,000 in year 5; tax rate = 35%; discount rate = 10%.  What is the IRR of the project?

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Question 15

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Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.7 million. 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 $2,080,000 in annual sales, with costs of $775,000. The tax rate is 35 percent and the required return on the project is 12 percent. What is the project’s NPV? (Round your answer to the nearest $10).

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Question 16

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Your firm is contemplating the purchase of a new $580,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $60,000 at the end of that time. You will save $210,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $75,000 (this is a one-time reduction). If the tax rate is 35 percent, what is the IRR for this project? (Round your answer to 2 decimal places. )

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Question 17

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I am considering two mutually exclusive projects, each with a cost of $600 and a 3-year life (straight-line depreciation).  Project A provides cash flows of $300 per year for 3 years, while project B provides cash flows of $150, $300 and $600 in years 1, 2 and 3, respectively.  Assume the discount rate is 10% and my tax rate is 20%.  At discount rate would I be indifferent between the two projects?

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Question 18

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A college friend of mine just filed for a patent for a new product – the “bowling buddy” bowlers’ training aid.  The bowling buddy sells for $55 and the variable cost per unit is $26.  They rent production space for $25,000 annually.  The initial investment is $250,000 and the project life is 5 years.  Assume appropriate discount rate is 10% and ignore taxes.  Assuming my friend can sell 3,000 bowling buddies per year, what is the NPV of the project?

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Question 19

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A college friend of mine just filed for a patent for a new product – the “bowling buddy” bowlers’ training aid.  The bowling buddy sells for $55 and the variable cost per unit is $26.  They rent production space for $25,000 annually.  The initial investment is $250,000 and the project life is 5 years.  Assume appropriate discount rate is 10% and ignore taxes.  Assuming my friend can sell 4,000 bowling buddies per year, what is the IRR of the project?

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Question 20

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A college friend of mine just filed for a patent for a new product – the “bowling buddy” bowlers’ training aid (Google it after the exam).  The bowling buddy sells for $55 and the variable cost per unit is $26.  They rent production space for $25,000 annually.  The initial investment is $250,000 and the project life is 5 years.  Assume appropriate discount rate is 10% and ignore taxes.  Assuming my friend can sell 3,000 bowling buddies per year, what is the discounted payback period of the project?

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