Assignment:
1. You are considering the following two equally-risky investments. If you are indifferent between these twoinvestments, what is the NPV of Project B?
t0 t1 t2 t3 t4
Project A: -40000 26000 20000 16000 10000
Project B: -40000 14000 18000 22000 26000
2. Suppose you just finished analyzing a 5-year capital investment, but you get a call from the CFO saying the initialcost of the equipment will be $1 million more than expected. How much will NPV change? The equipment is5-year MACRS property. Assume a 35% marginal tax rate, 10% required return, and no change in salvage value.3. Stock Y has a beta of 1.40 and an expected return of 16%. Stock Z has a beta of 0.7 and an expected return of9.0%. If these two stocks are correctly priced, what is the expected return on the market index, E(Rm)?
4. A capital investment will produce cash flows of $10,000 annually, in arrears, over its 10-year life. This looks like agreat investment since the IRR of 14.97% far exceeds the 10.00% required return. To be sure, calculate the NPV.
5. Suppose you just finished a capital investment analysis on a $250 million project with the following results. What'sthe standard deviation of the project's IRR?
Scenario Probability IRR
Worst case 30% - 2%
Base case 50% 14%
Best case 20% 23%
6. You invested $100,000 of your client's money in a portfolio of stocks. At the end of the first year the portfolio wasworth $115,000. At the end of the second year the portfolio was worth $138,000. Then the market crashed, andduring the third year the portfolio lost 40% of its value. What was the annual geometric mean return over theentire three-year period?
7. One year ago you paid $1,093 for an 8% coupon bond which had a remaining maturity of 14 years. The couponsare paid semiannually. The current YTM on this bond is 6.2%. If you sold the bond today, what would be yourholding-period return (%)?
8. An asset that originally cost $175,000 is sold for $75,000 after three years of use. The asset is classified as 5-yearproperty for tax purposes. If the company has a 35% marginal tax rate, what is the after-tax salvage value?
9. Stock XYZ just paid its $5 annual dividend, which is expected to grow 20% annually for the next three years. Afterthat, the dividend is expected to grow a mere 2% forever due to emerging competition. If you require a 14%return, what is the most you'd pay for this stock today?
10. EarthCom stock has been trading for $72 per share. It just paid a $4 annual dividend, and investors require a 14%return. According to the Dividend Growth Model, what would be the stock price if EarthCom reported revenuethat disappointed the market causing growth expectations to be cut in half?