FINA 307 Survey of Finance
Summer 2017 Assignment 3 and 4 (due at the beginning of class on Thursday, June 29th ): Remember: you are expected to show all work including timelines, formulas, inputs, and outputs.
1. Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback for the project is 2.5 years.
a. Use the IRR to evaluate this project; should it be accepted or rejected? b. Use the NPV decision rule to evaluate this project; should it be accepted or rejected? c. Use the PB to evaluate this project; should it be accepted or rejected?
2. At the beginning of the year you owned $3,000 of Dollenz stock, $11,000 of Torkelson
stock, and $6,000 of Nesmith stock. During the year the three company’s returns were – 7.6 percent, 21.4 percent, and 14.8 percent respectively. What is your portfolio return?
3. Using the following returns, calculate the average return, the variance, the standard deviation, and the coefficient of variation for Jones stock.
Year Jones 1 7% 2 14% 3 -3%
4. You own $2,500 of Diner’s Corp stock that has a beta of 2.6. You also own $2,500 of Comm Corp (beta = 1.1) and $5,000 of Airlines Corp (beta = 0.3). Assume that the market return will be 10 percent and the risk-free rate is 4 percent. What is the risk premium of the portfolio?
5. A manager believes his firm will earn a 16 percent return next year. His firm has a beta of 1.5, the expected return on the market is 14 percent, and the risk-free rate is 4 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued.
6. The balance sheet for Stratton Co. shows $400,000 in common equity, $100,000 in preferred stock, and $500,000 in long-term debt. The company has 20,000 common shares outstanding at a market price of $65 per share. The firm’s 4,000 shares of preferred stock are currently priced at $50 per share. The firm has 500 bonds outstanding selling at par value ($1,000). The company’s before-tax cost of debt is 6%. The cost of common stock and preferred stock are estimated to be 10% and 7% respectively. If the firm’s marginal tax rate is 40%, what is the firm’s weighted average cost of capital (WACC)?
