Advanced Finance exam

1. You are considering the following two mutually exclusive projects. The crossover point is _____ and project _____ should be accepted at a 17 percent discount rate.

A. 12.98 percent; B
B. 15.47 percent; A
C. 15.47 percent; B
D. 16.67 percent; A
E. 16.67 percent; B

2. Lakeside Grapes is considering expanding its wine-making operations. They would need new equipment that costs $390,000 that would be depreciated on a straight-line basis to a zero balance over the 5-year life of the project. The estimated salvage value is $62,000. The project requires $35,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $187,500 a year. What is the internal rate of return on this project if the relevant tax rate is 39 percent?
A. 16.42 percent
B. 16.67 percent
C. 18.90 percent
D. 35.94 percent
E. 41.50 percent
3. A project has an initial requirement of $230,000 for fixed assets and $80,000 for net working capital. The fixed assets will be depreciated to a zero book value over the 5-year life of the project and have an estimated salvage value of $200,000. All of the net working capital will be recouped at the end of the 5 years. The annual operating cash flow is $290,000 and the discount rate is 16 percent. What is the project’s net present value if the tax rate is 35 percent?
A. $739,529.00
B. $818,260.34
C. $820,001.68
D. $821,386.23
E. $825,002.67.

4. Operating cash flow is equal to:
A. net income plus depreciation minus taxes.
B. net income minus depreciation minus interest expense.
C. EBIT minus taxes.
D. EBIT minus taxes minus depreciation.
E. EBIT minus taxes plus depreciation
5. Russell’s of Townville has a proposed project which will generate sales of 4,500 units at a selling price of $18 each. The fixed costs are $12,000 and the variable costs per unit are $11. The project requires $48,000 of capital expenditures which will be depreciated on a straight-line basis to a zero book value over the 5-year life of the project. The salvage value of the capital is $6,000 and the tax rate is 35 percent. What is the operating cash flow for year 5?
A. $16,035
B. $16,575
C. $19,935
D. $22,035
E. $22,815

6. Over the past six years, a stock produced returns of 12 percent, 16 percent, -3 percent, 7 percent, -5 percent, and 9 percent. Based on these six years, what range of returns would you expect to see 95 percent of the time?
A. -23.18 percent to 31.48 percent
B. -18.58 percent to 26.58 percent
C. -14.28 percent to 25.28 percent
D. -10.69 percent to 22.69 percent
E. -2.34 percent to 14.34 percent

7. Risk premium is defined as the:
A. rate of return on a U.S. Treasury bill.
B. required return on a security less the inflation rate.
C. excess return required on a risky investment over that of a risk-free investment.
D. average actual return on a security minus the inflation rate.
E. the nominal rate of return less the real rate of return.

8. Last year, Kurt invested $1,000 in ABC stock, $1,000 in long-term government bonds, and $1,000 in U.S. Treasury bills. Over the course of the year, he earned returns of 10.3 percent, 8.8 percent, and 4.3 percent, respectively. What is the risk premium that Kurt received on his ABC stock investment?
A. 1.50 percent
B. 3.00 percent
C. 4.50 percent
D. 6.00 percent
E. 10.5 percent

9. Felix purchased a stock four year ago and has earned returns of 2 percent, 12 percent, 21 percent and -7 percent for each of these four years. What is the standard deviation of these returns?
A. 10.52 percent
B. 10.87 percent
C. 11.02 percent
D. 11.44 percent
E. 12.14 percent

11. The beta of a risk-free security is _____ and the beta of the overall market is:
A. 0; 0.
B. 0; 1.
C. 1; 0.
D. 1; 1.
E. infinite; 1.

12. The stock of Delta Electrical, Inc., has a beta of .98. The market risk premium is 9 percent and the risk-free rate is 4.4 percent. What is the expected return on this stock?
A. 8.91 percent
B. 9.43 percent
C. 10.67 percent
D. 11.25 percent
E. 13.22 percent

13. You own a stock that has an expected return of 13.6 percent and a beta of 1.3. The U.S. Treasury bill is yielding 4.2 percent and the inflation rate is 3.8 percent. What is the expected rate of return on the market?
A. 9.74 percent
B. 9.80 percent
C. 10.67 percent
D. 10.87 percent
E. 11.43 percent

14. Given the following information, what is the standard deviation of a portfolio which is invested 30 percent in stock A, 20 percent in stock B, and 50 percent in stock C?

A. 2.55 percent
B. 6.67 percent
C. 7.69 percent
D. 8.99 percent
E. 10.37 percent

15. GE has a beta of 1.1 and the average stock market expected return is 12%. The 30-day T-Bill currently earns 4%:
• What is GE’s expected rate of return?
If you purchased GE at $35, given that GE pays $0.25 dividend quarterly:
• What do you expect GE’s price will be a year from now?

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