Midterm Part 2

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University of Maryland, College Park *

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640

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Finance

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Apr 3, 2024

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pdf

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10

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Midterm Exam Part 2 - Results Attempt 1 of 1 Written Nov 1, 2023 9:29 PM - Nov 1, 2023 11:53 PM Released Mar 5, 2018 12:01 AM Attempt Score 18 / 20 - 90 % Overall Grade (Highest Attempt) 18 / 20 - 90 % Question 1 0 / 1 point Answer: 1,167.50 (1,395.88) Hide ques±on 1 feedback Feedback after End of Due Date What is the future value of $1,100, placed in a saving account for four years if the account pays 6.00%, compounded quarterly? (Your answer should be correct to two decimal places.) SOLUTION: FV n = PV[FVF i,16 ]
Question 2 1 / 1 point Answer: 4,807.09 Hide ques±on 2 feedback Question 3 0 / 1 point Answer: 201.21 (216.15) Hide ques±on 3 feedback Question 4 1 / 1 point A dollar to be received in the future is worth more than a dollar in hand today. Your brother, who is 6 years old, just received a trust fund that will be worth $23,000 when he is 21 years old. If the fund earns 0.11 interest compounded annually, what is the value of the fund today? Round to two decimal places. SOLUTION: PV = FV / (1+i)^15 If you were to borrow $9,500 over five years at 0.13 compounded monthly, what would be your monthly payment? Round to two decimal places. SOLUTION: First, calculate Present value factor = 1/(1+i) n Next, calculate the PV annuity factor = 1 - Present Value Factor/ i Lastly, solve by dividing CF by the PV annuity factor.
Question 5 1 / 1 point Why might a person be interested in calculating the covariance for two stocks? Question 6 1 / 1 point Answer: 0.09 Hide ques±on 6 feedback True False The result indicates how far each stock is in distance from the mean. The result indicates the systematic risk found in each stock. The result indicates how the two stocks move together in the market. Use the following information to calculate your company’s expected return. State Probability Return Boom 20% 0.28 Normal 60% 0.13 Recession 20% -0.20 Round to two decimal places. Expected Return = (.20)(BOOM return) + (.60)(NORMAL return) + (.20) (RECESSION return)
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Question 7 1 / 1 point Calculating Expected Return for a portfolio is valuable, because it can be used to forecast the future value of the portfolio and it provides a benchmark for comparison to actual returns. Question 8 1 / 1 point Frazier Manufacturing paid a dividend last year of $2, which is expected to grow at a constant rate of 5%. Frazier has a beta of 1.3. If the market is returning 11% and the risk-free rate is 4%, calculate the value of Frazier’s stock. Hide ques±on 8 feedback Question 9 1 / 1 point True False $25.93 $31.33 $38.53 $41.63 SOLUTION: k = 4% + (11% – 4%)1.3 = 13.1% Po = [2(1.05)]/(.131 – .05) = $25.93 You have invested 30 percent of your portfolio in Jacob, Inc., 40 percent in Bella Co., and 30 percent in Edward Resources. What is the expected return
Answer: 0.09 Hide ques±on 9 feedback Question 10 1 / 1 point Which of the following statements are true in regard to the concept of correlation? Question 11 1 / 1 point of your portfolio if Jacob, Bella, and Edward have expected returns of 0.04, 0.14, and 0.08, respectfully? Round to two decimal places. SOLUTION: E(R portfolio ) = [x 1 * E(R 1 )] + [x 2 * E(R 2 )] + .... Where X is the percentage invested and E(R) is the expected return. The value will always fall between -1 and 1. A correlation of 0.1 indicates that there is a very small correlation between the two stocks. A positive value indicates that when the return on one asset is positive, the return on the other asset will be positive. All of the above A project has the following cash flows: 0 1 2 3
Answer: 70 Hide ques±on 11 feedback Question 12 1 / 1 point Medela's Entertainment Systems is setting up to manufacture a new line of video game consoles. The cost of the manufacturing equipment is $1,750,000. Expected cash flows over the next four years are $725,000, $850,000, $1,200,000, and $1,500,000. Given the company's required rate of return of 15 percent, what is the NPV of this project? Question 13 1 / 1 point A project requires an initial outlay of $100,000, and is expected to generate annual net cash inflows of $28,000 for the next 5 years. Determine the payback period for the project. ($500)$140.00$200$310.00 What is the project’s NPV if the interest rate is 6%? Round to two decimal places. (-Cash Flow Year 0)+(CF Year 1/(1+rate))+(CF Year 2/(1+rate)^2)+(CF Year 3/(1+rate)^3) $1,169,806 $2,919,806 $4,669,806 $3,122, 607
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Hide ques±on 13 feedback Question 14 1 / 1 point An investment project requires an initial outlay of $100,000, and is expected to generate annual cash inflows of $28,000 for the next 5 years. (round to the nearest tenth of the percentage) Determine the (Internal Rate of Return) IRR for the project using a financial calculator Hide ques±on 14 feedback Question 15 1 / 1 point .28 years 1.4 years 3.57 years 17.86 years PB = $100,000 / $28,000 = 3.57 years 12.0% 3.6% 12.6% 12.4% $100,000/$28,000 = 3.571 From Annuity table, PVFA k,5 = 3.571, which falls between 3.605 (12%) and 3.517 (13%). k = 12.38% (calculator) or 12.4% (rounded)
Capital budgeting analysis of mutually exclusive projects A and B yields the following: Project A Project B IRR 18% 22% NPV $270,000$255,000 Payback Period 2.5 yrs 2.0 yrs Management should choose: Question 16 1 / 1 point Answer: 4.22 Hide ques±on 16 feedback Project B because most executives prefer the IRR method Project B because two out of three methods choose it Project A because NPV is the best method either project because the results aren’t consistent Christopher Electronics bought new machinery for $5,150,000 million. This is expected to result in additional cash flows of $1,220,000 million over the next 7 years. What is the payback period for this project? Their acceptance period is five years. Round to two decimal places.
Question 17 1 / 1 point Which of the following represents a potential drawback of using the payback period calculation for capital budgeting decisions? Question 18 1 / 1 point 18) A common-size financial statement is one in which each number is expressed Question 19 1 / 1 point Return on Equity (ROE) is defined as: Payback Period = Years before cost recover + (Remaining cost to recover/Cash flow during the year) A project is accepted if its payback period is below some pre-specified threshold. The rule does not consider cash flows after the payback period. The technique can serve as a risk indicator. All of the Above as a percentage of some base number for the firm (such as total assets or revenues) as a percentage of an industry average (such as rate of return) as a percentage of a stock market average (such as market capitalization) as a percentage of a national average (such as per capita GDP) Gross Income / Total Assets Revenues / Total Debt Net Income / Stockholder’s Equity
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Question 20 1 / 1 point Which of the following ratios is incorrect? Done (Revenues – COGS) / Total Liabilities Current ratio = Current assets / Current liabilities Quick ratio = (Current assets – Inventory) / Current liabilities Inventory turnover = (Cost of goods sold) / Inventory Days Sales Outstanding = 365 / Accounts payable turnover