Ask Question, Ask an Expert


Ask Basic Finance Expert

When we consider "risk" in a financial sense (i.e. investments), the meaning differs from the conventional definition. describe what is meant by "risk" in the financial/investment realm. Why should an investor expect to be rewarded for assuming "risk?"

True or False (2pts. Each)
2. Market risk refers to the tendency of a stock to move with the general market. A stock with above-average market risk will have a beta which is less than 1.0___________.
3. The expected rate of return of an asset will always equal one of the possible rates of return for the asset__________.
4. To attempt to eliminate diversifiable risk in a portfolio, I would consider investing in an unlimited number of stocks and would prefer them to have similar correlation coefficients__________.
5. The internal rate of return is that discount rate which equates the pv of the cash outflows (or costs) with the PV of the cash inflows__________.
6. Other things held constant, an increase in the required rate of return will result in a decrease of a project's IRR__________.
7. Conflicts between two mutually exclusive projects should generally be resolved in favor of the one with the higher NPV__________.
8. A capital budgeting project is acceptable if the rate of return required for such an endeavor is greater than the project's internal rate of return_________.
9. Capital budgeting decisions must be based on the accounting income the project generates since stockholders are concerned with the reported net income the firm generates________.
10. Sensitivity analysis is a risk analysis technique in which key variables are changed and the resulting changes in the NPV and IRR are observed__________.
11. Risk in a revenue-producing project can best be adjusted by adjusting the discount rate downward for increasing risk_________.

Problem Solving (5pts. except as noted-please show work for partial credit)
12. Steve currently has an investment portfolio that contains 4 stocks totaling $80,000, with a portfolio beta = 1.4. He is thinking of investing an additional $20,000 in a stock with a beta = 2.4. What will the portfolio beta be after he adds the stock?
13. Suppose the risk-free rate = 5%, and the expected return in the market = 15%. What would be the appropriate required rate of return for a stock with a beta coefficient = 1.5?
What would the appropriate required rate of return be for a stock with Beta = .5?
14. If the following two projects are mutually exclusive, and the rate of return is 10%, which project should be purchased?
Yr Project Q Project R
0 $(4,000) $(4,000)
1 $0 $3,500
2 $5,000 $1,100
15. Sparrow Corporation is evaluating a project which costs $200,000, is expected to last for 10 years and produce after-tax cash flows of $44,503 per year. If the firm's required rate of return is 14%,
a. What is the project's IRR? (5 pts.)
b. What is the project's MIRR? (5 pts.)
16. Seattle Corp. is looking at an investment which will result in cashflows of $30,000 per year in Years 1 thru 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. The project will cost $150,000 today, and the firm's required rate of return is 10%. What is the NPV for this investment?
17. Mars, Inc. is considering the purchase of a new machine which will reduce manufacturing costs by $5,000 annually. The company will depreciate the cost of the new machine using the straight line method over the project life and it expects to sell the machine at the end of its 5-year life for $10,000. The firm expects to be able to REDUCE net working capital by $15,000 when the machine is installed, but required working capital will return to the original level when the machine is sold after 5 years. Mars' marginal tax rate is 40%, and it uses a 12% required rate of return to evaluate projects of this nature. If the machine costs $60,000, what are the NPV and IRR of the project?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M925153

Have any Question? 

Related Questions in Basic Finance

Explain how the afn equation can be used to forecast the

Explain how the AFN equation can be used to forecast the amount of funds that will be needed over a several year period.

I need your help with the below three assignment no need

I need your help with the below three assignment. No need for "Executive Summary" just start with introduction, please. Assignment 1: Module 01 - Introduction and Framework for Sustainability Which of the nine principles ...

Small business dilemmacase scenarioensuring payment for

Small Business Dilemma CASE SCENARIO Ensuring Payment for Products Exported by the Sports Exports Company The Sports Exports Company produces footballs and exports them to a distributor in the United Kingdom. It typicall ...

Suppose a firm has several divisions each with a unique

Suppose a firm has several divisions, each with a unique area of business. What role does the firm-wide weighted average cost of capital play when determining a project's cost of capital in a given division?

Mike is taking 2 classes this summer he is taking stat and

Mike is taking 2 classes this summer. He is taking Stat and History. He knows that he will earn either pass or fail each class. The results in each class are independent of one another. He also knows that he has a 10% ch ...

David axehead sells new cars for axehead ford david usually

David Axehead sells new cars for Axehead Ford. David usually sells the largest number of cars on Saturday. He has developed the following probability distribution for the number of cars he expects to sell on a particular ...

For this assignment you will analyze a home mortgage loan1

For this assignment, you will analyze a home mortgage loan. 1. Find a description, asking price, and real estate taxes of a house for sale, and decide on a purchase price you would be willing to pay (assuming you have th ...

Develop a computer program that can be used to maintain the

Develop a computer program that can be used to maintain the current status of all active contracts of a construction rum. Input should include contract number and description, contract amount, date of contract award, dat ...

How would you use preferred and convertible instruments as

How would you use preferred and convertible instruments as investments to strengthen your portfolio?

Following table shows the price information for three

Following table shows the price information for three stocks:  Stock Price 0 Quantity 0 P 1 Q 1 A $70 50 $85 50 B 10 150 12 150 C 100 30 50 60 1. What happened for stock C during this period? 2. Calculate the price-weigh ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

A cola-dispensing machine is set to dispense 9 ounces of

A cola-dispensing machine is set to dispense 9 ounces of cola per cup, with a standard deviation of 1.0 ounce. The manuf

What is marketingbullwhat is marketing think back to your

What is Marketing? • "What is marketing"? Think back to your impressions before you started this class versus how you

Question -your client david smith runs a small it

QUESTION - Your client, David Smith runs a small IT consulting business specialising in computer software and techno

Inspection of a random sample of 22 aircraft showed that 15

Inspection of a random sample of 22 aircraft showed that 15 needed repairs to fix a wiring problem that might compromise

Effective hrmquestionhow can an effective hrm system help

Effective HRM Question How can an effective HRM system help facilitate the achievement of an organization's strate