# Finan midterm

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**Opportunity Cost of Capital**: Expected rate of return given up by investing in a project.

**NPV**: Present value of cash flows minus investments

**Payback period**: Time until cash flows recover the initial investment in the project.

**IRR:**Discount rate at which project NPV = 0

**Profitability Index**: Ratio of net present value to initial investment

**Opportunity Cost**: Benefit or cash flow as a result of an action

**Net Working Capital**: Current assets minus liabilities

**Depreciation Tax Shield**: Reduction in taxes attributable to depreciation

**Operating Leverage**: Degree to which costs are fixed

**Market Index:**Measure of the investment performance of the overall market

**Maturity Premium**: Extra avg. return from investing long vs. short- term treasury securities

**Risk Premium**: Expected return in excess of risk-free return as compensation for risk

**Variance**: Avg. value of sq. deviations from mean. A measure of volatility

**Unique Risk**: risk factors affecting only that firm. Also called diversifiable risk

**Market Risk:**Economy wide(marco0 sources of risk that affect the overall stock market. Also called systematic risk.

**Market Portfolio**: Assets in the economy. A broad stock market index used to represent the market.

**Beta**: Sensitivity of a stock’s return to the return on the market portfolio.

**Market Risk Premium**: Difference between market return and return on risk-free treasury bills

**CAPM**: Relationship between risk and return which states that the expected risk premium on any security equals its beta X market risk premium.

**Security Market Line**: Relationships between expected return and beta

**Company Cost of Capital**: Expected rate of return demanded by investors in a company. determined by the average risk of the company securities

**Project Cost of Capital**: MIN. acceptable expected rate of return on project given its risk

PV: PV Annuity: FV Annuity:

Find Real: Nominal Inflation:

WACC: CAPM: Expected Return:

Market Rate of Return Cash Flow:

If a project's expected return is 20%, which represents a 40% return in a booming economy and a10% return in a stagnant economy, what is the probability of a booming economy?

How much will a firm need in cash flow before tax and interest to satisfy debtholders and equityholders if: the tax rate is 40%, there is $15 million in common stock requiring a 20% return, and $20 million in bonds requiring a 10% return?

What is the WACC for a firm with equal amounts of debt and equity financing, a 18% before-tax company cost of capital, a 35% tax rate, and a 10% coupon rate on its debt that is selling at par value?

What should you expect to receive in coupon payments for a bond priced at $1,200 that has 3 years remaining until maturity, and an 8% coupon, with semiannual payments? Remember, at $1,200 the discount rate must be less than the coupon rate.

Calculate the NPV for a project costing $200,000 and providing $20,000 annually for 40 years. The discount rate is 9%. By how much would the NPV change if the inflows were reduced to 30 years?

What proportion of a firm is equity financed if the WACC is 14%, the before-tax cost of debt is 10.77%, the tax rate is 35%, and the required return on equity is 18%?

What is the equivalent annual cost for a project that requires a $40,000 investment at time-period zero, and a $10,000 annual expense during each of the next 4 years, if the opportunity cost of capital is 8%

Stock A has a current price of $30.00, a beta of 1.75, and a dividend yield of 6%. If the Treasury bill yield is 5% and the market portfolio is expected to return 16%, what should Stock A sell for at the end of an investor's two year investment horizon?

Your classmate, Josh S.

**offers**to buy your car with five, equal annual payments of $2,000, beginning five years from today. Assuming you think he is a good guy and the current discount rate is 10%, what is the

**present value**of Josh’s offer ?

A stock sells now for $80, pays an annual dividend of $6.00, and experienced a 20% return on investment over the past year. Its price one year ago was?

A common stock is held for three years, during which time it receives an annual dividend of $10. The stock was sold for $100 and generated an average annual return of 16%. What price was paid for the stock?

What is the standard deviation of a portfolio’s returns if the mean return is 15%, the inflation rate is 6.5%, the variance of returns is 264, with a real rate of return of 13.8%, and there are three stocks in the portfolio?

Jay's Jams Inc. was just established with an investment of $5 million into stereo equipment. Jay expects his company to generate $900,000 a year for the next 10 years, followed by $1 million a year for the following 10 years. If Jay's cost of capital is 15%, find the market value of his company.

What is the after-tax cost to a corporation in the 40% tax bracket of paying $30,000 in preferred-stock dividends?

Calculate the real return for the following corporate bond investment: Purchased for $840 one year ago, 4% coupon rate, sold for $894. The inflation rate was 5.0% during the year. Would you consider this an appropriate investment if Treasury bills had yielded 6.0% over the same period?

A firm has an opportunity to invest in a project that will generate $55,000 per year for the next 10 years and requires an initial investment of $300,000. The firm will need to raise equity to pay for the project, but the flotation costs are 10% of the funds raised. If the firms discount rate is 11%, what is the NPV and should they

invest in the project?

The salesperson offers, "Buy this new car for $25,000 cash or, with appropriate down payment, pay $500 per month for 48 months at 6% interest." Assuming that the salesperson does not offer a free lunch, calculate the "appropriate" down payment.

Your car loan requires payments of $200 per month for the first year and payments of $400 per month duringthe second year. The annual interest rate is 10% and payments begin in one month. What is the present value of this two-year loan?

What is the present value of a five period annuity of $3,000 if the interest rate is 12% and the first payment is made today?

$3,000 is deposited into an account paying 10% annually, to provide three annual withdrawals of $1,206.34 beginning in one year. How much remains in the account after the second payment has been withdrawn?

How much can be accumulated for retirement if $2,000 is deposited annually, beginning one year from today, and the account earns 8% interest compounded annually for 40 years?

If Treasury bills are yielding 10% at a time when the market risk premium is 8%, your beta is .75, then the market portfolio should yield?

The capital structure for the CR Corporation is the following: bonds $5,500, and common stock $11,000. If CR has an after-tax cost of debt of 6%, and a 16% cost of common stock, what is its WACC?

Determine the beta for Stock A based on the following set of returns. Of course, the reliability of a beta calculated with only four data points may be low. Interpret the beta that you have calculated.

If equity investors require a 25% rate of return, what is the maximum acceptable amount of equity financing for a project with $3 million annual cash flows before tax and interest, $5 million in debt with a 12% coupon, and a 40% tax rate?