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Econ 104 homework 1 answer (penn state university)

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ECON 104 Homework 1 Answer (Penn State University) in 2 examples (2019 and 2018) SEE BELOW:

EXAMPLE 1:

Part 1: 20 questions worth 3 points each for a total of 60 points.   FOR FILL-IN-THE-BLANK questions: If your answer is in decimal form, round to 2 decimal places. For example, if your answer is .412, enter it into the fill-in-the-blank as .41, or if your answer is 1.415, enter it into the fill-in-the-blank as 1.42. If there are no decimals in your answer, you will simply enter the number; so if your answer is 2, enter 2 with no decimals. Do not enter any extra spaces, do not enter commas or $ or % symbols.   

 Question 1. Suppose the consumption function is: C = a1 Yd + a2 WRE/S + a3CC Where all the a’s (the sensitivity parameters) are greater than zero. Initial conditions: Let a1 = 0.65, a2 = 0.04, a3 = 0.5, WRE/S = 18,000: CC = 70

Solve for C in terms of Yd. Select the correct equation.  

C = 765 + .60 Yd 

C = 70 + .65 Yd 

C = 685 + .64 Yd 

None of these are correct 

C = 755 + .65 Yd  

 Question 2  Use the equation you found in #1 and let Yd = 2000. C is equal to:   

Question 3  Suppose that the stock market rallies so that WRE/S increases to 22,000. Additionally, consumer confidence (CC) rises to 120. Re-solve for C in terms of Yd. 

Select the correct equation.  

C = 930 + .60 Yd 

C = 830 + .65 Yd

None of these are correct 

C = 980 + .64 Yd 

C = 940 + .65 Yd 

Question 4 3 pts Now suppose disposable income (Yd) falls due to a tax increase (Uncle Sam is trying to balance the budget) to 1800. Solve for the level of consumption using the equation you found in question #3. Consumption (C) is equal to:   

Question 5 3 pts Now we will calculate the level of consumption that would have occurred if Uncle Sam did not raise taxes. In other words, use the equation you found in question 3, but keep Yd at its original value of 2000. Consumption (C) is equal to:      

Question 6 3 pts Look at the consumption values you calculated in #2 and #4. The percent change in consumption between those values is: _________%   

 NOTE: There is no graphing component to be collected for this homework. However, you should be comfortable graphing the equations you found in #1 and #3. You should also be able to plot the points you found in #2, #4 and #5.    Flag this Question 

Question 7 3 pts Use the table below for questions 7 & 8. Let’s consider some data on consumption and disposable income from the Federal Reserve Database (measured in billions of dollars)  Real Personal Consumption Expenditures Real Disposable Personal Income January 1, 1995 6442.9 7190.9 January 1, 2018 12061.0 12940.5   The percent change in consumption between 1/1/95 and 1/1/18 is: _______%.    Flag this Question 

Question 8 3 pts The percent change in real disposable between 1/1/95 and 1/1/18 is: _______%.    Flag this Question 

Question 9 3 pts Given equation Y=520+.6Y, what does Y equal? None of these are correct 325 208 1650 1300  Flag this Question 

Question 10 3 pts Use the following information to answer questions 10 – 14. Suppose South Korea can produce 100 computer chips with 12 hours of labor input and 50 bed linens with 6 hours of labor input. The US can produce 100 computer chips with 10 hours of labor input and 50 bed linens with 4 hours of labor input.    The opportunity cost of producing 100 computer chips for South Korea is:  40 Computer Chips None of these are correct 100 Bed Linens 125 Bed Linens 50 computer Chips  Flag this Question 

Question 11 3 pts The opportunity cost of producing 50 bed linens for South Korea is:  40 Computer Chips 125 Bed Linens None of these are correct 50 computer Chips 100 Bed Linens  Flag this Question 

Question 12 3 pts The opportunity cost of producing 100 computer chips for the US is:  125 Bed Linens None of these are correct 40 Computer Chips 50 computer Chips 100 Bed Linens  Flag this Question 

Question 13 3 pts The opportunity cost of producing 50 bed linens for the US is:  125 Bed Linens None of these are correct 40 Computer Chips 100 Bed Linens 50 computer Chips  Flag this Question 

Question 14 3 pts Using comparative advantage, which country should export bed linens?  South Korea United States Neither country should export bed linens Both countries have a comparative advantage in computer chips, so both should export bed linens Both countries have a comparative advantage in bed linens, so both should export bed linens  Flag this Question 

Question 15 3 pts Economics promote which of the following as the way to make the best decision? Continue an enjoyable activity until you cannot afford to pursue it Continue an enjoyable activity as long as you do not have to pay for it Continue an enjoyable activity until it is no longer enjoyable Continue an enjoyable activity up to the point where its marginal benefit equals its marginal cost  Flag this Question 

Question 16 3 pts By definition, economics is the study of supply and demand the choices people make to attain their goals, given their scarce resources how to make money in a market economy how to make money in the stock market  Flag this 

Question Question 17 3 pts Which of the following best describes an assumption economists make about human behavior? They assume that individuals act rationally all the time in all circumstances They assume that individuals act randomly They assume that people take into account the question of fairness in all decisions they make They assume that rational behavior is useful in explaining choices people make even though people may not behave rationally all the time  Flag this Question 

Question 18 3 pts Which of the following is a normative economic statement? When the price of gasoline rises, transportation costs rise The price of gasoline is too high The current high price of gasoline is the result of strong worldwide demand When the price of gasoline rises, the quantity of gasoline purchased falls  Flag this Question 

Question 19 3 pts Which of the following is a positive economic statement? People should not buy SUVs The government should mandate electric automobiles Foreign workers should not be allowed to work for lower wages than the citizens of a country Scarcity necessitates that people make trade-offs  Flag this Question 

Question 20 3 pts Jen makes $12 per hour and Sammie makes $24 per hour. Both Jen and Sammie like to eat hamburgers that cost $6 each. Select the correct answer below Jen’s real wage is equal to 2 hamburgers Sammie’s real wage is equal to 100 hamburgers Jen and Sammie’s real wages are equal Sammie’s real wage is equal to 2 hamburgers Jen’s real wage is higher than Sammie’s real wage  Flag this 

Question Part 2: 20 questions worth 2 points each for a total of 40 points.  Flag this Question 

Question 21 2 pts Examining the conditions that could lead to a recession in an economy is an example of a macroeconomics topic.  True False  Flag this Question 

Question 22 2 pts Every individual, no matter how rich or poor, is faced with making trade-offs. True False  Flag this Question 

Question 23 2 pts When voluntary exchange takes place, only one party gains from the exchange. True False  Flag this Question 

Question 24 2 pts A college must decide if it wants to offer more Internet-based classes. This decision involves answering the economic question of “what to produce.” True False  Flag this Question 

Question 25 2 pts One desirable outcome of a market economy is that it leads to a more equitable distribution of income. True False  Flag this Question 

Question 26 2 pts An economic model is a simplified version of reality used to analyze real-world economic situations. True False  Flag this Question 

Question 27 2 pts The decisions Apple makes in determining production levels for its iPhone is an example of a macroeconomics topic. True False  Flag this Question 

Question 28 2 pts Economic resources are also called factors of production. True False  Flag this Question 

Question 29 2 pts A curved line has slope values that change at every point. True False  Flag this Question 

Question 30 2 pts A straight line has a slope of zero. True False  Flag this Question 

Question 31 2 pts If a country is producing efficiently and is on the production possibilities frontier, the only way to produce more of one good is to produce less of the other. True False  Flag this Question 

Question 32 2 pts If a country produces only two goods, then it is not possible to have a comparative advantage in the production of both those goods. True False  Flag this Question 

Question 33 2 pts Any output combination outside a production possibility frontier is associated with unused or underutilized resources. True False  Flag this Question 

Question 34 2 pts An increase in the labor force shifts the production possibility frontier inwards over time. True False  Flag this Question 

Question 35 2 pts If Sanjaya can shuck more oysters in one hour than Tatiana, then Sanjaya has a comparative advantage in shucking oysters. True False  Flag this Question 

Question 36 2 pts The basis for trade is comparative advantage, not absolute advantage. True False  Flag this Question 

Question 37 2 pts In a two-good, two country world, if one country has an absolute advantage in the production of both goods, it cannot benefit by trading with the other country. True False  Flag this Question 

Question 38 2 pts For a person to have a comparative advantage in producing a product, she must be able to produce that product at a lower opportunity cost than her competitors. True False  

 Question 39 2 pts It is possible to have a comparative advantage in producing a good or service without having an absolute advantage. True False  

 Question 40 2 pts An increase in the unemployment rate may be represented as a movement from a point on the production possibilities frontier to a point inside the frontier. True False

EXAMPLE 2:

1. Suppose the consumption function is: C = a1 Yd + a2 WRE/S + a3CC Where all the a’s (the sensitivity parameters) are greater than zero. Initial conditions: Let a1 = 0.60, a2 = 0.04, a3 = 0.5, WRE/S = 18,000: CC = 90 Solve for C in terms of Yd. Select the correct equation below.

2. Use the equation you found in #1 and let Yd = 2000. C is equal to

3. Suppose that the stock market rallies so that WRE/S increases to 22,000. Additionally, consumer confidence (CC) rises to 100. Re-solve for C in terms of Yd. Select the correct equation below.

4. Now suppose disposable income (Yd) falls due to a tax increase (Uncle Sam is trying to balance the budget) to 1800. Solve for the level of consumption using the equation you found in #3. Consumption (C) is equal to

5. Now we will calculate the level of consumption that would have occurred if Uncle Sam did not raise taxes. In other words, use the equation you found in question 3, but keep Yd at its original value of 2000. Consumption (C) is equal to 

6. Look at the consumption values you calculated in #2 and #4. The percent change in consumption between those values is

7. Use the table below for questions 7 & 8. Let’s consider some data on consumption and disposable income from the Federal Reserve Database (measured in billions of dollars)

8. The percent change in real disposable between 1/1/90 and 4/1/13 is

9. Given equation Y=330+.8Y, what does Y equal?

10. Use the following information to answer questions 10 – 14. Suppose South Korea can produce 100 computer chips with 10 hours of labor input and 50 bed linens with 6 hours of labor input. The US can produce 100 computer chips with 8 hours of labor input and 50 bed linens with 4 hours of labor input.

The opportunity cost of producing 100 computer chips for South Korea is:

11. The opportunity cost of producing 50 bed linens for South Korea is:

12. The opportunity cost of producing 100 computer chips for the US is:

13. The opportunity cost of producing 50 bed linens for the US is:

14. Using comparative advantage, which country should import bed linens?

15. Marginal analysis involves undertaking an activity

16. Which of the following statements is true about scarcity?

17. Economists assume that individuals

18. Which of the following is a normative economic statement?

19. Which of the following is a positive economic statement?

20. Jen makes $12 per hour and Sammie makes $20 per hour. Both Jen and Sammie like to eat hamburgers that cost $5 each. Select the correct answer below

21. Examining the conditions that could lead to a recession in an economy is an example of a macroeconomics topic

22. Every individual, no matter how rich or poor, is faced with making trade-offs

23. When voluntary exchange takes place, only one party gains from the exchange

24. A college must decide if it wants to offer more Internet-based classes. This decision involves answering the economic question of “what to produce.”

25. One desirable outcome of a market economy is that it leads to a more equitable distribution of income

26. An economic model is a simplified version of reality used to analyze real-world economic situations

27. The decisions Apple makes in determining production levels for its iPhone is an example of a macroeconomics topic

28. Economic resources are also called factors of production

29. A curved line has slope values that change at every point

30. A straight line has a slope of zero

31. If a country is producing efficiently and is on the production possibilities frontier, the only way to produce more of one good is to produce less of the other

32. If a country produces only two goods, then it is not possible to have a comparative advantage in the production of both those goods

33. Any output combination outside a production possibility frontier is associated with unused or underutilized resources

34. An increase in the labor force shifts the production possibility frontier inwards over time

35. If Sanjaya can shuck more oysters in one hour than Tatiana, then Sanjaya has a comparative advantage in shucking oysters

36. The basis for trade is comparative advantage, not absolute advantage

37. In a two-good, two country world, if one country has an absolute advantage in the production of both goods, it cannot benefit by trading with the other country

38. For a person to have a comparative advantage in producing a product, she must be able to produce that product at a lower opportunity cost than her competitors

39. It is possible to have a comparative advantage in producing a good or service without having an absolute advantage

40. An increase in the unemployment rate may be represented as a movement from a point on the production possibilities frontier to a point inside the frontier

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July 1, 2023
    

Q13) Your father is about to retire, and he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years, with the first payment coming immediately. The discount rate on such annuities is 5.15%. How much would it cost him to buy the annuity today?

 

Q14) On January 1, 2009, your brother's business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes. What will the interest tax deduction be for 2009?

Q15)The Ramirez Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 13%. What is the best estimate of the current stock price?

Q16) ABC Inc.'s bonds currently sell for $1,280 and have a par value of $1,000. They pay a $35 semi-annual coupon and have a 15-year maturity, but they can be called in 10 years at $1,100. What is their yield to call (YTC)?

Q17) ABC Corporation's bonds have a 10-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 5.75%, based on semiannual compounding. What is the bond's price?

Q18) ABC Inc.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm's expected rate of return?

Q19) ABC Corp believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock?

 


State of

Economy

Probability

Expected

return

Boom

45%

25%

Normal

50%

15%

Recession

5%

5%

 

Q20)  Consider the following information and then calculate the required rate of return for the Global Investment Fund, which holds 4 stocks. The market's required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows:

StockInvestmentBetaA$ 200,0001.50B$ 300,000-0.50C$ 500,0001.25D$1,000,0001.75

Q22) ABC Trucking's balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a market value of $50 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 million. The current stock price is $22.50 per share; stockholders' required return, rs, is 14.00%; and the firm's tax rate is 40%. The CFO thinks the WACC should be based on market value weights, but the president thinks book weights are more appropriate. What is the difference between these two WACCs?

Q23) Barry Company is considering a project that has the following cash flow and WACC data. What is the project's NPV? What is IRR? What is MIRR? Should this project be accepted? Why?

WACC:

13.00%

          

Year

0

1

2

3

4

5

Cash flows

-$1,100

$400

$390

$380

$370

$360
             

 

Q24) Marshall-Miller & Company is considering the purchase of a new machine for $50,000, installed. The machine has a tax life of 5 years, and it can be depreciated according to the following rates. The firm expects to operate the machine for 4 years and then to sell it for $12,500. If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 4?

 

Depreciation

Year

Rate

1

0.20

2

0.32

3

0.19

4

0.12

5

0.11

6

0.06

 

Q25) Thomson Media is considering some new equipment whose data are shown below. The equipment has a 3-year tax life and would be fully depreciated by the straight-line method over 3 years, but it would have a positive pre-tax salvage value at the end of Year 3, when the project would be closed down. Also, some new working capital would be required, but it would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? Should you accept this project? Explain with evidence.

 

WACC

15.0%

Net investment in fixed assets (depreciable basis)

$70,000

Required new working capital

$10,000

Straight-line deprec. rate

33.333%

Sales revenues, each year

$75,000

Operating costs (excl. deprec.), each year

$30,000

Expected pretax salvage value

$ 5,000

Tax rate

35.0%

 

Q26) Your company has an opportunity to invest in a project that is expected to result in after-tax cash flows of $18,500 the first year, $21,000 the second year, $25,000 the third year, -$10,000 the fourth year, $31,000 the fifth year, $37,000 the sixth year, $39,000 the seventh and eighth year, and -$9,000 the ninth year. The project would cost the firm $145,000. If the firm's cost of capital is 11%, find NPV, IRR and MIRR for the project. Do you accept this project? Why?

Q27) XYZ Corporation is considering an expansion project. To date they have spent $65,000 investigating the viability of the project and have decided to proceed. The CEO of XYZ spent $20,000 last year on his business trip to New York where he discussed about the proposed new project with the board members. The company spent $50,000 on a marketing study before its current analysis regarding whether to accept or reject the project. The proposed project will cost $550,000. The project will be depreciated over a 3 year MACRS class life. XYX would use the 3-year MACRS method to depreciate the machine and equipment which are 33% 45%, 15% and 7%. 
If the project is undertaken the company will need to increase its inventories by $45,000, and its accounts payable will rise by $10,000. The company will realize an additional $750,000 in sales over each of the next four years. The company’s operating costs (not including depreciation) will increase by $540,000 a year. Both sales and the operating cost are expected to grow 4.5% annually during the life of the project. The company’s tax rate is 35%. At t = 3, the project’s economic life is complete, but it will have a salvage value (before-tax) of $55,000 after three years. The project’s WACC is 10.5%. What is the project’s net present value (NPV)? What is the IRR? Should the project be accepted? Why or why not?

Q28) Using the following information, find the Expected Return, Variance, and Standard Deviation for the returns on Stock 1 and Stock 2. Also, find the Covariance and Correlation Coefficient between the returns on Stocks 1 and 2. If you invest $10,000 in stock X and $25,000 in stock Y, what would be the expected return and risk on your portfolio?

 

States

Probability

Return on
StockX

Return on
StockY

A

10%

15%

25%

B

25%

15%

20%

C

30%

17%

12%

D

35%

20%

10%

 

Q30) The required return on ABC Corporation's stock is 10.4%, beta is 1.7, and a risk-free asset is 5%. What would be the required rate of return on the stock if the stock's beta increased to 2.15 while the risk-free rate and market return remained unchanged?

default image
July 1, 2023
    

Q13) Your father is about to retire, and he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years, with the first payment coming immediately. The discount rate on such annuities is 5.15%. How much would it cost him to buy the annuity today?

 

Q14) On January 1, 2009, your brother's business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes. What will the interest tax deduction be for 2009?

Q15)The Ramirez Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 13%. What is the best estimate of the current stock price?

Q16) ABC Inc.'s bonds currently sell for $1,280 and have a par value of $1,000. They pay a $35 semi-annual coupon and have a 15-year maturity, but they can be called in 10 years at $1,100. What is their yield to call (YTC)?

Q17) ABC Corporation's bonds have a 10-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 5.75%, based on semiannual compounding. What is the bond's price?

Q18) ABC Inc.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm's expected rate of return?

Q19) ABC Corp believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock?

 


State of

Economy

Probability

Expected

return

Boom

45%

25%

Normal

50%

15%

Recession

5%

5%

 

Q20)  Consider the following information and then calculate the required rate of return for the Global Investment Fund, which holds 4 stocks. The market's required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows:

StockInvestmentBetaA$ 200,0001.50B$ 300,000-0.50C$ 500,0001.25D$1,000,0001.75

Q22) ABC Trucking's balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a market value of $50 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 million. The current stock price is $22.50 per share; stockholders' required return, rs, is 14.00%; and the firm's tax rate is 40%. The CFO thinks the WACC should be based on market value weights, but the president thinks book weights are more appropriate. What is the difference between these two WACCs?

Q23) Barry Company is considering a project that has the following cash flow and WACC data. What is the project's NPV? What is IRR? What is MIRR? Should this project be accepted? Why?

WACC:

13.00%

          

Year

0

1

2

3

4

5

Cash flows

-$1,100

$400

$390

$380

$370

$360
             

 

Q24) Marshall-Miller & Company is considering the purchase of a new machine for $50,000, installed. The machine has a tax life of 5 years, and it can be depreciated according to the following rates. The firm expects to operate the machine for 4 years and then to sell it for $12,500. If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 4?

 

Depreciation

Year

Rate

1

0.20

2

0.32

3

0.19

4

0.12

5

0.11

6

0.06

 

Q25) Thomson Media is considering some new equipment whose data are shown below. The equipment has a 3-year tax life and would be fully depreciated by the straight-line method over 3 years, but it would have a positive pre-tax salvage value at the end of Year 3, when the project would be closed down. Also, some new working capital would be required, but it would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? Should you accept this project? Explain with evidence.

 

WACC

15.0%

Net investment in fixed assets (depreciable basis)

$70,000

Required new working capital

$10,000

Straight-line deprec. rate

33.333%

Sales revenues, each year

$75,000

Operating costs (excl. deprec.), each year

$30,000

Expected pretax salvage value

$ 5,000

Tax rate

35.0%

 

Q26) Your company has an opportunity to invest in a project that is expected to result in after-tax cash flows of $18,500 the first year, $21,000 the second year, $25,000 the third year, -$10,000 the fourth year, $31,000 the fifth year, $37,000 the sixth year, $39,000 the seventh and eighth year, and -$9,000 the ninth year. The project would cost the firm $145,000. If the firm's cost of capital is 11%, find NPV, IRR and MIRR for the project. Do you accept this project? Why?

Q27) XYZ Corporation is considering an expansion project. To date they have spent $65,000 investigating the viability of the project and have decided to proceed. The CEO of XYZ spent $20,000 last year on his business trip to New York where he discussed about the proposed new project with the board members. The company spent $50,000 on a marketing study before its current analysis regarding whether to accept or reject the project. The proposed project will cost $550,000. The project will be depreciated over a 3 year MACRS class life. XYX would use the 3-year MACRS method to depreciate the machine and equipment which are 33% 45%, 15% and 7%. 
If the project is undertaken the company will need to increase its inventories by $45,000, and its accounts payable will rise by $10,000. The company will realize an additional $750,000 in sales over each of the next four years. The company’s operating costs (not including depreciation) will increase by $540,000 a year. Both sales and the operating cost are expected to grow 4.5% annually during the life of the project. The company’s tax rate is 35%. At t = 3, the project’s economic life is complete, but it will have a salvage value (before-tax) of $55,000 after three years. The project’s WACC is 10.5%. What is the project’s net present value (NPV)? What is the IRR? Should the project be accepted? Why or why not?

Q28) Using the following information, find the Expected Return, Variance, and Standard Deviation for the returns on Stock 1 and Stock 2. Also, find the Covariance and Correlation Coefficient between the returns on Stocks 1 and 2. If you invest $10,000 in stock X and $25,000 in stock Y, what would be the expected return and risk on your portfolio?

 

States

Probability

Return on
StockX

Return on
StockY

A

10%

15%

25%

B

25%

15%

20%

C

30%

17%

12%

D

35%

20%

10%

 

Q30) The required return on ABC Corporation's stock is 10.4%, beta is 1.7, and a risk-free asset is 5%. What would be the required rate of return on the stock if the stock's beta increased to 2.15 while the risk-free rate and market return remained unchanged?

default image
July 1, 2023
    

Q13) Your father is about to retire, and he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years, with the first payment coming immediately. The discount rate on such annuities is 5.15%. How much would it cost him to buy the annuity today?

 

Q14) On January 1, 2009, your brother's business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes. What will the interest tax deduction be for 2009?

Q15)The Ramirez Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 13%. What is the best estimate of the current stock price?

Q16) ABC Inc.'s bonds currently sell for $1,280 and have a par value of $1,000. They pay a $35 semi-annual coupon and have a 15-year maturity, but they can be called in 10 years at $1,100. What is their yield to call (YTC)?

Q17) ABC Corporation's bonds have a 10-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 5.75%, based on semiannual compounding. What is the bond's price?

Q18) ABC Inc.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm's expected rate of return?

Q19) ABC Corp believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock?

 


State of

Economy

Probability

Expected

return

Boom

45%

25%

Normal

50%

15%

Recession

5%

5%

 

Q20)  Consider the following information and then calculate the required rate of return for the Global Investment Fund, which holds 4 stocks. The market's required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows:

StockInvestmentBetaA$ 200,0001.50B$ 300,000-0.50C$ 500,0001.25D$1,000,0001.75

Q22) ABC Trucking's balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a market value of $50 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 million. The current stock price is $22.50 per share; stockholders' required return, rs, is 14.00%; and the firm's tax rate is 40%. The CFO thinks the WACC should be based on market value weights, but the president thinks book weights are more appropriate. What is the difference between these two WACCs?

Q23) Barry Company is considering a project that has the following cash flow and WACC data. What is the project's NPV? What is IRR? What is MIRR? Should this project be accepted? Why?

WACC:

13.00%

          

Year

0

1

2

3

4

5

Cash flows

-$1,100

$400

$390

$380

$370

$360
             

 

Q24) Marshall-Miller & Company is considering the purchase of a new machine for $50,000, installed. The machine has a tax life of 5 years, and it can be depreciated according to the following rates. The firm expects to operate the machine for 4 years and then to sell it for $12,500. If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 4?

 

Depreciation

Year

Rate

1

0.20

2

0.32

3

0.19

4

0.12

5

0.11

6

0.06

 

Q25) Thomson Media is considering some new equipment whose data are shown below. The equipment has a 3-year tax life and would be fully depreciated by the straight-line method over 3 years, but it would have a positive pre-tax salvage value at the end of Year 3, when the project would be closed down. Also, some new working capital would be required, but it would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? Should you accept this project? Explain with evidence.

 

WACC

15.0%

Net investment in fixed assets (depreciable basis)

$70,000

Required new working capital

$10,000

Straight-line deprec. rate

33.333%

Sales revenues, each year

$75,000

Operating costs (excl. deprec.), each year

$30,000

Expected pretax salvage value

$ 5,000

Tax rate

35.0%

 

Q26) Your company has an opportunity to invest in a project that is expected to result in after-tax cash flows of $18,500 the first year, $21,000 the second year, $25,000 the third year, -$10,000 the fourth year, $31,000 the fifth year, $37,000 the sixth year, $39,000 the seventh and eighth year, and -$9,000 the ninth year. The project would cost the firm $145,000. If the firm's cost of capital is 11%, find NPV, IRR and MIRR for the project. Do you accept this project? Why?

Q27) XYZ Corporation is considering an expansion project. To date they have spent $65,000 investigating the viability of the project and have decided to proceed. The CEO of XYZ spent $20,000 last year on his business trip to New York where he discussed about the proposed new project with the board members. The company spent $50,000 on a marketing study before its current analysis regarding whether to accept or reject the project. The proposed project will cost $550,000. The project will be depreciated over a 3 year MACRS class life. XYX would use the 3-year MACRS method to depreciate the machine and equipment which are 33% 45%, 15% and 7%. 
If the project is undertaken the company will need to increase its inventories by $45,000, and its accounts payable will rise by $10,000. The company will realize an additional $750,000 in sales over each of the next four years. The company’s operating costs (not including depreciation) will increase by $540,000 a year. Both sales and the operating cost are expected to grow 4.5% annually during the life of the project. The company’s tax rate is 35%. At t = 3, the project’s economic life is complete, but it will have a salvage value (before-tax) of $55,000 after three years. The project’s WACC is 10.5%. What is the project’s net present value (NPV)? What is the IRR? Should the project be accepted? Why or why not?

Q28) Using the following information, find the Expected Return, Variance, and Standard Deviation for the returns on Stock 1 and Stock 2. Also, find the Covariance and Correlation Coefficient between the returns on Stocks 1 and 2. If you invest $10,000 in stock X and $25,000 in stock Y, what would be the expected return and risk on your portfolio?

 

States

Probability

Return on
StockX

Return on
StockY

A

10%

15%

25%

B

25%

15%

20%

C

30%

17%

12%

D

35%

20%

10%

 

Q30) The required return on ABC Corporation's stock is 10.4%, beta is 1.7, and a risk-free asset is 5%. What would be the required rate of return on the stock if the stock's beta increased to 2.15 while the risk-free rate and market return remained unchanged?

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