A proposed project has an initial cost of $475,000 and cash flows of -$21,200, $

Question

A proposed project has an initial cost of $475,000 and cash flows of -$21,200, $367,500, and $287,000 for Years 1 to 3, respectively. Victoria, the boss, insists that only projects that can return at least $1.10 in today's dollars for every $1 invested can be accepted. She also insists on applying a discount rate of 12 percent to all cash flows. Based on these criteria, the project should be:

accepted because IRR is less than 12 percent.

accepted because the PI exceeds 1.

accepted the NPV is positive.

rejected because the IRR exceeds 12 percent.

rejected because the PI is 1.01.

Projects A and B require an initial investment of $48,000 and $98,000, respectively. The projects are mutually exclusive and both have positive net present values. Which of these methods is probably the best method to use to determine which project to accept?

Modified IRR

Incremental IRR

AAR

Payback

IRR

Mosler Company has compiled this information for a new project:

Initial investment: $229,700

Fixed costs: $66,800

Variable costs: $5.07 per unit

Selling price: $12.99 per unit

Discount rate: 14 percent

Project life: 4 years

Tax rate: 34 percent

Depreciation is straight-line to zero over the project's life. What is the accounting break-even point?

11,301.82 units

13,200.00 units

15,684.97 units

10,352.08 units

12,388.60 units

4. Which one of these is an analysis of the relationship between the sales volume and net present value?

Monte Carlo simulation

Forecasting analysis

Forecasting simulation

Financial break-even analysis

Accounting profit break-even analysis

5. The accounting break-even production quantity for a project is 6,425 units. The fixed costs are $51,600 and the contribution margin is $9. What is the projected depreciation expense?

$7,053

$5,050

$6,225

$7,143

$3,600

6. Eight months ago, Isaac purchased 50 shares of stock at a price of $65.90 a share. To date, he has received two quarterly dividends of $1.03 a share each. If he sells his shares at the current price of $52.80 a share, what will be his total percentage return?

-9.38%

-20.91%

-13.40%

-11.27%

-16.75%

7. Stock A has a beta of .92 and an expected return of 9.04 percent. Stock B has a beta of 1.04 and an expected return of 9.51 percent. Stock C has a beta of 1.36 and an expected return of 11.68 percent. The risk-free rate is 3 percent and the market risk premium is 6.5 percent. Which of these stocks are underpriced?

C only

A and C only

A only

B and C only

A and B only

8. The stock of Martin Industries has a beta of 1.02. The risk-free rate of return is 3.7 percent and the market risk premium is 6.85 percent. What is the expected rate of return on Martin Industries stock?

10.19%

14.46%

16.42%

6.91%

10.69%

9. Which one of these statements is correct?

The DDM seems to have more estimation error than the CAPM.

Measurement error in the estimate of the growth rate of dividends increases as you move from a single security to the overall market.

Academics generally prefer the DDM over the CAPM.

ROE as used in the estimation of g is defined as a firm's earnings divided by the market value of its equity.

The DDM requires a short-term estimate of dividend growth.

10. Wilson s is reviewing a project with an internal rate of return of 13.09 percent and a beta of 1.42. The market risk premium is 8.1 percent, the tax rate is 35 percent, and the risk-free rate is 2.9 percent. The firm's WACC is 12.68 percent. Will the project be accepted if the WACC is used as the discount rate for the project? Should the project be accepted according to the CAPM, and why or why not?

Yes; Yes; The project plots above the security market line.

Yes; No; The CAPM return of 14.40 percent exceeds the IRR of 13.09 percent.

No; Yes; The project plots above the security market line.

Yes; Yes; The CAPM of 10.28 percent is less than the IRR of 13.09 percent.

No; No; The project plots below the security market line.

Explanation / Answer

Question 1: The IIR of the project is calcauted as 12.32%, and PI is 1.01. We can see that the manager required a PI of 1.10 for every $1 invested. Hovever in this example, the PI is only 1.01

Hence Project is rejected because Pi is 1.01

Question 2: The best Method is Modeified IRR or MIRR since it takes into considersation the fact that the future cash flows are re-invested at the cost of capital

Question 6: The total Purchase price is $65.90 *50 = #3295

The toal dividends recieved = 1.03*2*50 =$103

Toatal proceeds =Sale price + dividends = 52.80* 50 = 2640 + 103(dividends) = $2,743

Hence Loss = 2743-3295/3295 = -16.75%

Answer = -16.75%

Question 8: Expected return as per CAPM = Rf + beta*market risk premium = 3.7 + 1.02*6.85 = 10.687%

Hence Answer is 10.69%

Note:

I have answerd 4 questions: Kindly post other questions as individual questions so that the same are answered by experts

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