PART 1.

RISK AND RETURN

1. Calculate the expected value and standard deviation of a project:

a. Equal probability

Scenario Probability Outcome

1 25% 60%
2 25% 40%
3 25% 20%
4 25% -40%
Mean 20%
Stdev 43.20%

b. Different probability

Scenario Probability Outcome

1 10% 60%
2 50% 40%
3 30% 20%
4 10% -40%
Mean = 28%
SD = 25.61%

2. There is a 50% probability that the Plum Company’s sales will be 10 mil. USD next year, a 20% probability
that they will be 5 mil. USD and a 30% probability that they will be 3 mil. USD
a. What are the expected sales of Plum Company next year? Mean = 6.9 mil. USD
b. What is the standard deviation of Plum’s next year’s sales? SD = 3.1765 mil. USD

3. Consider the following investments:

Investment Expected Return Standard deviation
A 5% 10%
B 7% 11%
C 6% 12%
D 6% 10%

Which investment would you prefer between the following pairs:

a. A and D D
b. B and C B
c. C and D D

4. What is the expected return of the portfolio comprised of 3 following securities:

Securities Value Expected return
A 150mil.VND 12%
B 100mil.VND 13.5%
C 200mil.VND 9%
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Expected return = 11%

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5. Consider securities A and B with the following estimates:
μA = 8% σA = 12% μB = 13% σB = 20%
Now consider the portfolios that can be formed with A and B, assuming that the investment is equal
between A and B (that is, each has a weight of 50%). What is the portfolio’s standard deviation if the
correlation coefficient between A and B for each of the following:
a. ρAB = 1 -> SD(p) = 0.16 (max)
b. ρAB = 0.3 -> SD(p) = 0.13115
c. ρAB = 0 -> SD(p) = 0.11662
d. ρAB = -1 -> SD(p) = 0.04 (min)

6. Consider these two projects A and B with the following information:

Year Return A Return B

1 30% 40%
2 50% 20%
3 20% 10%
4 50% 10%
5 70% 5%

Calculate ρ (A,B)? → ρ = -0.45

7. Consider Projects X and Y with the following estimates:

μX = 5% σX = 10% μY = 15% σY = 25%
If the portfolio is comprised of 40% X and 60% Y and if the correlation coefficient between the returns on
X and Y is -0.25, what is the portfolio’s expected return and risk?
Expected return = 11%
SD = 14.527%

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PART 2. TIME VALUE OF MONEY

1. A company’s 2018 sales were $100 million. If sales grow at 8% per year, how large will they be 10
years later, in 2028, in millions? $215.89
2. Suppose a U.S. government bond will pay $1,000 three years from now. If the going interest rate on
3 year government bonds is 4%, how much is the bond worth today? $889.00
3. The U.S. Treasury offers to sell you a bond for $613.81. No payments will be made until the bond
matures 10 years from now, at which time it will be redeemed for $1,000. What interest rate would
you earn if you bought this bond at the offer price? 5.00%
4. A2Z’s 2019 earnings per share were $2, and its growth rate during the prior 5 years was 11.0% per
year. If that growth rate were maintained, how long would it take for A2Z’s EPS to double? 6.64
5. You can buy an annuity that pays $1,000 at the end of each year for 5 years. You could earn 6% on
your money in other investments with equal risk. What is the most you should pay? $4,212.36
6. Suppose you inherited $200,000 and invested it at 6% per year. How much could you withdraw at
the end of each of the next 15 years? $20,592.55
7. You are buying your first house for $220,000, and are paying $30,000 as a down payment. You have
arranged to finance the remaining $190,000 30- year mortgage with a 7% nominal interest rate and
monthly payments. What are the equal monthly payments you must make? $1,264
8. What’s the present value of a perpetuity that pays $100 per year if the appropriate interest rate is
6%? $1,666.67
9. What’s the rate of return you would earn if you paid $1,500 for a perpetuity that pays $105 per
year? 7.00%
10. At a rate of 8%, what is the present value of the following cash flow stream? $0 at Time 0; $100 at
the end of Year 1; $300 at the end of Year 2; $0 at the end of Year 3; and $500 at the end of Year 4?
$717.31
11. You’ve been offered an investment that will pay you 9% per year. If you invest $15,000, how long
until you have $30,000 8 years
12. You are considering borrowing $10,000 for 4 years at an annual interest rate of 6%. The loan
agreement calls for 4 equal payments, to be paid at the end of each of the next 4 years. The annual
payment that will fully pay off (amortize) the loan is closest to $2,886.
13. You are offered an investment that requires you to put up $13,000 today in exchange for $39,000
twelves years from now. What is the annual rate of return on this investment? 9.59%
14. You plan to deposit $1000 today, $2000 in 2 years and $2000 in 5 years. If you withdraw $1500 in 3
years and $1000 in 7 years, assuming no withdrawal penalties, how much will you have after 8 years if the
interest rate is 7%. $3,995.91
15. Project X has NPV of 290,000 USD, while it’s IRR is 20%. Project Y, comparable and mutually exclusive
to X, has NPV of 749,000 USD and IRR of 16%. What should be chosen and why? Project Y
16. You paid $3000 in a growing perpetuity with growth rate of 3%/year, with a return of 7.9%, next year
this perpetuity shall paid $200, do you want to invest? Yes, NPV is 1081.63
17. A project costs $5750 and has annual cash flows of $900 for the first four years and $750 in each of
the project's last five years. What is the payback period of the project? 6.8667 (years)
18. You paid $3000 in a growing perpetuity with growth rate of 3%/year, with a return of 7.9%, this year
this perpetuity has already paid $200, do you want to invest and why? $1204.08
19. An investment is expected to pay returns that is 20 mil. VND each year for 7 year
a. What is the present value of that investment assuming a discount rate of 6 %? 111.648
b. What happens to PV if the payment of the first return is delayed until year 4? 93.742
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20. With continuous compounding at 10 percent for 30 years, what is the future value of an initial
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investment of $1500? 30128.31

PART 3. FINANCIAL RATIOS

1. The financial records of A2Z show current assets of $850 and net fixed assets of $2,450. The firm has
$700 in liabilities, which is the amount the firm would need to pay today to extinguish its debt. The firm
estimates that it could sell its current assets for $800 and its fixed assets for $1,990. What is the market
value of the stockholders' equity? $2,090

2. A2Z firm's balance sheet shows current assets of $410, net fixed assets of $685, long-term debt of $320,
and owners' equity of $590. What is the value of the firm's current liabilities? $185

3. A2Z firm has cash of $15, accounts payable of $18, inventory of $102, net fixed assets of $147, accounts
receivable of $31, and stockholder's equity of $87. The current assets equal _____ and the long-term debt
is____: $148; $190.

4. A2Z had net sales of $750,000 over the past year. During that time, average receivables were $150,000.
Assuming a 365-day year, what was the average collection period? 73 days

5. A2Z firm has sales of $750, total assets of $400, and a debt-equity ratio of 1.50. If the return on equity
is 10 percent, what is the firm's net income? $16

6. A2Z firm has a return on equity of 15 percent, earnings before taxes of $30,000, a total asset turnover
of.80, a profit margin of 4.5 percent, and a tax rate of 35 percent. What is the firm's return on assets?
3.6%

7. A2Z has an 8 percent return on total assets of $300,000 and a net profit margin of 5 percent. What are
its sales? $480,000
8. A firm with Asset of 530, Liabilities of 270, COGS of 120 and Net Income of 20 shall have ROE of___
7.69%
9. A2Z had sales last year of $265 million. If its average collection period was 36 days, its ending accounts
receivable balance is closest to ____ $26.1 million
10. A2Z firm has sales 3030 mil, ROE of 7%, cash 200 mil., accounts payable 535 mil, inventory 2080 mil.,
net fixed assets of 2439 mil., accounts receivable of 351 mil, and stockholder’s equity of 1920 mil. The
current assets equal ______ and long-term debt is____: 2631 mil., 2615 mil

11. A2Z has a current ratio of 1.20. Current liabilities are $750, sales are $3660, net profit margin is 7.5%,
ROA is 9%. The amount of firm’s net fixed assets is: $2150

12. A2Z 's debt-to-total assets (D/TA) ratio is 0.4. What is its debt-to-equity (D/E) ratio? 0.667
13. A2Z has net income of $73,500. There are currently 14.2 days’ sales in receivables. Total assets are
$560,000, account receivables are $84,000, the debt-equity ratio is 0.65. ROE of the firm is: 21.66%

14. Refer to the financial statements of A2Z.

a. Fill in the blank cells for A2Z
b. Calculate: (This section has no provided answers)
- The firm's current ratio for 2018
- The firm's average collection period for 2018
- The firm's asset turnover ratio for 2018
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- The firm's ROE for 2018

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- The firm's EPS ratio for 2018

Income Statement (2018) (Unit: dollar) BlackBarn Company
Sales 2,500,000
Cost of goods sold (COGS) 1,260,000
Selling and Administrative Expenses 700,000

Operating Profit ?
Interest Expenses 160,000
Income before tax ?

Tax expense (tax rate: 25%) ?

Net Income ?

Balance Sheet (2018) (Unit: dollar)

Cash 50,000 Account Payable 200,000

Accounts Receivable ? Bank Loan 460,000

Inventory 280,000 Total current liabilities ?

Total Current Assets 810,000 Bonds payable 860,000

Fixed Assets ? Total Liabilities ?

Common stock (30,000 shares) 120,000

Retained Earnings 1,240,000

Total Assets 2,880,000 Total Liabilities & Equity 2,880,000

15. A2Z has 30,000 USD worth of equity, 70,000 USD worth of debt, its current interest rate is 6% and
current cost of equity is 11%, given that tax rate is 20%, what is A2Z's WACC? 9.14%
16. Greeko has the following projects to consider, choose the best combination for the firm:

Project Cash layout (Million $) NPV

Nu 111 15
Psi 55 -3
Zeta 56 7
Upsilon 124 5
Omikron 104 8

Knowing that

The maximum allowed investment is USD 240 millions

Nu and Upsilon are conflicted

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Zeta can only be launched if Omikron is approved