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This document contains 6 questions related to capital budgeting and investment analysis. Question 1 asks about analyzing a project with cash flows over 3 years and calculating its return. Question 2 involves calculating the expected return and standard deviation of a stock investment with given possible returns and probabilities. Question 3 covers the capital asset pricing model (CAPM) and whether risky assets can have betas of zero or negative values. Question 4 asks about the relationship between net present value (NPV) and payback period for a project. Question 5 analyzes conclusions that can be drawn about various measures for a project with positive NPV. Question 6 explains the difference in using after-tax figures for cost of equity versus cost of debt.

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Abdul Moiz Yousfani
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174 views

Assignment

This document contains 6 questions related to capital budgeting and investment analysis. Question 1 asks about analyzing a project with cash flows over 3 years and calculating its return. Question 2 involves calculating the expected return and standard deviation of a stock investment with given possible returns and probabilities. Question 3 covers the capital asset pricing model (CAPM) and whether risky assets can have betas of zero or negative values. Question 4 asks about the relationship between net present value (NPV) and payback period for a project. Question 5 analyzes conclusions that can be drawn about various measures for a project with positive NPV. Question 6 explains the difference in using after-tax figures for cost of equity versus cost of debt.

Uploaded by

Abdul Moiz Yousfani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Question # 1: A project will cost $4,819,724 and it is expected to earn zero after one year, but

$3,009,913 at the end of the second year and $2,779,333 at the end of the third year. Your
company currently has borrowings worth $73,789,532 for which the company is paying 7.4 % per
year interest, and the owners of the company have invested a total of $149,815,110.40; and they
generally want a return of 15% per year. Corporate tax rate is at 37%. (10 Marks)
a) Is this a good project or not? Justify with calculation.
b) How much excess percent return/loss will your company have if you go ahead with this
project?

Question # 2: Suppose that your estimates of the possible one-year returns from investing in the
common stock of a Corporation were as follows:
Possible one -5% 7% 19% 32% 45%
year return
Probability of 0.12 0.25 0.35 0.20 .08
Occurrence

a) What are the expected return and standard deviation? (5 Marks)


b) Assume that the parameters that you just determined [under Part (a)] pertain to a normal
probability distribution. What is the probability that return will be zero or less? Less than
10 percent? More than 40 percent? (Assume a normal distribution.) (6 Marks)

Question # 3:
a) Is it possible that a risky asset could have a beta of zero? Explain. Based on the CAPM, what is the expected
return on such an asset? (3 Marks)
b) Is it possible that a risky asset could have a negative beta? What does the CAPM predict about the expected
return on such an asset? (3 Marks)

Question # 4: Can you state the algebraic sign of the NPV with surety for a project with conventional cash flows that
has a payback period less than the project's life? Why or why not? What can you say about the NPV if you know the
discounted payback period is less than the project's life? Explain
(5 Marks)

Question # 5: Assume a project has conventional cash flows and a positive net present value. What can you conclude
about the following? (6 Marks)
a) Project’s payback period?
b) Project’s discounted payback period?
c) Project's profitability index?
d) Project’s IRR?
Explain your answers.

Question # 6: Explain why we do not use an after-tax figure for cost of equity but instead we use it for cost of debt? (2
Marks)

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