FNAN 301, fall 2011, final exam, solutionsConceptual: effect of rate and time on future value1. For each of the 4 investments described in the table, the investor would pa !"00 toda to purchase the investment.#ach investment would have the annual return noted in the table and each investment would ma$e a sin%le, lump sum pament to the investor in the number of ears from toda noted in the table.&f 'A ( ') and *+ ( *,, then which assertion is true-All annual returns and numbers of ears from todawhen the sin%le, lump sum pament is made are %reater than .ero.&nvestment Annual returnNumber of ears from toda when the sin%le,lump sum pament is madeA 'A *) ') *+ ' *+, ' *,A. &nvestment A will ma$e a lar%er sin%le, lump sum pament in * ears than investment ), and investment + will ma$e a lar%er sin%le, lump sum pament in *+ ears than investment , will ma$e in *, ears ). &nvestment A will ma$e a lar%er sin%le, lump sum pament in * ears than investment ), and investment , will ma$e a lar%er sin%le, lump sum pament in *, ears than investment + will ma$e in *+ ears /. &nvestment ) will ma$e a lar%er sin%le, lump sum pament in * ears than investment A, and investment + will ma$e a lar%er sin%le, lump sum pament in *+ ears than investment , will ma$e in *, ears 0. &nvestment ) will ma$e a lar%er sin%le, lump sum pament in * ears than investment A, and investment , will ma$e a lar%er sin%le, lump sum pament in *, ears than investment + will ma$e in *+ ears #. None of the above assertions is true 1. For each of the 4 investments described in the table, the investor would pa !"00 toda to purchase the investment.#ach investment would have the annual return noted in the table and each investment would ma$e a sin%le, lump sum pament to the investor in the number of ears from toda noted in the table.&f 'A ( ') and *, ( *+, then which assertion is true-All annual returns and numbers of ears from todawhen the sin%le, lump sum pament is made are %reater than .ero.&nvestment Annual returnNumber of ears from toda when the sin%le,lump sum pament is madeA 'A *) ') *+ ' *+, ' *,A. &nvestment A will ma$e a lar%er sin%le, lump sum pament in * ears than investment ), and investment + will ma$e a lar%er sin%le, lump sum pament in *+ ears than investment , will ma$e in *, ears ). &nvestment A will ma$e a lar%er sin%le, lump sum pament in * ears than investment ), and investment , will ma$e a lar%er sin%le, lump sum pament in *, ears than investment + will ma$e in *+ ears /. &nvestment ) will ma$e a lar%er sin%le, lump sum pament in * ears than investment A, and investment + will ma$e a lar%er sin%le, lump sum pament in *+ ears than investment , will ma$e in *, ears 0. &nvestment ) will ma$e a lar%er sin%le, lump sum pament in * ears than investment A, and investment , will ma$e a lar%er sin%le, lump sum pament in *, ears than investment + will ma$e in *+ ears #. None of the above assertions is true 1FNAN 301, fall 2011, final exam, solutions1. For each of the 4 investments described in the table, the investor would pa !"00 toda to purchase the investment.#ach investment would have the annual return noted in the table and each investment would ma$e a sin%le, lump sum pament to the investor in the number of ears from toda noted in the table.&f ') ( 'A and *+ ( *,, then which assertion is true-All annual returns and numbers of ears from todawhen the sin%le, lump sum pament is made are %reater than .ero.&nvestment Annual returnNumber of ears from toda when the sin%le,lump sum pament is madeA 'A *) ') *+ ' *+, ' *,A. &nvestment A will ma$e a lar%er sin%le, lump sum pament in * ears than investment ), and investment + will ma$e a lar%er sin%le, lump sum pament in *+ ears than investment , will ma$e in *, ears ). &nvestment A will ma$e a lar%er sin%le, lump sum pament in * ears than investment ), and investment , will ma$e a lar%er sin%le, lump sum pament in *, ears than investment + will ma$e in *+ ears /. &nvestment ) will ma$e a lar%er sin%le, lump sum pament in * ears than investment A, and investment + will ma$e a lar%er sin%le, lump sum pament in *+ ears than investment , will ma$e in *, ears 0. &nvestment ) will ma$e a lar%er sin%le, lump sum pament in * ears than investment A, and investment , will ma$e a lar%er sin%le, lump sum pament in *, ears than investment + will ma$e in *+ ears #. None of the above assertions is true 1. For each of the 4 investments described in the table, the investor would pa !"00 toda to purchase the investment.#ach investment would have the annual return noted in the table and each investment would ma$e a sin%le, lump sum pament to the investor in the number of ears from toda noted in the table.&f ') ( 'A and *, ( *+, then which assertion is true-All annual returns and numbers of ears from todawhen the sin%le, lump sum pament is made are %reater than .ero.&nvestment Annual returnNumber of ears from toda when the sin%le,lump sum pament is madeA 'A *) ') *+ ' *+, ' *,A. &nvestment A will ma$e a lar%er sin%le, lump sum pament in * ears than investment ), and investment + will ma$e a lar%er sin%le, lump sum pament in *+ ears than investment , will ma$e in *, ears ). &nvestment A will ma$e a lar%er sin%le, lump sum pament in * ears than investment ), and investment , will ma$e a lar%er sin%le, lump sum pament in *, ears than investment + will ma$e in *+ ears /. &nvestment ) will ma$e a lar%er sin%le, lump sum pament in * ears than investment A, and investment + will ma$e a lar%er sin%le, lump sum pament in *+ ears than investment , will ma$e in *, ears 0. &nvestment ) will ma$e a lar%er sin%le, lump sum pament in * ears than investment A, and investment , will ma$e a lar%er sin%le, lump sum pament in *, ears than investment + will ma$e in *+ ears #. None of the above assertions is true 2FNAN 301, fall 2011, final exam, solutionsFind missing CF associated with future value of multiple cash flows2. &n 3 ears from toda, 1aa expects to invest !12,000 in an account.3he also expects to ma$e an investment of 4 in the same account in 1 ear from toda.5hat is 4 if 1aa expects to have !36,000 in her account in " ears from toda and the expected return for the account is 7.7 percent per ear-A. An amount e8ual to or %reater than !10,200 but less than !11,200). An amount e8ual to or %reater than !11,200 but less than !12,200/. An amount e8ual to or %reater than !12,200 but less than !13,2000. An amount e8ual to or %reater than !13,200 but less than !14,200#. An amount less than !10,200 or an amount e8ual to or %reater than !14,2002. &n 3 ears from toda, 1aa expects to invest !16,000 in an account.3he also expects to ma$e an investment of 4 in the same account in 1 ear from toda.5hat is 4 if 1aa expects to have !32,000 in her account in " ears from toda and the expected return for the account is 7.7 percent per ear-A. An amount e8ual to or %reater than !10,200 but less than !11,200). An amount e8ual to or %reater than !11,200 but less than !12,200/. An amount e8ual to or %reater than !12,200 but less than !13,2000. An amount e8ual to or %reater than !13,200 but less than !14,200#. An amount less than !10,200 or an amount e8ual to or %reater than !14,2002. &n 3 ears from toda, 1aa expects to invest !12,000 in an account.3he also expects to ma$e an investment of 4 in the same account in 1 ear from toda.5hat is 4 if 1aa expects to have !36,000 in her account in " ears from toda and the expected return for the account is 9.7 percent per ear-A. An amount e8ual to or %reater than !10,200 but less than !11,200). An amount e8ual to or %reater than !11,200 but less than !12,200/. An amount e8ual to or %reater than !12,200 but less than !13,2000. An amount e8ual to or %reater than !13,200 but less than !14,200#. An amount less than !10,200 or an amount e8ual to or %reater than !14,2002. &n 3 ears from toda, 1aa expects to invest !16,000 in an account.3he also expects to ma$e an investment of 4 in the same account in 1 ear from toda.5hat is 4 if 1aa expects to have !32,000 in her account in " ears from toda and the expected return for the account is 9.7 percent per ear-A. An amount e8ual to or %reater than !10,200 but less than !11,200). An amount e8ual to or %reater than !11,200 but less than !12,200/. An amount e8ual to or %reater than !12,200 but less than !13,2000. An amount e8ual to or %reater than !13,200 but less than !14,200#. An amount less than !10,200 or an amount e8ual to or %reater than !14,2003FNAN 301, fall 2011, final exam, solutionsFind future value with simple interest and PMT for FV annuity3. *wo ears a%o from toda, :ortia invested !2,300 in a securit that has earned and is expected to continue to earn 14.7 percent per ear in simple interest and that pas investors in " ears from toda./hristina wants to have as much mone in " ears from toda as :ortia expects to have in " ears from toda.;ow much would /hristina need to contribute to her investment account each ear for " ears ifshe has !1,200 currentl saved in her investment account, ma$es e8ual annual contributions to her investment account, ma$es her first contribution in 1 ear, and can earn 12." percent per ear in compound interest-'ecall that interest rates are assumed to be compound rates unless told otherwise , so the vast ma?orit of the analsis of the time value of mone in FNAN 301 involves compound rates.*herefore, the analsis of /hristina=s account should be conducted in a wa that is consistent with similar problems anal.ed in the course.A. An amount e8ual to or %reater than !1,200 but less than !1,700). An amount e8ual to or %reater than !1,700 but less than !2,100/. An amount e8ual to or %reater than !2,100 but less than !2,3000. An amount e8ual to or %reater than !2,300 but less than !2,"00#. An amount less than !1,200 or an amount e8ual to or %reater than !2,"003. *wo ears a%o from toda, :ortia invested !2,300 in a securit that has earned and is expected to continue to earn 17.4 percent per ear in simple interest and that pas investors in " ears from toda./hristina wants to have as much mone in " ears from toda as :ortia expects to have in " ears from toda.;ow much would /hristina need to contribute to her investment account each ear for " ears if she has !1,200 currentl saved in her investment account, ma$es e8ual annual contributions to her investment account, ma$es her first contribution in 1 ear, and can earn 12." percent per ear incompound interest-'ecall that interest rates are assumed to be compound rates unless told otherwise, so the vast ma?orit of the analsis of the time value of mone in FNAN 301 involves compound rates.*herefore, the analsis of /hristina=s account should be conducted in a wa that is consistent with similar problems anal.ed in the course.A. An amount e8ual to or %reater than !1,200 but less than !1,700). An amount e8ual to or %reater than !1,700 but less than !2,100/. An amount e8ual to or %reater than !2,100 but less than !2,3000. An amount e8ual to or %reater than !2,300 but less than !2,"00#. An amount less than !1,200 or an amount e8ual to or %reater than !2,"004FNAN 301, fall 2011, final exam, solutions3. *wo ears a%o from toda, :ortia invested !2,300 in a securit that has earned and is expected to continue to earn 14.7 percent per ear in simple interest and that pas investors in " ears from toda./hristina wants to have as much mone in " ears from toda as :ortia expects to have in " ears from toda.;ow much would /hristina need to contribute to her investment account each ear for " ears if she has !1,200 currentl saved in her investment account, ma$es e8ual annual contributions to her investment account, ma$es her first contribution in 1 ear, and can earn 1".2 percent per ear incompound interest-'ecall that interest rates are assumed to be compound rates unless told otherwise, so the vast ma?orit of the analsis of the time value of mone in FNAN 301 involves compound rates.*herefore, the analsis of /hristina=s account should be conducted in a wa that is consistent with similar problems anal.ed in the course.A. An amount e8ual to or %reater than !1,200 but less than !1,700). An amount e8ual to or %reater than !1,700 but less than !2,100/. An amount e8ual to or %reater than !2,100 but less than !2,3000. An amount e8ual to or %reater than !2,300 but less than !2,"00#. An amount less than !1,200 or an amount e8ual to or %reater than !2,"003. *wo ears a%o from toda, :ortia invested !2,300 in a securit that has earned and is expected to continue to earn 17.4 percent per ear in simple interest and that pas investors in " ears from toda./hristina wants to have as much mone in " ears from toda as :ortia expects to have in " ears from toda.;ow much would /hristina need to contribute to her investment account each ear for " ears if she has !1,200 currentl saved in her investment account, ma$es e8ual annual contributions to her investment account, ma$es her first contribution in 1 ear, and can earn 1".2 percent per ear incompound interest-'ecall that interest rates are assumed to be compound rates unless told otherwise, so the vast ma?orit of the analsis of the time value of mone in FNAN 301 involves compound rates.*herefore, the analsis of /hristina=s account should be conducted in a wa that is consistent with similar problems anal.ed in the course.A. An amount e8ual to or %reater than !1,200 but less than !1,700). An amount e8ual to or %reater than !1,700 but less than !2,100/. An amount e8ual to or %reater than !2,100 but less than !2,3000. An amount e8ual to or %reater than !2,300 but less than !2,"00#. An amount less than !1,200 or an amount e8ual to or %reater than !2,"00"FNAN 301, fall 2011, final exam, solutionsGrowth rate on perpetuity after saving with FV annuity due4. ;al wants to create a scholarship trust fund that will ma$e its first scholarship pament in 6 ears from toda.;e plans to save !90,000 per ear in a trust fund for " ears.;is first savin%s donation to the trust fund is expected later toda.;ow much can the annual paments from the trust fund be expected to %row each ear if the fund is expected to earn 12.1 percent per ear, ma$e its first scholarship pament in 6 ears from toda, have that first pament be !12,000, andhave all subse8uent paments %row annuall at a constant rate forever-A. A rate e8ual to or %reater than ".00@ but less than 6.00@). A rate e8ual to or %reater than 6.00@ but less than 2.00@/. A rate e8ual to or %reater than 2.00@ but less than 9.00@0. A rate e8ual to or %reater than 9.00@ but less than 7.00@#. A rate less than ".00@ or a rate %reater than or e8ual to 7.00@4. ;al wants to create a scholarship trust fund that will ma$e its first scholarship pament in 6 ears from toda.;e plans to save !90,000 per ear in a trust fund for " ears.;is first savin%s donation to the trust fund is expected later toda.;ow much can the annual paments from the trust fund be expected to %row each ear if the fund is expected to earn 11.6 percent per ear, ma$e its first scholarship pament in 6 ears from toda, have that first pament be !17,000, andhave all subse8uent paments %row annuall at a constant rate forever-A. A rate e8ual to or %reater than ".00@ but less than 6.00@). A rate e8ual to or %reater than 6.00@ but less than 2.00@/. A rate e8ual to or %reater than 2.00@ but less than 9.00@0. A rate e8ual to or %reater than 9.00@ but less than 7.00@#. A rate less than ".00@ or a rate %reater than or e8ual to 7.00@4. ;al wants to create a scholarship trust fund that will ma$e its first scholarship pament in 6 ears from toda.;e plans to save !90,000 per ear in a trust fund for " ears.;is first savin%s donation to the trust fund is expected later toda.;ow much can the annual paments from the trust fund be expected to %row each ear if the fund is expected to earn 10.3 percent per ear, ma$e its first scholarship pament in 6 ears from toda, have that first pament be !12,000, andhave all subse8uent paments %row annuall at a constant rate forever-A. A rate e8ual to or %reater than ".00@ but less than 6.00@). A rate e8ual to or %reater than 6.00@ but less than 2.00@/. A rate e8ual to or %reater than 2.00@ but less than 9.00@0. A rate e8ual to or %reater than 9.00@ but less than 7.00@#. A rate less than ".00@ or a rate %reater than or e8ual to 7.00@4. ;al wants to create a scholarship trust fund that will ma$e its first scholarship pament in 6 ears from toda.;e plans to save !90,000 per ear in a trust fund for " ears.;is first savin%s donation to the trust fund is expected later toda.;ow much can the annual paments from the trust fund be expected to %row each ear if the fund is expected to earn 7.2 percent per ear, ma$e its first scholarship pament in 6 ears from toda, have that first pament be !17,000, andhave all subse8uent paments %row annuall at a constant rate forever-A. A rate e8ual to or %reater than ".00@ but less than 6.00@). A rate e8ual to or %reater than 6.00@ but less than 2.00@/. A rate e8ual to or %reater than 2.00@ but less than 9.00@0. A rate e8ual to or %reater than 9.00@ but less than 7.00@#. A rate less than ".00@ or a rate %reater than or e8ual to 7.00@6FNAN 301, fall 2011, final exam, solutionsFind payment with PV annuity and an extra, interim cash flow". ;al ?ust too$ out a loan from the ban$ for !9,300.;e plans to repa this loan b ma$in% a special pament to the ban$ of !2,900 in " ears and b also ma$in% e8ual, re%ular annual paments for 2 ears.&f the interest rate on the loan is 11.1 percent per ear and he ma$es his first re%ular annual pament in 1 ear, then what would ;al=s re%ular annual pament be-Assume that ;al ma$es two paments in " earsA the extra pament of !2,900 and the re%ular annual pament.". ;al ?ust too$ out a loan from the ban$ for !9,300.;e plans to repa this loan b ma$in% a special pament to the ban$ of !4,200 in " ears and b also ma$in% e8ual, re%ular annual paments for 2 ears.&f the interest rate on the loan is 11.1 percent per ear and he ma$es his first re%ular annual pament in 1 ear, then what would ;al=s re%ular annual pament be-Assume that ;al ma$es two paments in " earsA the extra pament of !4,200 and the re%ular annual pament.". ;al ?ust too$ out a loan from the ban$ for !9,300.;e plans to repa this loan b ma$in% a special pament to the ban$ of !2,900 in " ears and b also ma$in% e8ual, re%ular annual paments for 2 ears.&f the interest rate on the loan is 10.1 percent per ear and he ma$es his first re%ular annual pament in 1 ear, then what would ;al=s re%ular annual pament be-Assume that ;al ma$es two paments in " earsA the extra pament of !2,900 and the re%ular annual pament.". ;al ?ust too$ out a loan from the ban$ for !9,300.;e plans to repa this loan b ma$in% a special pament to the ban$ of !4,200 in " ears and b also ma$in% e8ual, re%ular annual paments for 2 ears.&f the interest rate on the loan is 10.1 percent per ear and he ma$es his first re%ular annual pament in 1 ear, then what would ;al=s re%ular annual pament be-Assume that ;al ma$es two paments in " earsA the extra pament of !4,200 and the re%ular annual pament.2FNAN 301, fall 2011, final exam, solutionsuantitative: discount a single cash flow with a periodic rate that must !e computed6. 5hat is the value of an investment that is scheduled to pa ou !12,300 in 2 ears and that hasan annual rate of return of 12.2 percent, compounded 8uarterl-A. An amount e8ual to or %reater than !9,700 but less than !7,100). An amount e8ual to or %reater than !7,100 but less than !7,300/. An amount e8ual to or %reater than !7,300 but less than !7,"000. An amount e8ual to or %reater than !7,"00 but less than !7,900#. An amount less than !9,700 or an amount e8ual to or %reater than !7,9006. 5hat is the value of an investment that is scheduled to pa ou !13,200 in 2 ears and that hasan annual rate of return of 12.2 percent, compounded 8uarterl-A. An amount e8ual to or %reater than !9,700 but less than !7,100). An amount e8ual to or %reater than !7,100 but less than !7,300/. An amount e8ual to or %reater than !7,300 but less than !7,"000. An amount e8ual to or %reater than !7,"00 but less than !7,900#. An amount less than !9,700 or an amount e8ual to or %reater than !7,9006. 5hat is the value of an investment that is scheduled to pa ou !12,300 in 2 ears and that hasan annual rate of return of 1".6 percent, compounded 8uarterl-A. An amount e8ual to or %reater than !9,700 but less than !7,100). An amount e8ual to or %reater than !7,100 but less than !7,300/. An amount e8ual to or %reater than !7,300 but less than !7,"000. An amount e8ual to or %reater than !7,"00 but less than !7,900#. An amount less than !9,700 or an amount e8ual to or %reater than !7,9006. 5hat is the value of an investment that is scheduled to pa ou !13,200 in 2 ears and that hasan annual rate of return of 1".6 percent, compounded 8uarterl-A. An amount e8ual to or %reater than !9,700 but less than !7,100). An amount e8ual to or %reater than !7,100 but less than !7,300/. An amount e8ual to or %reater than !7,300 but less than !7,"000. An amount e8ual to or %reater than !7,"00 but less than !7,900#. An amount less than !9,700 or an amount e8ual to or %reater than !7,9009FNAN 301, fall 2011, final exam, solutionsuantitative: find return for a !ond2. A bond issued b :atriot *heaters pas fixed annual coupons, ?ust paid an annual coupon, has anannual coupon rate of 16.4@, has a face value of !1,000, and matures in " ears from toda. Bne ear a%o, the ieldCtoCmaturit of the bond was 12.1@.*oda, the D*1 of the bond is 12.2@.5hat was the rate of return over the past ear for the :atriot *heaters bond-2. A bond issued b :atriot *heaters pas fixed annual coupons, ?ust paid an annual coupon, has anannual coupon rate of 16.6@, has a face value of !1,000, and matures in " ears from toda. Bne ear a%o, the ieldCtoCmaturit of the bond was 12.3@.*oda, the D*1 of the bond is 12.7@.5hat was the rate of return over the past ear for the :atriot *heaters bond-2. A bond issued b :atriot *heaters pas fixed annual coupons, ?ust paid an annual coupon, has anannual coupon rate of 16.4@, has a face value of !1,000, and matures in " ears from toda. Bne ear a%o, the ieldCtoCmaturit of the bond was 16.9@.*oda, the D*1 of the bond is 12.4@.5hat was the rate of return over the past ear for the :atriot *heaters bond-2. A bond issued b :atriot *heaters pas fixed annual coupons, ?ust paid an annual coupon, has anannual coupon rate of 16.6@, has a face value of !1,000, and matures in " ears from toda. Bne ear a%o, the ieldCtoCmaturit of the bond was 12.2@.*oda, the D*1 of the bond is 12.9@.5hat was the rate of return over the past ear for the :atriot *heaters bond-7FNAN 301, fall 2011, final exam, solutions"dentifying ris#ier stoc# after computing $ expected returns9. For the next ear, stoc$ A, which pas annual dividends with the next one expected in 1 ear, has an expected dividend ield of 2.3 percent and an expected capital appreciation ield of 3.4 percent.3toc$ ) is currentl priced at !"4."0 per share and is expected to pa its next annual dividend in 1 ear.&f stoc$ )=s next dividend is expected to be !4.30 per share and the stoc$ is expected to be priced at !"3.40 in 1 ear, then which of the followin% assertions is most stron%l supported b the information if the expected annual return for each stoc$ is expected to remain unchan%ed forever-A. 3toc$ A is more ris$ than stoc$ )). 3toc$ ) is more ris$ than stoc$ A/. 3toc$ A and stoc$ ) are e8uall as ris$ as each other0. All of the above assertions are supported e8uall as stron%l b the information9. For the next ear, stoc$ A, which pas annual dividends with the next one expected in 1 ear, has an expected dividend ield of 3.2 percent and an expected capital appreciation ield of 4.3 percent.3toc$ ) is currentl priced at !"4."0 per share and is expected to pa its next annual dividend in 1 ear.&f stoc$ )=s next dividend is expected to be !".40 per share and the stoc$ is expected to be priced at !"3.40 in 1 ear, then which of the followin% assertions is most stron%l supported b the information if the expected annual return for each stoc$ is expected to remain unchan%ed forever-A. 3toc$ A is more ris$ than stoc$ )). 3toc$ ) is more ris$ than stoc$ A/. 3toc$ A and stoc$ ) are e8uall as ris$ as each other0. All of the above assertions are supported e8uall as stron%l b the information9. For the next ear, stoc$ A, which pas annual dividends with the next one expected in 1 ear, has an expected dividend ield of 2.3 percent and an expected capital appreciation ield of 3.4 percent.3toc$ ) is currentl priced at !4".40 per share and is expected to pa its next annual dividend in 1 ear.&f stoc$ )=s next dividend is expected to be !4.30 per share and the stoc$ is expected to be priced at !43."0 in 1 ear, then which of the followin% assertions is most stron%l supported b the information if the expected annual return for each stoc$ is expected to remain unchan%ed forever-A. 3toc$ A is more ris$ than stoc$ )). 3toc$ ) is more ris$ than stoc$ A/. 3toc$ A and stoc$ ) are e8uall as ris$ as each other0. All of the above assertions are supported e8uall as stron%l b the information9. For the next ear, stoc$ A, which pas annual dividends with the next one expected in 1 ear, has an expected dividend ield of 3.2 percent and an expected capital appreciation ield of 4.3 percent.3toc$ ) is currentl priced at !4".40 per share and is expected to pa its next annual dividend in 1 ear.&f stoc$ )=s next dividend is expected to be !".20 per share and the stoc$ is expected to be priced at !43."0 in 1 ear, then which of the followin% assertions is most stron%l supported b the information if the expected annual return for each stoc$ is expected to remain unchan%ed forever-A. 3toc$ A is more ris$ than stoc$ )). 3toc$ ) is more ris$ than stoc$ A/. 3toc$ A and stoc$ ) are e8uall as ris$ as each other0. All of the above assertions are supported e8uall as stron%l b the information10FNAN 301, fall 2011, final exam, solutionsPrice !ond and then get fixed dividend7. 1aa has one share of stoc$ and one bond issued b :atriot *heaters.*he total value of the two securities is !1,100.*he bond has a ieldCtoCmaturit of 16.9 percent, an annual coupon rate of 14.6 percent, and a face value of !1,000E pas semiCannual coupons with the nextone expected in 6 monthsE and matures in 4 ears.*he stoc$ pas annual dividends that are expected to remain unchan%ed forever.*he next dividend is expected to be paid in one ear.*he stoc$ has an expected return of 19.2 percent per ear.5hat is the next dividend expected to be-7. 1aa has one share of stoc$ and one bond issued b :atriot *heaters.*he total value of the two securities is !1,100.*he bond has a ieldCtoCmaturit of 16.4 percent, an annual coupon rate of 14.4 percent, and a face value of !1,000E pas semiCannual coupons with the nextone expected in 6 monthsE and matures in 4 ears.*he stoc$ pas annual dividends that are expected to remain unchan%ed forever.*he next dividend is expected to be paid in one ear.*he stoc$ has an expected return of 19." percent per ear.5hat is the next dividend expected to be-7. 1aa has one share of stoc$ and one bond issued b :atriot *heaters.*he total value of the two securities is !1,100.*he bond has a ieldCtoCmaturit of 16.9 percent, an annual coupon rate of 14.9 percent, and a face value of !1,000E pas semiCannual coupons with the nextone expected in 6 monthsE and matures in 4 ears.*he stoc$ pas annual dividends that are expected to remain unchan%ed forever.*he next dividend is expected to be paid in one ear.*he stoc$ has an expected return of 19.2 percent per ear.5hat is the next dividend expected to be-7. 1aa has one share of stoc$ and one bond issued b :atriot *heaters.*he total value of the two securities is !1,100.*he bond has a ieldCtoCmaturit of 16.4 percent, an annual coupon rate of 14.2 percent, and a face value of !1,000E pas semiCannual coupons with the nextone expected in 6 monthsE and matures in 4 ears.*he stoc$ pas annual dividends that are expected to remain unchan%ed forever.*he next dividend is expected to be paid in one ear.*he stoc$ has an expected return of 19.7 percent per ear.5hat is the next dividend expected to be-11FNAN 301, fall 2011, final exam, solutions%an# securities !y ris#, which is reflected through expected return or &TM10. :atriot *heaters has issued bonds, common stoc$, and preferred stoc$.*he D*1 on the bonds is 13@ and the expected annual return on the preferred stoc$ is 12@.5hich of the followin% assertions about the expected annual return on the common stoc$ issued b :atriot *heaters is most li$el to be true-A. *he expected annual return on the common stoc$ is less than 13@). *he expected annual return on the common stoc$ is e8ual to 13@/. *he expected annual return on the common stoc$ is %reater than 13@ but less than 12@0. *he expected annual return on the common stoc$ is e8ual to 12@#. *he expected annual return on the common stoc$ is %reater than 12@10. :atriot *heaters has issued bonds, common stoc$, and preferred stoc$.*he D*1 on the bonds is 13@ and the expected annual return on the common stoc$ is 12@.5hich of the followin% assertions about the expected annual return on the preferred stoc$ issued b :atriot *heaters is most li$el to be true-A. *he expected annual return on the preferred stoc$ is less than 13@). *he expected annual return on the preferred stoc$ is e8ual to 13@/. *he expected annual return on the preferred stoc$ is %reater than 13@ but less than 12@0. *he expected annual return on the preferred stoc$ is e8ual to 12@#. *he expected annual return on the preferred stoc$ is %reater than 12@10. :atriot *heaters has issued bonds, common stoc$, and preferred stoc$.*he D*1 on the bonds is 12@ and the expected annual return on the preferred stoc$ is 22@.5hich of the followin% assertions about the expected annual return on the common stoc$ issued b :atriot *heaters is most li$el to be true-A. *he expected annual return on the common stoc$ is %reater than 22@). *he expected annual return on the common stoc$ is e8ual to 22@/. *he expected annual return on the common stoc$ is %reater than 12@ but less than 22@0. *he expected annual return on the common stoc$ is e8ual to 12@#. *he expected annual return on the common stoc$ is less than 12@10. :atriot *heaters has issued bonds, common stoc$, and preferred stoc$.*he D*1 on the bonds is 12@ and the expected annual return on the common stoc$ is 22@.5hich of the followin% assertions about the expected annual return on the preferred stoc$ issued b :atriot *heaters is most li$el to be true-A. *he expected annual return on the preferred stoc$ is %reater than 22@). *he expected annual return on the preferred stoc$ is e8ual to 22@/. *he expected annual return on the preferred stoc$ is %reater than 12@ but less than 22@0. *he expected annual return on the preferred stoc$ is e8ual to 12@#. *he expected annual return on the preferred stoc$ is less than 12@12FNAN 301, fall 2011, final exam, solutionsCompute maximum value that can !e created and compute 'PV11. *he mana%ers of :atriot *heaters are evaluatin% " potential pro?ects .)ased on the information presented in the 2 tables, what is the maximum amount of value that the mana%ers can create for the firm if the can choose to underta$e none, one, some, or all of the " potential pro?ects-:ro?ect&nitialinvestment

Net presentvalue

:abac$period

0iscountedpabac$period

&nternalrate ofreturn

Avera%eaccountin%return

A 2.3 3.3 3.4 4.1 6.1 C2.2) 1.2 C2.9 2.3 F 17.9 20.1/ 4.2 9.7 0.7 4.7 4.4 12.2#xpected cash flows in millions of dollars:ro?ect /ost of capital 0 1 2 3 40 9.0@ C".0 12.0 7.0 C9.0 C3.0# 10.0@ C10.0 1.0 2.0 3.0 4.0A. An amount e8ual to or %reater than !7 million and less than !11 million). An amount e8ual to or %reater than !11 million and less than !14 million/. An amount e8ual to or %reater than !14 million and less than !16 million0. An amount less than !7 million or an amount e8ual to or %reater than !16 million#. *he 8uestion can not be answered for one or more of the followin% reasonsA at least one of the pro?ects has nonCconventional cash flowsE the cost of capital is not $nown for all pro?ectsE and the pabac$, discounted pabac$, and avera%e accountin% return thresholds are not $nown.11. *he mana%ers of :atriot *heaters are evaluatin% " potential pro?ects .)ased on the information presented in the 2 tables, what is the maximum amount of value that the mana%ers can create for the firm if the can choose to underta$e none, one, some, or all of the " potential pro?ects-:ro?ect&nitialinvestment

Net presentvalue

:abac$period

0iscountedpabac$period

&nternalrate ofreturn

Avera%eaccountin%return

A 2.3 4.2 3.4 4.1 6.1 C2.2) 4.2 2.3 0.7 4.7 4.4 12.2/ 1.2 C".7 2.3 F 17.9 20.1#xpected cash flows in millions of dollars:ro?ect /ost of capital 0 1 2 3 40 9.0@ C".0 12.0 7.0 C9.0 C6.0# 10.0@ C10.0 1.0 2.0 3.0 4.0A. An amount e8ual to or %reater than !7 million and less than !11 million). An amount e8ual to or %reater than !11 million and less than !14 million/. An amount e8ual to or %reater than !14 million and less than !16 million0. An amount less than !7 million or an amount e8ual to or %reater than !16 million#. *he 8uestion can not be answered for one or more of the followin% reasonsA at least one of the pro?ects has nonCconventional cash flowsE the cost of capital is not $nown for all pro?ectsE and the pabac$, discounted pabac$, and avera%e accountin% return thresholds are not $nown.13FNAN 301, fall 2011, final exam, solutions11. *he mana%ers of :atriot *heaters are evaluatin% " potential pro?ects .)ased on the information presented in the 2 tables, what is the maximum amount of value that the mana%ers can create for the firm if the can choose to underta$e none, one, some, or all of the " potential pro?ects-:ro?ect&nitialinvestment

Net presentvalue

:abac$period

0iscountedpabac$period

&nternalrate ofreturn

Avera%eaccountin%return

A 4.4 C3.7 0.7 F 21.4 12.7) 1.6 6.1 2." 2.7 17.9 20.3/ 2.2 3." 3.2 4.1 6.1 C2.9#xpected cash flows in millions of dollars:ro?ect /ost of capital 0 1 2 3 40 9.0@ C10.0 12.0 7.0 C9.0 C6.0# 10.0@ C".0 1.0 2.0 3.0 4.0A. An amount e8ual to or %reater than !7 million and less than !11 million). An amount e8ual to or %reater than !11 million and less than !14 million/. An amount e8ual to or %reater than !14 million and less than !16 million0. An amount less than !7 million or an amount e8ual to or %reater than !16 million#. *he 8uestion can not be answered for one or more of the followin% reasonsA at least one of the pro?ects has nonCconventional cash flowsE the cost of capital is not $nown for all pro?ectsE and the pabac$, discounted pabac$, and avera%e accountin% return thresholds are not $nown.11. *he mana%ers of :atriot *heaters are evaluatin% " potential pro?ects .)ased on the information presented in the 2 tables, what is the maximum amount of value that the mana%ers can create for the firm if the can choose to underta$e none, one, some, or all of the " potential pro?ects-:ro?ect&nitialinvestment

Net presentvalue

:abac$period

0iscountedpabac$period

&nternalrate ofreturn

Avera%eaccountin%return

A 1.7 4.7 2.6 4.7 17.7 21.4) 4.1 C3.2 0.7 F 21.6 13.2/ 2.2 1.7 3.7 4." 6.9 C3.9#xpected cash flows in millions of dollars:ro?ect /ost of capital 0 1 2 3 40 10.0@ C10.0 12.0 7.0 C9.0 C6.0# 9.0@ C".0 1.0 2.0 3.0 4.0A. An amount e8ual to or %reater than !7 million and less than !11 million). An amount e8ual to or %reater than !11 million and less than !14 million/. An amount e8ual to or %reater than !14 million and less than !16 million0. An amount less than !7 million or an amount e8ual to or %reater than !16 million#. *he 8uestion can not be answered for one or more of the followin% reasonsA at least one of the pro?ects has nonCconventional cash flowsE the cost of capital is not $nown for all pro?ectsE and the pabac$, discounted pabac$, and avera%e accountin% return thresholds are not $nown.14FNAN 301, fall 2011, final exam, solutionsFind 'PV from revs(costs(investment(asset sale12. :atriot *heaters is considerin% a pro?ect that would last for 2 ears.*he pro?ect would involve an initial investment of !600,000 for new e8uipment that would be sold for an expected price of !420,000 at the end of the pro?ect in 2 ears.*he e8uipment would be depreciated to .ero over " ears usin% strai%htCline depreciation.&n ears 1 and 2, relevant, incremental annual revenue from the pro?ect is expected to be !440,000 per ear and relevant, incremental annual costs for the pro?ect are expected to be !260,000 per ear.*he tax rate is 40 percent and the cost of capital for the pro?ect is 7 percent.5hat is the net present value of the pro?ect-A. An amount e8ual to or %reater than !0 but less than !30,000). An amount e8ual to or %reater than !30,000 but less than !60,000/. An amount e8ual to or %reater than !60,000 but less than !70,0000. An amount e8ual to or %reater than !70,000 but less than !120,000#. An amount less than !0 or an amount e8ual to or %reater than !120,00012. :atriot *heaters is considerin% a pro?ect that would last for 2 ears.*he pro?ect would involve an initial investment of !600,000 for new e8uipment that would be sold for an expected price of !420,000 at the end of the pro?ect in 2 ears.*he e8uipment would be depreciated to .ero over " ears usin% strai%htCline depreciation.&n ears 1 and 2, relevant, incremental annual revenue from the pro?ect is expected to be !460,000 per ear and relevant, incremental annual costs for the pro?ect are expected to be !220,000 per ear.*he tax rate is 40 percent and the cost of capital for the pro?ect is 9 percent.5hat is the net present value of the pro?ect-A. An amount e8ual to or %reater than !0 but less than !30,000). An amount e8ual to or %reater than !30,000 but less than !60,000/. An amount e8ual to or %reater than !60,000 but less than !70,0000. An amount e8ual to or %reater than !70,000 but less than !120,000#. An amount less than !0 or an amount e8ual to or %reater than !120,00012. :atriot *heaters is considerin% a pro?ect that would last for 2 ears.*he pro?ect would involve an initial investment of !600,000 for new e8uipment that would be sold for an expected price of !490,000 at the end of the pro?ect in 2 ears.*he e8uipment would be depreciated to .ero over " ears usin% strai%htCline depreciation.&n ears 1 and 2, relevant, incremental annual revenue from the pro?ect is expected to be !440,000 per ear and relevant, incremental annual costs for the pro?ect are expected to be !260,000 per ear.*he tax rate is 40 percent and the cost of capital for the pro?ect is 7 percent.5hat is the net present value of the pro?ect-A. An amount e8ual to or %reater than !0 but less than !30,000). An amount e8ual to or %reater than !30,000 but less than !60,000/. An amount e8ual to or %reater than !60,000 but less than !70,0000. An amount e8ual to or %reater than !70,000 but less than !120,000#. An amount less than !0 or an amount e8ual to or %reater than !120,00012. :atriot *heaters is considerin% a pro?ect that would last for 2 ears.*he pro?ect would involve an initial investment of !600,000 for new e8uipment that would be sold for an expected price of !490,000 at the end of the pro?ect in 2 ears.*he e8uipment would be depreciated to .ero over " ears usin% strai%htCline depreciation.&n ears 1 and 2, relevant, incremental annual revenue from the pro?ect is expected to be !460,000 per ear and relevant, incremental annual costs for the pro?ect are expected to be !220,000 per ear.*he tax rate is 40 percent and the cost of capital for the pro?ect is 9 percent.5hat is the net present value of the pro?ect-A. An amount e8ual to or %reater than !0 but less than !30,000). An amount e8ual to or %reater than !30,000 but less than !60,000/. An amount e8ual to or %reater than !60,000 but less than !70,0000. An amount e8ual to or %reater than !70,000 but less than !120,000#. An amount less than !0 or an amount e8ual to or %reater than !120,0001"FNAN 301, fall 2011, final exam, solutionsFind 'PV from )CF, CF from capital spending, and '*C levels13. :atriot *heaters is considerin% a pro?ect that would last for 3 ears and have a cost of capital of 4.0 percent.*he relevant level of net wor$in% capital for the pro?ect is expected to be !2,000 immediatel , !6,000 in 1 ear, !3,000 in 2 ears, and !0 in 3 ears.'elevant expected operatin% cash flows and cash flows from capital spendin% in ears 0, 1, 2, and 3 are presented in the followin% table.5hat is the net present value of this pro?ect-Assume that the cash flow from sellin% the pro?ect, terminal value, and opportunit costs are !0 in each ear.Dear 0 Dear 1 Dear 2Dear 3Bperatin% cash flows !0 !3,000 !3,000 !3,000/ash flows from capital spendin% C!14,000 !0 !0 !11,00013. :atriot *heaters is considerin% a pro?ect that would last for 3 ears and have a cost of capital of 2.0 percent.*he relevant level of net wor$in% capital for the pro?ect is expected to be !4,000 immediatel , !",000 in 1 ear, !7,000 in 2 ears, and !0 in 3 ears.'elevant expected operatin% cash flows and cash flows from capital spendin% in ears 0, 1, 2, and 3 are presented in the followin% table.5hat is the net present value of this pro?ect-Assume that the cash flow from sellin% the pro?ect, terminal value, and opportunit costs are !0 in each ear.Dear 0 Dear 1 Dear 2Dear 3Bperatin% cash flows !0 !3,000 !3,000 !3,000/ash flows from capital spendin% C!14,000 !0 !0 !11,00013. :atriot *heaters is considerin% a pro?ect that would last for 3 ears and have a cost of capital of 6.0 percent.*he relevant level of net wor$in% capital for the pro?ect is expected to be !4,000 immediatel , !2,000 in 1 ear, !2,000 in 2 ears, and !0 in 3 ears.'elevant expected operatin% cash flows and cash flows from capital spendin% in ears 0, 1, 2, and 3 are presented in the followin% table.5hat is the net present value of this pro?ect-Assume that the cash flow from sellin% the pro?ect, terminal value, and opportunit costs are !0 in each ear.Dear 0 Dear 1 Dear 2Dear 3Bperatin% cash flows !0 !3,000 !3,000 !3,000/ash flows from capital spendin% C!14,000 !0 !0 !11,00013. :atriot *heaters is considerin% a pro?ect that would last for 3 ears and have a cost of capital of 3.0 percent.*he relevant level of net wor$in% capital for the pro?ect is expected to be !2,000 immediatel , !4,000 in 1 ear, !9,000 in 2 ears, and !0 in 3 ears.'elevant expected operatin% cash flows and cash flows from capital spendin% in ears 0, 1, 2, and 3 are presented in the followin% table.5hat is the net present value of this pro?ect-Assume that the cash flow from sellin% the pro?ect, terminal value, and opportunit costs are !0 in each ear.Dear 0 Dear 1 Dear 2Dear 3Bperatin% cash flows !0 !3,000 !3,000 !3,000/ash flows from capital spendin% C!14,000 !0 !0 !11,00016FNAN 301, fall 2011, final exam, solutionsFind the tax rate from an incomplete pro+ect income statement with partial sun# costs14. :atriot *heaters is evaluatin% the claw machine pro?ect.0urin% ear 1, the claw machine pro?ect is expected to have relevant revenue of !7",000, relevant variable costs of !3",000, and relevant depreciation of !0.&n addition, :atriot *heaters would have one source of fixed costs associated with the claw machine pro?ect.Desterda, :atriot *heaters si%ned a deal with 'ub 1ar$etin% to develop a mar$etin% campai%n for use in the pro?ect.*he terms of the deal re8uire :atriot *heaters to pa 'ub 1ar$etin% either !1",000 in 1 ear if the pro?ect is pursued or !20,000 in 1 ear if the pro?ect is not pursued. 'elevant net income for the claw machine pro?ect in ear 1 is expected to be 31,000.5hat is the tax rate expected to be in ear 1-A. A rate less than 40.00@ or a rate %reater than or e8ual to 60.00@). A rate e8ual to or %reater than 40.00@ but less than 4".00@/. A rate e8ual to or %reater than 4".00@ but less than "0.00@0. A rate e8ual to or %reater than "0.00@ but less than "".00@#. A rate e8ual to or %reater than "".00@ but less than 60.00@14. :atriot *heaters is evaluatin% the claw machine pro?ect.0urin% ear 1, the claw machine pro?ect is expected to have relevant revenue of !7",000, relevant variable costs of !3",000, and relevant depreciation of !0.&n addition, :atriot *heaters would have one source of fixed costs associated with the claw machine pro?ect.Desterda, :atriot *heaters si%ned a deal with 'ub 1ar$etin% to develop a mar$etin% campai%n for use in the pro?ect.*he terms of the deal re8uire :atriot *heaters to pa 'ub 1ar$etin% either !1",000 in 1 ear if the pro?ect is pursued or !20,000 in 1 ear if the pro?ect is not pursued. 'elevant net income for the claw machine pro?ect in ear 1 is expected to be 32,000.5hat is the tax rate expected to be in ear 1-A. A rate less than 40.00@ or a rate %reater than or e8ual to 60.00@). A rate e8ual to or %reater than 40.00@ but less than 4".00@/. A rate e8ual to or %reater than 4".00@ but less than "0.00@0. A rate e8ual to or %reater than "0.00@ but less than "".00@#. A rate e8ual to or %reater than "".00@ but less than 60.00@12FNAN 301, fall 2011, final exam, solutions14. :atriot *heaters is evaluatin% the claw machine pro?ect.0urin% ear 1, the claw machine pro?ect is expected to have relevant revenue of !7",000, relevant variable costs of !30,000, and relevant depreciation of !0.&n addition, :atriot *heaters would have one source of fixed costs associated with the claw machine pro?ect.Desterda, :atriot *heaters si%ned a deal with 'ub 1ar$etin% to develop a mar$etin% campai%n for use in the pro?ect.*he terms of the deal re8uire :atriot *heaters to pa 'ub 1ar$etin% either !1",000 in 1 ear if the pro?ect is pursued or !20,000 in 1 ear if the pro?ect is not pursued. 'elevant net income for the claw machine pro?ect in ear 1 is expected to be 36,000.5hat is the tax rate expected to be in ear 1-A. A rate less than 40.00@ or a rate %reater than or e8ual to 60.00@). A rate e8ual to or %reater than 40.00@ but less than 4".00@/. A rate e8ual to or %reater than 4".00@ but less than "0.00@0. A rate e8ual to or %reater than "0.00@ but less than "".00@#. A rate e8ual to or %reater than "".00@ but less than 60.00@14. :atriot *heaters is evaluatin% the claw machine pro?ect.0urin% ear 1, the claw machine pro?ect is expected to have relevant revenue of !7",000, relevant variable costs of !30,000, and relevant depreciation of !0.&n addition, :atriot *heaters would have one source of fixed costs associated with the claw machine pro?ect.Desterda, :atriot *heaters si%ned a deal with 'ub 1ar$etin% to develop a mar$etin% campai%n for use in the pro?ect.*he terms of the deal re8uire :atriot *heaters to pa 'ub 1ar$etin% either !1",000 in 1 ear if the pro?ect is pursued or !20,000 in 1 ear if the pro?ect is not pursued. 'elevant net income for the claw machine pro?ect in ear 1 is expected to be 27,000.5hat is the tax rate expected to be in ear 1-A. A rate less than 40.00@ or a rate %reater than or e8ual to 60.00@). A rate e8ual to or %reater than 40.00@ but less than 4".00@/. A rate e8ual to or %reater than 4".00@ but less than "0.00@0. A rate e8ual to or %reater than "0.00@ but less than "".00@#. A rate e8ual to or %reater than "".00@ but less than 60.00@19FNAN 301, fall 2011, final exam, solutionsConceptual: using base-case NPV to make final decisions15. Patriot Theaters operates movie theaters in the Mid-Atlantic region of the United States.Theobjective of the firms managers is to maximize shareholder value.The firm is evaluating a new project that would involve expanding into Boston, where there are often blizzards.Based on the information given in the question and the following table on the Boston project, which assertion is true?Base-case NPV (based on final estimates and expectations) $27,000Value created if the blizzard scenario occurs (based on scenario analysis) -$230,000Value created if worst-case sales occur (based on sensitivity analysis) -$420,000Value created if best-case sales occur (based on sensitivity analysis) $210,000Probability that project will have NPV > 0 (based on simulation analysis) 18%A. It is not clear whether Patriot Theaters should accept or reject the Boston project, because the information that is provided is contradictory with respect to answering the questionB. It is not clear whether Patriot Theaters should accept or reject the Boston project, because the cost of capital is not givenC. Patriot Theaters should be indifferent between accepting and rejecting the Boston projectD. Patriot Theaters should accept the Boston projectE. Patriot Theaters should reject the Boston project15. Patriot Theaters operates movie theaters in the Mid-Atlantic region of the United States.Theobjective of the firms managers is to maximize shareholder value.The firm is evaluating a new project that would involve expanding into Boston, where there are often blizzards.Based on the information given in the question and the following table on the Boston project, which assertion is true?Base-case NPV (based on final estimates and expectations) -$27,000Value created if the blizzard scenario occurs (based on scenario analysis) $230,000Value created if worst-case sales occur (based on sensitivity analysis) -$210,000Value created if best-case sales occur (based on sensitivity analysis) $420,000Probability that project will have NPV > 0 (based on simulation analysis) 81%A. It is not clear whether Patriot Theaters should accept or reject the Boston project, because the information that is provided is contradictory with respect to answering the questionB. It is not clear whether Patriot Theaters should accept or reject the Boston project, because the cost of capital is not givenC. Patriot Theaters should be indifferent between accepting and rejecting the Boston projectD. Patriot Theaters should accept the Boston projectE. Patriot Theaters should reject the Boston project17FNAN 301, fall 2011, final exam, solutions15. Patriot Theaters operates movie theaters in the Mid-Atlantic region of the United States.Theobjective of the firms managers is to maximize shareholder value.The firm is evaluating a new project that would involve expanding into Miami, where there are often hurricanes.Based on theinformation given in the question and the following table on the Miami project, which assertion is true?Base-case NPV (based on final estimates and expectations) $27,000Value created if the hurricane scenario occurs (based on scenario analysis) -$230,000Value created if worst-case sales occur (based on sensitivity analysis) -$420,000Value created if best-case sales occur (based on sensitivity analysis) $210,000Probability that project will have NPV > 0 (based on simulation analysis) 18%A. It is not clear whether Patriot Theaters should accept or reject the Miami project, because the information that is provided is contradictory with respect to answering the questionB. It is not clear whether Patriot Theaters should accept or reject the Miami project, because the cost of capital is not givenC. Patriot Theaters should be indifferent between accepting and rejecting the Miami projectD. Patriot Theaters should reject the Miami projectE. Patriot Theaters should accept the Miami project15. Patriot Theaters operates movie theaters in the Mid-Atlantic region of the United States.Theobjective of the firms managers is to maximize shareholder value.The firm is evaluating a new project that would involve expanding into Miami, where there are often hurricanes.Based on theinformation given in the question and the following table on the Miami project, which assertion is true?Base-case NPV (based on final estimates and expectations) -$27,000Value created if the hurricane scenario occurs (based on scenario analysis) $230,000Value created if worst-case sales occur (based on sensitivity analysis) -$210,000Value created if best-case sales occur (based on sensitivity analysis) $420,000Probability that project will have NPV > 0 (based on simulation analysis) 81%A. It is not clear whether Patriot Theaters should accept or reject the Miami project, because the information that is provided is contradictory with respect to answering the questionB. It is not clear whether Patriot Theaters should accept or reject the Miami project, because the cost of capital is not givenC. Patriot Theaters should be indifferent between accepting and rejecting the Miami projectD. Patriot Theaters should reject the Miami projectE. Patriot Theaters should accept the Miami project20FNAN 301, fall 2011, final exam, solutionsGet geometric from arithmetic and all !ut one return16. A stoc$ had returns of 21.0@, C20.0@, and 32.0@ in each of the past three ears.Bver the past four ears, the arithmetic avera%e annual return for the stoc$ was ".0@.5hat was the %eometric return for the stoc$ over the past four ears-A. A rate e8ual to or %reater than 2."0@ but less than 3."0@). A rate e8ual to or %reater than 3."0@ but less than 4."0@/. A rate e8ual to or %reater than 4."0@ but less than "."0@0. A rate e8ual to or %reater than "."0@ but less than 6."0@#. A rate less than 2."0@ or a rate %reater than or e8ual to 6."0@16. A stoc$ had returns of 21.0@, C20.0@, and 32.0@ in each of the past three ears.Bver the past four ears, the arithmetic avera%e annual return for the stoc$ was 9.0@.5hat was the %eometric return for the stoc$ over the past four ears-A. A rate e8ual to or %reater than 2."0@ but less than 3."0@). A rate e8ual to or %reater than 3."0@ but less than 4."0@/. A rate e8ual to or %reater than 4."0@ but less than "."0@0. A rate e8ual to or %reater than "."0@ but less than 6."0@#. A rate less than 2."0@ or a rate %reater than or e8ual to 6."0@16. A stoc$ had returns of 12.0@, C20.0@, and 37.0@ in each of the past three ears.Bver the past four ears, the arithmetic avera%e annual return for the stoc$ was 6.0@.5hat was the %eometric return for the stoc$ over the past four ears-A. A rate e8ual to or %reater than 2."0@ but less than 3."0@). A rate e8ual to or %reater than 3."0@ but less than 4."0@/. A rate e8ual to or %reater than 4."0@ but less than "."0@0. A rate e8ual to or %reater than "."0@ but less than 6."0@#. A rate less than 2."0@ or a rate %reater than or e8ual to 6."0@16. A stoc$ had returns of 12.0@, C20.0@, and 37.0@ in each of the past three ears.Bver the past four ears, the arithmetic avera%e annual return for the stoc$ was 2.0@.5hat was the %eometric return for the stoc$ over the past four ears-A. A rate e8ual to or %reater than 2."0@ but less than 3."0@). A rate e8ual to or %reater than 3."0@ but less than 4."0@/. A rate e8ual to or %reater than 4."0@ but less than "."0@0. A rate e8ual to or %reater than "."0@ but less than 6."0@#. A rate less than 2."0@ or a rate %reater than or e8ual to 6."0@21FNAN 301, fall 2011, final exam, solutionsGet expected ,- from $ states and P., -/, and P/12. 3hares of :atriot *heaters are currentl priced at !90 per share.*he followin% table indicateswhat could happen with the :atriot *heaters stoc$ price and dividend per share over the next ear.5hat is the standard deviation of :atriot *heaters stoc$=s returns-Butcome:robabilit ofoutcome:rice of :atriot *heatersstoc$ in 1 ear0ividend paid b :atriot*heaters in 1 earHood .2 !9" !11)ad .3 !"7 !"A. A rate less than 6.0@ or a rate %reater than or e8ual to 26.0@). A rate e8ual to or %reater than 6.0@ but less than 11.0@/. A rate e8ual to or %reater than 11.0@ but less than 16.0@0. A rate e8ual to or %reater than 16.0@ but less than 21.0@#. A rate e8ual to or %reater than 21.0@ but less than 26.0@12. 3hares of :atriot *heaters are currentl priced at !90 per share.*he followin% table indicateswhat could happen with the :atriot *heaters stoc$ price and dividend per share over the next ear.5hat is the standard deviation of :atriot *heaters stoc$=s returns-Butcome:robabilit ofoutcome:rice of :atriot *heatersstoc$ in 1 ear0ividend paid b :atriot*heaters in 1 earHood .2 !9" !1")ad .3 !"7 !1A. A rate less than 6.0@ or a rate %reater than or e8ual to 26.0@). A rate e8ual to or %reater than 6.0@ but less than 11.0@/. A rate e8ual to or %reater than 11.0@ but less than 16.0@0. A rate e8ual to or %reater than 16.0@ but less than 21.0@#. A rate e8ual to or %reater than 21.0@ but less than 26.0@22FNAN 301, fall 2011, final exam, solutions12. 3hares of :atriot *heaters are currentl priced at !60 per share.*he followin% table indicateswhat could happen with the :atriot *heaters stoc$ price and dividend per share over the next ear.5hat is the standard deviation of :atriot *heaters stoc$=s returns-Butcome:robabilit ofoutcome:rice of :atriot *heatersstoc$ in 1 ear0ividend paid b :atriot*heaters in 1 earHood .2 !63 !6)ad .3 !"0 !1A. A rate less than 6.0@ or a rate %reater than or e8ual to 26.0@). A rate e8ual to or %reater than 6.0@ but less than 11.0@/. A rate e8ual to or %reater than 11.0@ but less than 16.0@0. A rate e8ual to or %reater than 16.0@ but less than 21.0@#. A rate e8ual to or %reater than 21.0@ but less than 26.0@12. 3hares of :atriot *heaters are currentl priced at !60 per share.*he followin% table indicateswhat could happen with the :atriot *heaters stoc$ price and dividend per share over the next ear.5hat is the standard deviation of :atriot *heaters stoc$=s returns-Butcome:robabilit ofoutcome:rice of :atriot *heatersstoc$ in 1 ear0ividend paid b :atriot*heaters in 1 earHood .2 !62 !4)ad .3 !"2 !2A. A rate less than 6.0@ or a rate %reater than or e8ual to 26.0@). A rate e8ual to or %reater than 6.0@ but less than 11.0@/. A rate e8ual to or %reater than 11.0@ but less than 16.0@0. A rate e8ual to or %reater than 16.0@ but less than 21.0@#. A rate e8ual to or %reater than 21.0@ but less than 26.0@23FNAN 301, fall 2011, final exam, solutions%is# premium of a portfolio 19. Dou own a portfolio that has a total value of !17,000.*he portfolio has 2,000 shares of stoc$A, which is priced at !6.00 per share and has an expected return of 11.2@.*he portfolio also has",000 shares of stoc$ ), which has an expected return of 4."@.*he ris$Cfree return is 2.3@ and inflation is expected to be 3.2@.5hat is the ris$ premium for our portfolio- A. 6.43@ /. ".36@ #. *he 8uestion can not be answered without $nowin% the share price of stoc$ ) or the 8uestion can be answered without $nowin% the share price of stoc$ ), but none of the above is within 0.0"percenta%e points of the correct answer19. Dou own a portfolio that has a total value of !17,000.*he portfolio has 2,000 shares of stoc$A, which is priced at !6.00 per share and has an expected return of 11.2@.*he portfolio also has",000 shares of stoc$ ), which has an expected return of 4."@.*he ris$Cfree return is 3.2@ and inflation is expected to be 2.3@.5hat is the ris$ premium for our portfolio- A. "."3@ /. 6.27@ #. *he 8uestion can not be answered without $nowin% the share price of stoc$ ) or the 8uestion can be answered without $nowin% the share price of stoc$ ), but none of the above is within 0.0"percenta%e points of the correct answer19. Dou own a portfolio that has a total value of !17,000.*he portfolio has 2,000 shares of stoc$A, which is priced at !6.00 per share and has an expected return of 4."@.*he portfolio also has ",000 shares of stoc$ ), which has an expected return of 11.2@.*he ris$Cfree return is 2.3@ andinflation is expected to be 3.2@.5hat is the ris$ premium for our portfolio- A. 4.62@ /. 3.6"@ #. *he 8uestion can not be answered without $nowin% the share price of stoc$ ) or the 8uestion can be answered without $nowin% the share price of stoc$ ), but none of the above is within 0.0"percenta%e points of the correct answer19. Dou own a portfolio that has a total value of !17,000.*he portfolio has 2,000 shares of stoc$A, which is priced at !6.00 per share and has an expected return of 4."@.*he portfolio also has ",000 shares of stoc$ ), which has an expected return of 11.2@.*he ris$Cfree return is 3.2@ andinflation is expected to be 2.3@.5hat is the ris$ premium for our portfolio- A. 3.22@ /. 4."6@ #. *he 8uestion can not be answered without $nowin% the share price of stoc$ ) or the 8uestion can be answered without $nowin% the share price of stoc$ ), but none of the above is within 0.0"percenta%e points of the correct answer24FNAN 301, fall 2011, final exam, solutions0thics of insider trading17. Accordin% to the class overheads and basic ethics, which one of the followin% assertions about insider tradin%, which is a%ainst the law, is true-A. &nsider tradin% is ille%al and should not be considered as a potential approach to investin%). &nsider tradin% is ille%al and should be considered as a potential approach to investin%/. &nsider tradin% is le%al and should not be considered as a potential approach to investin%0. &nsider tradin% is le%al and should be considered as a potential approach to investin%17. Accordin% to the class overheads and basic ethics, which one of the followin% assertions about insider tradin%, which is a%ainst the law, is true-A. &nsider tradin% is ille%al and should be considered as a potential approach to investin%). &nsider tradin% is ille%al and should not be considered as a potential approach to investin%/. &nsider tradin% is le%al and should be considered as a potential approach to investin%0. &nsider tradin% is le%al and should not be considered as a potential approach to investin%17. Accordin% to the class overheads and basic ethics, which one of the followin% assertions about insider tradin%, which is a%ainst the law, is true-A. &nsider tradin% is le%al and should not be considered as a potential approach to investin%). &nsider tradin% is le%al and should be considered as a potential approach to investin%/. &nsider tradin% is ille%al and should not be considered as a potential approach to investin%0. &nsider tradin% is ille%al and should be considered as a potential approach to investin%17. Accordin% to the class overheads and basic ethics, which one of the followin% assertions about insider tradin%, which is a%ainst the law, is true-A. &nsider tradin% is le%al and should be considered as a potential approach to investin%). &nsider tradin% is le%al and should not be considered as a potential approach to investin%/. &nsider tradin% is ille%al and should be considered as a potential approach to investin%0. &nsider tradin% is ille%al and should not be considered as a potential approach to investin%2"FNAN 301, fall 2011, final exam, solutionsConceptual: unexpected return on a given day and !an# !eta20. 5hich one of the assertions about statement 1 and statement 2 is true-3tatement 1A Bn a %iven da, a sin%le stoc$=s unexpected return would li$el be .ero.3tatement 2A &f Hlobal National )an$ is a ban$, then the beta of Hlobal National )an$ common stoc$ is li$el to be %reater than 1.A. 3tatement 1 is true and statement 2 is true). 3tatement 1 is true and statement 2 is false/. 3tatement 1 is false and statement 2 is true0. 3tatement 1 is false and statement 2 is false20. 5hich one of the assertions about statement 1 and statement 2 is true-3tatement 1A Bn a %iven da, a sin%le stoc$=s unexpected return would li$el be .ero.3tatement 2A &f Hlobal National )an$ is a ban$, then the beta of Hlobal National )an$ common stoc$ is li$el to be less than 1.A. 3tatement 1 is true and statement 2 is true). 3tatement 1 is true and statement 2 is false/. 3tatement 1 is false and statement 2 is true0. 3tatement 1 is false and statement 2 is false26FNAN 301, fall 2011, final exam, solutionsCompute holdings of asset from portfolio and asset !etas21. ;al owns a portfolio worth !1,200 that consists of 2 stoc$sA :atriot *heaters, which has a beta of 1.90, and #ast 5est /ola, which has a beta of 0."0.;ow much is his #ast 5est /ola stoc$ worth if his portfolio has a beta of 1.30-A. An amount less than !300 or an amount e8ual to or %reater than !200). An amount e8ual to or %reater than !300 but less than !400/. An amount e8ual to or %reater than !400 but less than !"000. An amount e8ual to or %reater than !"00 but less than !600#. An amount e8ual to or %reater than !600 but less than !20021. ;al owns a portfolio worth !1,200 that consists of 2 stoc$sA :atriot *heaters, which has a beta of 1.90, and #ast 5est /ola, which has a beta of 0."0.;ow much is his #ast 5est /ola stoc$ worth if his portfolio has a beta of 1.20-A. An amount less than !300 or an amount e8ual to or %reater than !200). An amount e8ual to or %reater than !300 but less than !400/. An amount e8ual to or %reater than !400 but less than !"000. An amount e8ual to or %reater than !"00 but less than !600#. An amount e8ual to or %reater than !600 but less than !20021. ;al owns a portfolio worth !1,200 that consists of 2 stoc$sA :atriot *heaters, which has a beta of 1."0, and #ast 5est /ola, which has a beta of 0.90.;ow much is his #ast 5est /ola stoc$ worth if his portfolio has a beta of 1.10-A. An amount less than !300 or an amount e8ual to or %reater than !200). An amount e8ual to or %reater than !300 but less than !400/. An amount e8ual to or %reater than !400 but less than !"000. An amount e8ual to or %reater than !"00 but less than !600#. An amount e8ual to or %reater than !600 but less than !20021. ;al owns a portfolio worth !1,200 that consists of 2 stoc$sA :atriot *heaters, which has a beta of 1."0, and #ast 5est /ola, which has a beta of 0.90.;ow much is his #ast 5est /ola stoc$ worth if his portfolio has a beta of 1.30-A. An amount less than !300 or an amount e8ual to or %reater than !200). An amount e8ual to or %reater than !300 but less than !400/. An amount e8ual to or %reater than !400 but less than !"000. An amount e8ual to or %reater than !"00 but less than !600#. An amount e8ual to or %reater than !600 but less than !20022FNAN 301, fall 2011, final exam, solutionsFind !eta from 0%M, %F, and 0% of stoc#22. &f the expected return on the mar$et is 12.9 percent, the ris$Cfree rate is 4.2 percent, and :atriot *heaters common stoc$ has an expected return of 12.9 percent, then what is the beta for :atriot *heaters accordin% to the /apital Asset :ricin% 1odel -A. An amount less than 1.10 or an amount %reater than or e8ual to 1.70). An amount e8ual to or %reater than 1.10 but less than 1.30/. An amount e8ual to or %reater than 1.30 but less than 1."00. An amount e8ual to or %reater than 1."0 but less than 1.20#. An amount e8ual to or %reater than 1.20 but less than 1.7022. &f the expected return on the mar$et is 12.9 percent, the ris$Cfree rate is 4.2 percent, and :atriot *heaters common stoc$ has an expected return of 19.2 percent, then what is the beta for :atriot *heaters accordin% to the /apital Asset :ricin% 1odel -A. An amount less than 1.10 or an amount %reater than or e8ual to 1.70). An amount e8ual to or %reater than 1.10 but less than 1.30/. An amount e8ual to or %reater than 1.30 but less than 1."00. An amount e8ual to or %reater than 1."0 but less than 1.20#. An amount e8ual to or %reater than 1.20 but less than 1.7022. &f the expected return on the mar$et is 14.2 percent, the ris$Cfree rate is 2.9 percent, and :atriot *heaters common stoc$ has an expected return of 12.9 percent, then what is the beta for :atriot *heaters accordin% to the /apital Asset :ricin% 1odel -A. An amount less than 1.10 or an amount %reater than or e8ual to 1.70). An amount e8ual to or %reater than 1.10 but less than 1.30/. An amount e8ual to or %reater than 1.30 but less than 1."00. An amount e8ual to or %reater than 1."0 but less than 1.20#. An amount e8ual to or %reater than 1.20 but less than 1.7022. &f the expected return on the mar$et is 14.2 percent, the ris$Cfree rate is 2.9 percent, and :atriot *heaters common stoc$ has an expected return of 19.2 percent, then what is the beta for :atriot *heaters accordin% to the /apital Asset :ricin% 1odel -A. An amount less than 1.10 or an amount %reater than or e8ual to 1.70). An amount e8ual to or %reater than 1.10 but less than 1.30/. An amount e8ual to or %reater than 1.30 but less than 1."00. An amount e8ual to or %reater than 1."0 but less than 1.20#. An amount e8ual to or %reater than 1.20 but less than 1.7029FNAN 301, fall 2011, final exam, solutionsFind inflation from C1PM 0% and expected real rate23. *he ris$Cfree return is 3.0@, the expected return on the mar$et is 16.0@, the expected real return for :atriot *heaters stoc$ is 4."@, and the beta for :atriot *heaters stoc$ is 0.9.5hat is the inflation rate expected to be- 23. *he ris$Cfree return is 3.0@, the expected return on the mar$et is 16.0@, the expected real return for :atriot *heaters stoc$ is ".4@, and the beta for :atriot *heaters stoc$ is 0.9.5hat is the inflation rate expected to be- 23. *he ris$Cfree return is 6.0@, the expected return on the mar$et is 13.0@, the expected real return for :atriot *heaters stoc$ is 4."@, and the beta for :atriot *heaters stoc$ is 0.9.5hat is the inflation rate expected to be- 23. *he ris$Cfree return is 6.0@, the expected return on the mar$et is 13.0@, the expected real return for :atriot *heaters stoc$ is ".4@, and the beta for :atriot *heaters stoc$ is 0.9.5hat is the inflation rate expected to be- Compute *1CC with $ items24. :atriot *heaters has 700,000 shares of common e8uit outstandin% that have an expected return of 19.70@ and a current price of !"0 each.*he expected return on the mar$et is 22."0@ and the ris$Cfree rate is 1.20@.:atriot *heaters has issued 90,000 bonds with a face value of !1,000 and a mar$et value of !1,0"0 each.*he ield to maturit on these bonds is 6.24@, the annual coupon rate is 2.42@, and the current ield is 2.02@.&f the corporate tax rate is 40@, what is the wei%htedCavera%e cost of capital for :atriot *heaters-24. :atriot *heaters has 700,000 shares of common e8uit outstandin% that have an expected return of 19.70@ and a current price of !30 each.*he expected return on the mar$et is 22."0@ and the ris$Cfree rate is 1.20@.:atriot *heaters has issued 90,000 bonds with a face value of !1,000 and a mar$et value of !1,0"0 each.*he ield to maturit on these bonds is 6.24@, the annual coupon rate is 2.42@, and the current ield is 2.02@.&f the corporate tax rate is 40@, what is the wei%htedCavera%e cost of capital for :atriot *heaters-24. :atriot *heaters has 700,000 shares of common e8uit outstandin% that have an expected return of 19.70@ and a current price of !"0 each.*he expected return on the mar$et is 22."0@ and the ris$Cfree rate is 1.20@.:atriot *heaters has issued 90,000 bonds with a face value of !1,000 and a mar$et value of !7"0 each.*he ield to maturit on these bonds is 2.42@, the annual coupon rate is 6.24@, and the current ield is 6."2@.&f the corporate tax rate is 40@, what is the wei%htedCavera%e cost of capital for :atriot *heaters-24. :atriot *heaters has 700,000 shares of common e8uit outstandin% that have an expected return of 19.70@ and a current price of !30 each.*he expected return on the mar$et is 22."0@ and the ris$Cfree rate is 1.20@.:atriot *heaters has issued 90,000 bonds with a face value of !1,000 and a mar$et value of !7"0 each.*he ield to maturit on these bonds is 2.42@, the annual coupon rate is 6.24@, and the current ield is 6."2@.&f the corporate tax rate is 40@, what is the wei%htedCavera%e cost of capital for :atriot *heaters-27FNAN 301, fall 2011, final exam, solutionsCompute 'PV from *1CC and ad+ustment for !elow(a!ove average ris# for firm2". :atriot *heaters is evaluatin% the ;arvard pro?ect, which is a 2Cear pro?ect with expected cash flows of C!100,000 todaE !60,000 in 1 earE and !60,000 in 2 ears.*he ;arvard pro?ect is considered more ris$ than an avera%eCris$ pro?ect at :atriot *heaters, such that the appropriate discount rate for it is 2.6 percenta%e points different than the discount rate used for an avera%eCris$ pro?ect at :atriot *heaters.5hat is the N:G of the ;arvard pro?ect if the wei%htedCavera%e cost of capital for :atriot *heaters is 2.2 percent-2". :atriot *heaters is evaluatin% the ;arvard pro?ect, which is a 2Cear pro?ect with expected cash flows of C!100,000 todaE !60,000 in 1 earE and !60,000 in 2 ears.*he ;arvard pro?ect is considered less ris$ than an avera%eCris$ pro?ect at :atriot *heaters, such that the appropriate discount rate for it is 2.6 percenta%e points different than the discount rate used for an avera%eCris$ pro?ect at :atriot *heaters.5hat is the N:G of the ;arvard pro?ect if the wei%htedCavera%e cost of capital for :atriot *heaters is 2.2 percent-2". :atriot *heaters is evaluatin% the ;arvard pro?ect, which is a 2Cear pro?ect with expected cash flows of C!100,000 todaE !60,000 in 1 earE and !60,000 in 2 ears.*he ;arvard pro?ect is considered more ris$ than an avera%eCris$ pro?ect at :atriot *heaters, such that the appropriate discount rate for it is 1.6 percenta%e points different than the discount rate used for an avera%eCris$ pro?ect at :atriot *heaters.5hat is the N:G of the ;arvard pro?ect if the wei%htedCavera%e cost of capital for :atriot *heaters is 7.2 percent-2". :atriot *heaters is evaluatin% the ;arvard pro?ect, which is a 2Cear pro?ect with expected cash flows of C!100,000 todaE !60,000 in 1 earE and !60,000 in 2 ears.*he ;arvard pro?ect is considered less ris$ than an avera%eCris$ pro?ect at :atriot *heaters, such that the appropriate discount rate for it is 1.6 percenta%e points different than the discount rate used for an avera%eCris$ pro?ect at :atriot *heaters.5hat is the N:G of the ;arvard pro?ect if the wei%htedCavera%e cost of capital for :atriot *heaters is 7.2 percent-30FNAN 301, fall 2011, final exam, solutionsConceptual: effect of rate and time on future value1. For each of the 4 investments described in the table, the investor would pa !"00 toda to purchase the investment.#ach investment would have the annual return noted in the table and each investment would ma$e a sin%le, lump sum pament to the investor in the number of ears from toda noted in the table.&f 'A ( ') and *+ ( *,, then which assertion is true-All annual returns and numbers of ears from toda when the sin%le, lump sum pament is made are %reater than .ero.&nvestment Annual returnNumber of ears from toda when thesin%le, lump sum pament is madeA 'A *) ') *+ ' *+, ' *,12 "nvestment 1 will ma#e a larger single, lump sum payment in T years than investment 3, and investmentwill ma#e a larger single, lump sum payment in T years than investment 4 will ma#e in T4 years ). &nvestment A will ma$e a lar%er sin%le, lump sum pament in * ears than investment ), and investment , will ma$e a lar%er sin%le, lump sum pament in *, ears than investment + will ma$e in *+ ears /. &nvestment ) will ma$e a lar%er sin%le, lump sum pament in * ears than investment A, and investment + will ma$e a lar%er sin%le, lump sum pament in *+ ears than investment , will ma$e in *, ears 0. &nvestment ) will ma$e a lar%er sin%le, lump sum pament in * ears than investment A, and investment , will ma$e a lar%er sin%le, lump sum pament in *, ears than investment + will ma$e in *+ ears #. None of the above assertions is true "nvestment 1 will ma#e a larger single, lump sum payment in T years than investment 3*ith any investment in T years, you would have 5.. 6 7/ 8 r9T*ith investment 1, you would have 5.. 6 7/ 8 %19T in T years *ith investment 3, you would have 5.. 6 7/ 8 %39T in T years*e can conclude that 5.. 6 7/ 8 %19T : 5.. 6 7/ 8 %39T,ince !oth 1 and 3 are positive, /8%1 and /8%3 are !oth greater than /, which means that !oth investments get more valua!le each year, and since %1 : %3, investment 1 will get more valua!le each year than investment 3"nvestmentwill ma#e a larger single, lump sum payment in T years than investment 4 will ma#e in T4 years*ith any investment that pays % per year, you would get 5.. 6 7/ 8 %9t in t years*ith investment , you would get 5.. 6 7/ 8 %9T in T years *ith investment 4, you would get 5.. 6 7/ 8 %9T4 in T4 years*e can conclude that 5.. 6 7/ 8 %9T : 5.. 6 7/ 8 %9T4,ince % is positive, /8% is greater than /, which means that !oth investments get more valua!le each year, and since T : T4, investmentwill increase its value for more years, so it will pay a larger single, lump sum than investment 4, which will pay off earlierPutting it together, the answer is:12 "nvestment 1 will ma#e a larger single, lump sum payment in T years than investment 3 and investmentwill ma#e a larger single, lump sum payment in T years than investment 4 will ma#e in T4 years31FNAN 301, fall 2011, final exam, solutions1. For each of the 4 investments described in the table, the investor would pa !"00 toda to purchase the investment.#ach investment would have the annual return noted in the table and each investment would ma$e a sin%le, lump sum pament to the investor in the number of ears from toda noted in the table.&f 'A ( ') and *, ( *+, then which assertion is true-All annual returns and numbers of ears from toda when the sin%le, lump sum pament is made are %reater than .ero.&nvestment Annual returnNumber of ears from toda when thesin%le, lump sum pament is madeA 'A *) ') *+ ' *+, ' *,A. &nvestment A will ma$e a lar%er sin%le, lump sum pament in * ears than investment ), and investment + will ma$e a lar%er sin%le, lump sum pament in *+ ears than investment , will ma$e in *, ears 32 "nvestment 1 will ma#e a larger single, lump sum payment in T years than investment 3,and investment 4 will ma#e a larger single, lump sum payment in T4 years than investmentwill ma#e in T years /. &nvestment ) will ma$e a lar%er sin%le, lump sum pament in * ears than investment A, and investment + will ma$e a lar%er sin%le, lump sum pament in *+ ears than investment , will ma$e in *, ears 0. &nvestment ) will ma$e a lar%er sin%le, lump sum pament in * ears than investment A, and investment , will ma$e a lar%er sin%le, lump sum pament in *, ears than investment + will ma$e in *+ ears #. None of the above assertions is true "nvestment 1 will ma#e a larger single, lump sum payment in T years than investment 3*ith any investment in T years, you would have 5.. 6 7/ 8 r9T*ith investment 1, you would have 5.. 6 7/ 8 %19T in T years *ith investment 3, you would have 5.. 6 7/ 8 %39T in T years*e can conclude that 5.. 6 7/ 8 %19T : 5.. 6 7/ 8 %39T,ince !oth 1 and 3 are positive, /8%1 and /8%3 are !oth greater than /, which means that !oth investments get more valua!le each year, and since %1 : %3, investment 1 will get more valua!le each year than investment 3"nvestment 4 will ma#e a larger single, lump sum payment in T4 years than investmentwill ma#e in T years*ith any investment that pays % per year, you would get 5.. 6 7/ 8 %9t in t years*ith investment , you would get 5.. 6 7/ 8 %9T in T years *ith investment 4, you would get 5.. 6 7/ 8 %9T4 in T4 years*e can conclude that 5.. 6 7/ 8 %9T4 : 5.. 6 7/ 8 %9T,ince % is positive, /8% is greater than /, which means that !oth investments get more valua!le each year, and since T4 : T, investment 4 will increase its value for more years, so it will pay a larger single, lump sum than investment , which will pay off earlierPutting it together, the answer is:32 "nvestment 1 will ma#e a larger single, lump sum payment in T years than investment 3 and investment 4 will ma#e a larger single, lump sum payment in T4 years than investmentwill ma#e in T years32FNAN 301, fall 2011, final exam, solutions1. For each of the 4 investments described in the table, the investor would pa !"00 toda to purchase the investment.#ach investment would have the annual return noted in the table and each investment would ma$e a sin%le, lump sum pament to the investor in the number of ears from toda noted in the table.&f ') ( 'A and *+ ( *,, then which assertion is true-All annual returns and numbers of ears from toda when the sin%le, lump sum pament is made are %reater than .ero.&nvestment Annual returnNumber of ears from toda when thesin%le, lump sum pament is madeA 'A *) ') *+ ' *+, ' *,A. &nvestment A will ma$e a lar%er sin%le, lump sum pament in * ears than investment ), and investment + will ma$e a lar%er sin%le, lump sum pament in *+ ears than investment , will ma$e in *, ears ). &nvestment A will ma$e a lar%er sin%le, lump sum pament in * ears than investment ), and investment , will ma$e a lar%er sin%le, lump sum pament in *, ears than investment + will ma$e in *+ ears C2 "nvestment 3 will ma#e a larger single, lump sum payment in T years than investment 1, and investmentwill ma#e a larger single, lump sum payment in T years than investment 4 will ma#e in T4 years 0. &nvestment ) will ma$e a lar%er sin%le, lump sum pament in * ears than investment A, and investment , will ma$e a lar%er sin%le, lump sum pament in *, ears than investment + will ma$e in *+ ears #. None of the above assertions is true "nvestment 3 will ma#e a larger single, lump sum payment in T years than investment 1*ith any investment in T years, you would have 5.. 6 7/ 8 r9T*ith investment 1, you would have 5.. 6 7/ 8 %19T in T years *ith investment 3, you would have 5.. 6 7/ 8 %39T in T years*e can conclude that 5.. 6 7/ 8 %39T : 5.. 6 7/ 8 %19T,ince !oth 1 and 3 are positive, /8%1 and /8%3 are !oth greater than /, which means that !oth investments get more valua!le each year, and since %3 : %1, investment 3 will get more valua!le each year than investment 1"nvestmentwill ma#e a larger single, lump sum payment in T years than investment 4 will ma#e in T4 years*ith any investment that pays % per year, you would get 5.. 6 7/ 8 %9t in t years*ith investment , you would get 5.. 6 7/ 8 %9T in T years *ith investment 4, you would get 5.. 6 7/ 8 %9T4 in T4 years*e can conclude that 5.. 6 7/ 8 %9T : 5.. 6 7/ 8 %9T4,ince % is positive, /8% is greater than /, which means that !oth investments get more valua!le each year, and since T : T4, investmentwill increase its value for more years, so it will pay a larger single, lump sum than investment 4, which will pay off earlierPutting it together, the answer is:C2 "nvestment 3 will ma#e a larger single, lump sum payment in T years than investment 1 and investmentwill ma#e a larger single, lump sum payment in T years than investment 4 will ma#e in T4 years33FNAN 301, fall 2011, final exam, solutions1. For each of the 4 investments described in the table, the investor would pa !"00 toda to purchase the investment.#ach investment would have the annual return noted in the table and each investment would ma$e a sin%le, lump sum pament to the investor in the number of ears from toda noted in the table.&f ') ( 'A and *, ( *+, then which assertion is true-All annual returns and numbers of ears from toda when the sin%le, lump sum pament is made are %reater than .ero.&nvestment Annual returnNumber of ears from toda when thesin%le, lump sum pament is madeA 'A *) ') *+ ' *+, ' *,A. &nvestment A will ma$e a lar%er sin%le, lump sum pament in * ears than investment ), and investment + will ma$e a lar%er sin%le, lump sum pament in *+ ears than investment , will ma$e in *, ears ). &nvestment A will ma$e a lar%er sin%le, lump sum pament in * ears than investment ), and investment , will ma$e a lar%er sin%le, lump sum pament in *, ears than investment + will ma$e in *+ ears /. &nvestment ) will ma$e a lar%er sin%le, lump sum pament in * ears than investment A, and investment + will ma$e a lar%er sin%le, lump sum pament in *+ ears than investment , will ma$e in *, ears -2 "nvestment 3 will ma#e a larger single, lump sum payment in T years than investment 1, and investment 4 will ma#e a larger single, lump sum payment in T4 years than investmentwill ma#e in T years #. None of the above assertions is true "nvestment 3 will ma#e a larger single, lump sum payment in T years than investment 1*ith any investment in T years, you would have 5.. 6 7/ 8 r9T*ith investment 1, you would have 5.. 6 7/ 8 %19T in T years *ith investment 3, you would have 5.. 6 7/ 8 %39T in T years*e can conclude that 5.. 6 7/ 8 %39T : 5.. 6 7/ 8 %19T,ince !oth 1 and 3 are positive, /8%1 and /8%3 are !oth greater than /, which means that !oth investments get more valua!le each year, and since %3 : %1, investment 3 will get more valua!le each year than investment 1"nvestment 4 will ma#e a larger single, lump sum payment in T4 years than investmentwill ma#e in T years*ith any investment that pays % per year, you would get 5.. 6 7/ 8 %9t in t years*ith investment , you would get 5.. 6 7/ 8 %9T in T years *ith investment 4, you would get 5.. 6 7/ 8 %9T4 in T4 years*e can conclude that 5.. 6 7/ 8 %9T4 : 5.. 6 7/ 8 %9T,ince % is positive, /8% is greater than /, which means that !oth investments get more valua!le each year, and since T4 : T, investment 4 will increase its value for more years, so it will pay a larger single, lump sum than investment , which will pay off earlierPutting it together, the answer is:-2 "nvestment 3 will ma#e a larger single, lump sum payment in T years than investment 1 and investment 4 will ma#e a larger single, lump sum payment in T4 years than investmentwill ma#e in T years 34FNAN 301, fall 2011, final exam, solutionsFind missing CF associated with future value of multiple cash flows2. &n 3 ears from toda, 1aa expects to invest !12,000 in an account.3he also expects to ma$e an investment of 4 in the same account in 1 ear from toda.5hat is 4 if 1aa expects to have !36,000 in her account in " ears from toda and the expected return for the account is 7.7 percent per ear-A. An amount e8ual to or %reater than !10,200 but less than !11,200). An amount e8ual to or %reater than !11,200 but less than !12,200/. An amount e8ual to or %reater than !12,200 but less than !13,2000. An amount e8ual to or %reater than !13,200 but less than !14,20002 1n amount less than ;/.,, 5"nvest A / *e #now FV5 D /5,>B,o /5,>B< D C/ 6 7/2.CC9>,o C/ D /5,>B< ( 7/2.CC9> D /.,B.@Mode is not relevant, since PMT D .0nter > C2C . /5,>B,C/@2C.' "F PV PMT FV,olve for E/,CI yrs "n 5 yrsTime E$ E/ . / $ @ > 5%eEtime . / $ @ > 5 B 5 B ,C/@2C.Christina will ma#e 5 e=ual annual contri!utions with the first in / year and we are interested in the value of her account in 5 years2*e can find this is as the future value of an annuity where "F D interest rate per year 7compound9 D /52$F' D 5 payments and future value in 5 yearsFV D future value in 5 years D />,C/@2C. 7from step /9PV D E/,$.. 7she currently has ;/,$..90'- Mode0nter 5 /52$ E/,$.. />,C/@2C.' "F PV PMT FV,olve for E/,I>@2551nswer: 1, as ;/,I>@255 is an amount e=ual to or greater than ;/, 5%eEtime . / $ @ > 5 B /,...' "FPV PMT FV,olve for ECBI2@.%ate of returnCash flows from investment D ;/B>2..Price at start of period D ;CI5252.. 8 CBI2@. G CI5252.. 8 7E/2ICF"2FNAN 301, fall 2011, final exam, solutions2. A bond issued b :atriot *heaters pas fixed annual coupons, ?ust paid an annual coupon, has anannual coupon rate of 16.6@, has a face value of !1,000, and matures in " ears from toda. Bne ear a%o, the ieldCtoCmaturit of the bond was 12.2@.*oda, the D*1 of the bond is 12.9@.5hat was the rate of return over the past ear for the :atriot *heaters bond-12 /52@.F 7plus or minus .2.$ percentage points9). 1"."6@ /. 19.63@ 0. 19.74@ #. None of the above is within 0.02 percenta%e points of the correct answer%ate of return D 7cash flows from investment 8 capital gain9 N price at start of periodD 7cash flows from investment 8 price at periodEend G price at periodEstart9 N price at periodEstart/2 Cash flows from investment D coupon that was +ust paid in this caseD coupon rate 6 face N coupons per year D 2/BB 6 /,... N / D ;/BB$2 Price at start of period D price of the !ond / year ago D price of a !ond with the following:"f the !ond matures in 5 years from today, then it matures in B years from / year ago, so' D B years 6 / coupon per year D B"F D &TM N K coupons per year D / D 2.5< D 52< percent,toc# 3P. D 7-/ 8 P/9 ( 7/ 8 expected return9 D 7-/ 8 P/9 ( 7/ 8 %9P. D 5>25.-/ D >2@.P/ D 5@2>.5>25. D 7>2@. 8 5@2>.9 ( 7/ 8 %9 5>25. D 52@ percent D 2.>@0xpected return D 2.@$ 8 2.>@ D 2..-/ D 52$.P/ D >@25.>52>. D 752$. 8 >@25.9 ( 7/ 8 %9 >52>. D >I2I252>.P D /2. years 6 $ coupons per year D I"F D &TM N K coupons per year D /B2> N $ D I2$FV D /,... D parPMT D par 6 coupon rate N K coupons per year D /... 6 />2>F N $ D 0. !23.19 FV D /,... D parPMT D par 6 coupon rate N K coupons per year D /... 6 />2IF N $ D 0'- mode0nter I I2> /...' "F PV PMT FV,olve for EC>@2>.Finding the stoc# value,ince !ond value 8 stoc# value D ;/,/.., stoc# value D ;/,/.. G ;C>@2>. D ;/5B2B.Finding the expected dividend,ince P. D -/( %Then ;/5B2B. D -/ ( 2/I million/. An amount e8ual to or %reater than !14 million and less than !16 million0. An amount less than !7 million or an amount e8ual to or %reater than !16 million#. *he 8uestion can not be answered for one or more of the followin% reasonsA at least one of the pro?ects has nonCconventional cash flowsE the cost of capital is not $nown for all pro?ectsE and the pabac$, discounted pabac$, and avera%e accountin% return thresholds are not $nown.The value created !y pursuing a pro+ect is its 'PV, so the most value that can !e created would !e the aggregate 'PV of all pro+ects with positive 'PV21mong pro+ects 1, 3, and C, pro+ects 3 and C have positive 'PV, so pursuing each of them would increase the amount of value created2Therefore, each should !e underta#en2The 'PVs of pro+ects - and 0 must !e computed2'PV 7-9 D OE/.2.P 8 O/$2.(/2.IP 8 OC2.(/2.I$P 8 OEI2.(/2.I@P 8 OEB2.(/2.I>P D E/2CPro+ect -: npv7I2.,E/.2.,Q/$2.,C2.,EI2.,E@2.R9 E/2CPro+ect - has a negative 'PV, so pursuing it would decrease the amount