Assignment help with managerial financeI get the questions tomorrow at noon eastern time and they are due at 6 pm eastern timeit is 10 medium questions
some topics arevaluing stocksNPV and other investment criteriaRisk and Return
MOS3310: Managerial Finance Final Exam – Winter 2020 April 15, 2020 INSTRUCTIONS: 1. The Exam is open book and you may use the textbook and excel for your calculations. 2. Please take pictures/scan your exam booklet and show as much work as possible. 3. Just writing a few numbers without showing the steps will not give you any grades. 4. Use reasonable assumptions if you feel like any information is missing. 1. Consider the following information about stocks I and stock II. State of the economy Probability of state of economy Return of stock I Return of Stock II Recession 0.25 .02 -0.25 Normal 0.5 .21 .09 Boom 0.25 .06 .44 The market risk premium is 8% and risk free rate is 4%. Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is “riskier”? Explain. 2. Consider the following information on 3 stocks. State of the economy Probability of state of economy Return of stock A Return of Stock B Return of Stock C Recession 0.20 .24 .36 .55 Normal 0.55 .17 .13 .09 Boom 0.25 0 -.28 -.45 a. If your portfolio is invested 40% in A , 40% in B and 20% in C. What is the portfolio expected return? b. What is the portfolio standard deviation? c. If the expected t-bill rate is 3.8%, what is the expected risk premium on the portfolio? d. If the expected inflation rate is 3.5%, what are the approximate and exact expected real returns on the portfolio? 3. Coral corporation just paid a dividend of $4.25 a share. The company will increase its dividend by 20% next year and will then reduce its dividend growth rate by 5% a year (example year 2 dividend growth rate is 20% - 5% = 15%) until it reaches the industry average of 5 percent dividend growth after which the company will keep the constant growth rate of 5%. a. If the required rate of return on Coral corp stock is 11%, what will be the share price according to the Dividend discount model? b. If the share price is 63.82$ and all the dividend information remains the same, what is the required rate of return of Coral Stock? 4. A project has the following cash flows Year Cash Flow 0 58000 1 -34000 2 -45000 a) What is the IRR for this project? If the required rate of return is 12%, should the firm accept the project? b) What is the NPV for this project? What is the NPV for the project if the required rate of return is 0%? 24%? What is going on here? Sketch the NPV profile to help with your answer 5. Suppose we are thinking about replacing a series of old computer systems with new computers. The old ones cost us $420,000 one year ago and is depreciated at a rate of $140,000 a year and will be completely written off in 3 years.It can be sold for $190,000 now or sold for $80,000 in two years. The new machine will cost $368,000 a year and will be depreciated at a rate of 10% a year. It is expected to be worth $198,000 after five years. The new machine will save $130,00 in maintenance costs per year. The tax rate is 38% and the discount rate is 13%. Should we replace the computer now or should we replace the computer in two years or should we not replace the computer at all? What are the relevant cash flows? Explain. 6. a. Gentle corporation has two divisions of equal size. Division A has a beta of 0.93, division B has a beta of 1.57. The company has no debt. The cost of capital for the entire corporation is 16%. Which of the two divisions have a lower cost of capital? Explain. b. Barrack mining uses a cost of capital of 11 % to evaluate an average risk project. It adds or subtracts 3% from its WACC to adjust for risk. Currently the firm has two mutually exclusive projects under consideration. Both the projects have an initial cost of $100,000 and will last 4 years. Project A , riskier than the average will produce an annual cash flow of $72,164 at the end of each year. Project B is less than average risk and will produce cash flows of $145,340 at the end of years 3 and 4 only. Which investment should the firm choose? Explain 7. Indicate whether the following events might cause stocks in general to change price, and whether they might cause Country Corp’s stock to change price. Explain why/how for each scenario a. The government announces that inflation unexpectedly jumped by 2 percent last month. b. Country corp’s quarterly earnings report just issued generally fell in line with analyst expectations, c. The government reports that economic growth last quarter was at 3 percent which is in line with economist’s forecasts d. The directors of the Corp die in a plane crash e. The government of Canada approves changes to the tax code that will increase the top marginal tax rate. The legislation has been debated for the previous six months. 8. NoRoni corp masks sells recyclable high quality personal protective equipment that will be sold for $55 each to all hospitals across Canada. Non-depreciated fixed costs are $100000 per year and variable costs are $50 per unit. Initial investment to manufacture the project is $500,000. The tax rate is 20% and the opportunity cost of capital is 8%. The project is expected to last 3 years and the machinery is expected to be worth 200,000 at the end of the 3 years. a. What is the NPV breakeven number of units to be sold each year? Assume straight line depreciation. b. If the maximum production capacity is 50,000 units a year, how much subsidy should the government give NoRoni corp every year to break even on an NPV basis? 9. Explain in a few sentences a. What is the security market line in the Capital asset pricing model? Why is it important/significant? (4) b. What is beta? Why is beta important? [3] c. Should diversified investors care about firm specific risk? Why/ Why not? (3)