Chapters 8 and 9

Question 1:
Profits. What are the profits and returns on the following investments?

Selling Price Percent

Original Cost of Distributions Dollar Return
Investment or Invested $ Investment Received $ Profits
CD $500.00 $525.00 $0.00
Stock $34.00 $26.00 $2.00
Bond $955.00 $1000.00 $240.00
Car $42,000.00 $3,220.00 $0.00

Question 2:
Expected return and standard deviation. Use the information in the following to answer the
questions below.

State of Probability Return on D Return on E Return on F

Economy of State in State in State in State
Boom .35 0.060 0.310 0.150
Normal .50 0.060 0.180 0.120
Recession .15 0.060 -0.210 -0.060
a. What is the expected returns of each asset?
b. What is the variance of each asset?
c. What is the standard deviation of each asset?

Question 3:
Beta of a portfolio. The beta of four stocks—G, H, I, and J—are 0.45, 0.8, 1.15, and 1.6,
respectively. What is the beta of a portfolio with the following weights in each asset?

Weight in G Weight in H Weight in I Weight in J

Portfolio 1 25% 25% 25% 25%
Portfolio 2 30% 40% 20% 10%

1|Page
Question 4:
Net present value. Garth Industries has a project with the following projected cash flows:
Initial Cost, Year 0: $320,000
Cash flow year one: $ 55,000
Cash flow year two: $ 75,000
Cash flow year three: $120,000
Cash flow year four: $180,000
a. Using a 10% discount rate for this project and the NPV model, determine whether this
project should be accepted or rejected.
b. Should it be accepted or rejected using a 12% discount rate?

Question 5:
Comparing all methods. Given the following after-tax cash flows on a new toy for Tyler's Toys,
find the project's payback period, NPV, and IRR. The appropriate discount rate for the project is
12%. If the cutoff period is six years for major projects, determine whether management will
accept or reject the project under the three different decision models.
Year 0 cash outflow: $10,400,000
Years 1 to 4 cash inflow: $2,600,000 each year
Year 5 cash inflow: $1,200,000
Years 6 to 8 cash inflow: $750,000 each year

2|Page