UB MGF 401 - MGF301_Test_2_-_Spring_2011_Test_2a (6 pages)

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MGF301_Test_2_-_Spring_2011_Test_2a



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MGF301_Test_2_-_Spring_2011_Test_2a

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Pages:
6
School:
University at Buffalo, The State University of New York
Course:
Mgf 401 - Financial Institutions
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Name Student Number TEST 2 MGF 301 Corporation Finance Spring 2011 Please sign name in box Please tear off the answer sheet and answer all of the following questions on the answer sheet Note Total Points 100 Multiple Choice 4 points each unless otherwise indicated 1 The following arise out of a new project X implemented by YT Inc Which of the following does not represent a cash flow that should be taken into account for capital budgeting purposes a a decrease in income taxes paid to the government because of expenses of project X b increase in electricity usage because of new machinery c an increase in sales of a related YT Inc product caused by project X d all of the above should be taken into account 2 Jon is conducting a capital budgeting analysis using NPV for a major expansion of his company He is concerned because there is a lot of uncertainty about what the market conditions will be for his product the next few years Jon has decided to use his best estimate for the revenue even though there is a lot of uncertainty Is this the correct way to handle uncertainty in an NPV analysis a No he should use worst case estimates for cash flows if there is a lot of uncertainty b No NPV analysis requires the use of best case scenario cash flows c Yes because increased uncertainty is accounted for in an NPV analysis through a higher discount rate d It doesn t matter what cash flows Jon uses as he will get the same NPV 3 In which of the following investments is an investor expected to earn the most over a 40 year period A E r 1 and 100 2 and 10 Explain your answer 6 points B E r 0 and 25 C E r 4 Mark each statement about capital budgeting as true or false 2 points each a If a company accepts a project with a positive NPV the value of the company increases by the NPV b The IRR decision rule will give the same answer as the NPV decision rule for projects where none of the flaws with IRR are present Name Test 2 Spring 2011 Student Number c The payback method is not used as often as NPV because it is more difficult to calculate payback 5 AGG Inc s earnings are very dependent on the economy They have high earnings when the economy is booming and large losses in recessions Which is not true about the company a the company has a greater than 1 b the company has no unique risk c an investor in the company can diversify some of the company s overall risk d the company has high market risk 6 You are analyzing the stock of a Hollywood movie studio You find that the company has a high standard deviation of stock returns which means it has high overall risk But when you calculate beta you find 8 Is it possible to have high overall risk and low market risk Explain 6 points 7 Using estimates for E Rm and Rf based on our discussions in class as to what is reasonable if the Neptune Company has 1 1 what is an appropriate estimate for the E r next year under CAPM 6 points Show your estimates and calculation 8 An investment project costs 250 in time 0 and has the following payouts C1 75 C2 125 C3 100 and C4 100 The cost of capital for the firm is 13 Which of the following is the formula for NPV a 250 75 1 13 125 1 132 100 1 133 100 1 134 b 250 75 1 13 125 1 132 100 1 133 100 1 134 c 0 250 75 1 r 125 1 r 2 100 1 r 3 100 1 r 4 and solve for r d 250 1 13 75 1 132 125 1 133 100 1 134 100 1 135 9 Sensitivity analysis is useful to NPV calculations because a It shows which individual assumptions are the most crucial b It shows how bad things will be if several bad events occur at the same time c It shows where there are mistakes in the calculation d None of the above 10 The cash flows for a project are as follows initial cost of 2 000 000 C1 200 000 C2 800 000 C3 1 200 000 C4 2 000 000 C5 3 000 000 If the company uses the payback method with a three year payback should they accept the project Explain 6 points 2 Name Test 2 Spring 2011 Student Number 11 A proposed investment will cost 600 000 in year 0 It will have a life of 4 years and the cost will be depreciated using straight line to a zero salvage value The company expects revenues of 500 000 in time 1 and 600 000 in time 2 The variable cost is 50 of revenues and the fixed costs will be 50 000 Working capital is 10 of next year s revenues If taxes are 35 what is the incremental cash flow for year 1 Show your calculations 10 points 12 Assuming you have the per unit data for question 11 if you calculate the accounting breakeven and the economic breakeven which will require the sale of more units a the economic breakeven because the depreciation calculation under the accounting breakeven is too low if the time value of money is considered b the accounting breakeven because Generally Accepted Accounting Principles GAAP are conservative c both give the same breakeven d none of the above is true 13 If investors in the market are expecting that quarterly earnings of BCJ will be 25 below last year s earnings draw a graph indicating the market reaction to the announcement by the company that its quarterly earnings turned out to be 20 below last year s earnings Assume semi strong market efficiency 6 points 14 If the actual return over the last year was 7 2 and the dividend yield was 1 2 which of the following is the percentage capital gain a 6 b 8 4 c 6 d 8 4 15 Which of the following is not true about methods of capital budgeting a a discount rate is required to calculate IRR b NPV is generally preferred over the payback method because NPV includes discounting for the time value of money c the payback method ignores cash flows after the cutoff period d all of the above are true 3 Name Test 2 Spring 2011 Student Number 16 The company is considering a new project that costs 1 million in time 0 If the cash flows from the project are 200 000 per year for years 1 10 and the discount rate is 8 calculate the NPV of the project using the following annuity table 6 points time periods 9 10 11 interest rate 8 6 247 6 710 7 139 17 Some analysts have argued that stock prices follow trends in public culture One example is that the stock market is said to go …


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