BUAD 306 Business Finance Fall 2015 Practice Exam 3 THIS PRACTICE EXAM HAS 16 QUESTIONS THE ACTUAL EXAM HAS 28 THE ACTUAL EXAM HAS MORE CONCEPTUAL QUESTIONS THAN THIS PRACTICE EXAM 1 The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following A Salvage value B Wasted value C Sunk cost D Opportunity cost E Erosion 2 Gateway Communications is considering a project with an initial fixed asset cost of 2 46 million which will be depreciated straight line over the 10 year life of the project At the end of the project the equipment will be sold for an estimated salvage of 300 000 The project will not directly produce any sales but will reduce operating costs by 725 000 a year The tax rate is 35 percent The project will require 45 000 of inventory which will be recouped when the project ends Should this project be implemented if the firm requires a 20 percent rate of return Why or why not a No The NPV is 224 937 49 b No The NPV is 156 627 21 c Yes The NPV is 251 860 34 d Yes The NPV is 387 516 67 e Yes The NPV is 466 940 57 3 Silver Petroleum Inc just purchased some equipment at a cost of 67 000 What is the proper methodology for computing the depreciation expense for year 5 if the equipment is classified as 5 year property for MACRS a b c d e 67 000 x 1 0 20 x 0 1152 67 000 1 0 20 0 1152 67 000 x 1 0 1152 67 000 x 1 0 1152 67 000 x 0 1152 4 You own some equipment that you purchased 4 years ago at a cost of 225 000 The equipment is 5 year property for MACRS You are considering selling the equipment today for 95 000 Which one of the following statements is correct if your tax rate is 35 a b c d e The tax due on the sale is 26 425 The book value today is 186 120 The accumulated depreciation to date is 38 880 The taxable amount on the sale is 38 880 The aftertax salvage value is 75 358 5 A 4 year project has an initial asset investment of 306 600 and initial net working capital investment of 29 200 and an annual operating cash flow of 46 720 The fixed asset is fully depreciated over the life of the project and has no salvage value The net working capital will be recovered when the project ends The required return is 10 percent What is the project s equivalent annual cost or EAC a 158 491 b 152 309 c 146 363 d 145 509 e 142 212 6 A stock has a beta of 1 5 The expected return on the market portfolio is 12 The riskfree rate is 7 What is the expected return on the stock a 25 0 b 20 2 c 14 5 d 7 45 e 13 22 7 You own a portfolio with 50 invested in a risk free asset 30 in stock A with a beta of 1 5 and 20 in stock B Your portfolio has the same expected return as the market portfolio What is the beta of stock B The risk free rate is 5 a 0 43 b 1 00 c 1 73 d 1 85 e 2 75 8 If the CAPM holds which stock has the highest expected return Stock A B C Beta 0 5 1 4 1 0 A B C D Stock A Stock B Stock C Can not be determined because the answer depends on the return on the market portfolio E Can not be determined because the answer depends on both the risk free rate and the market risk premium 9 You observe the following Security Beta Expected Return A 2 0 28 B 1 5 25 What would the risk free rate have to be if the two stocks are correctly priced A B C D E 10 00 12 50 14 50 16 00 18 00 10 Calculate the expected return of stock A State of Economy Probability of State Boom 0 30 Normal 0 50 Recession 0 20 A B C D E 3 0 2 1 3 4 1 2 2 3 Rate of Return for A 10 2 3 11 A project is expected to create operating cash flows of 12 500 a year for three years The initial cost of the fixed assets is 50 000 These assets will be worthless at the end of the project An additional 5 000 of net working capital will be required throughout the life of the project What is the project s net present value if the required rate of return is 10 percent A B C D E 20 157 76 10 954 17 1 306 09 5 208 11 15 954 17 12 You have a portfolio consisting solely of stock A and stock B The portfolio has an expected return of 9 7 percent Stock A has an expected return of 12 percent while stock B is expected to return 7 percent What is the portfolio weight of stock A A 46 percent B 54 percent C 58 percent D 64 percent E 70 percent 13 The expected rate of return on a stock with a beta of 1 28 is 14 24 percent The market risk premium is 8 percent What is the risk free rate of return A 3 12 percent B 4 00 percent C 5 12 percent D 6 24 percent E 7 36 percent 14 Assume you want to construct a portfolio with a 15 percent return from the following two securities Security 1 2 Expected Return 16 12 5 Beta 1 12 0 94 What percentage of your portfolio should be invested in Security 1 A 71 B 47 C 43 D 53 E 67 15 If the reward to risk ratio is the same for all assets then which of the following is true i The market is not in equilibrium ii Holding risk constant some assets earn higher returns iii All assets have the same risk and the same return A I B II C III D I and II E None 16 What is operating cash flow using the following income statement The tax rate is 34 Sales 200 000 COGS 125 000 Depreciation 30 000 EBIT 45 000 Interest 20 000 Taxes 8 500 Net Income 16 500 A B C D E 66 500 46 500 59 700 55 700 47 500 BUAD 306 Formula Sheet Financial Statements Operating Cash Flow Sales Costs 1 tax rate Depreciation tax rate Net Capital Spending Ending Net Fixed Assets NFA Beginning NFA Depreciation Net Working Capital Current Assets Current Liabilities Free cash flow Operating Cash Flow Net Capital Spending Change in NWC Capital Budgeting Profitability Index PV Cash Flows Cost of Investment NPV C0 0 C0 C1 C2 1 r 1 r 2 C1 C2 1 …