Name_________________________________ Student Number___________________________________TEST 2MGF 301 Corporation FinanceFall 2011 Please sign name in boxPlease 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)1. Last year, stocks A, B & C had historical standard deviations: σA = .25, σB = .35, σC = .20. Which stock has the highest E(r) for the year 2012?(a) B(b) C(c) A(d) more information is required to answer this question2. ABC stock sells today for $35. You expect that one year from now one of three outcomes willoccur with the following probabilities and prices: there is a 20% chance P=$30; a 40% chance P=$40 and a 40% chance P=50. What is the expected return on the stock over the next year if you invest today? Show your work. (6 points) E(r) = .20 x [(30-35)/35] + .4 x [(40-35)/35] + .4 x [(50-35)/35] = .20 or 20%3. In 2010, stocks A,B,C had the following returns: rA = .12; rB= -.10; rC = .15 Which of the following is true? (a) E(rc) must be greater than E(rA)(b) A, B, C will have the same E(r) because they are all stocks(c) Stock B has E(r)>0(d) None of the above is true4. If markets follow the semi-strong form of efficient market theory, which is true about the stock price reaction to public announcements of information? (a) If stock prices are slow to react to public announcements of information, the theory is violated(b) As long as there is a quick initial movement in price after the announcement, there is no violation of the theory if the price returns to where it started(c)The price of a stock changes only when there is a public announcement of information(d) None of the above is true 5. The cash flows for a project are as follows: initial cost of $1,000,000, C1 = -200,000, C2 = 500,000, C3 = 600,000, C4 = 2,000,000, C5 = 10,000,000. If the company uses the payback method with a three year payback, should they take the project? Show your calculation and explain your answer. (6 points)Sum of cash flows received after 3 years = -200,000 + 500,000 + 600,000 = 900,000. As this isless than the 1,000,000 cost, this project does not payback within 3 years and should be rejected.Name_________________________________ Student Number___________________________________Test 2 – Fall 20116. Sensitivity analysis is useful to NPV calculations because(a) It can show which individual assumptions are the most crucial (b) It can show how bad things will be if many things go wrong at the same time(c) It can show where there are mistakes in the calculation(d) None of the above7-9. You have purchased a portfolio of equal investments in 4 stocks X,Y,W,Z that have the following β's: βW = 1.25; βX = 1.5; β Y = .7; βZ =.5. 7. Calculate the portfolio β. Show your calculation (6 points)Portfolio beta = average of the stock betas = (1.25+1.5+.7+.5)/4 = .98758. Using the portfolio beta from question 7, if E(Rm) = 9% and rf = 1%, what is the expected return using CAPM? Show your calculation. (6 points)E(r) = .01 + .9875(.09 - .01) = .089 or 8.9%9. Have you reduced any risk by combining the 4 stocks above into a portfolio? (a) Yes, because the portfolio will now have a β = .75(b) No, because the β of the portfolio represents market risk and this type of risk cannot be diversified(c) No, because all stocks have risk and you can only reduce risk by adding a bond(d) Yes, because some unique risk for each company will be canceled by the other stocks10. Which of the following is most likely to represent a cash flow that should be taken into account for capital budgeting analysis of a new product? (a) The decrease in revenue from an existing product that is caused by the availability of the new product(b) The depreciation expense charged under generally accepted accounting principals (GAAP)(c) The new project's share of the CEO's salary(d) The cost of developing the new product over the last two years11. Mark each statement about capital budgeting as true or false. (2 points each) a._F__To find the payback period under the payback method, you must first know the discount rateb._T__ If you are choosing between two mutually exclusive projects, the IRR method can lead to choosing the project with the lower NPVc._T__The time value of money is included in the IRR analysis by discounting future cash flows to the present2Name_________________________________ Student Number___________________________________Test 2 – Fall 201112. A proposed investment will cost $1,000,000 in year 0. It will have a life of 5 years and the cost will be depreciated using straight-line to a zero salvage value. For year 1, the company expects sales of 20,000 units at $45 each. The variable cost is $23 per unit and the fixed costs will be $150,000. Working capital in year 0 is $100,000 and this increases to $120,000 in year 1.If taxes are 35%, what is the incremental cash flow for year 1? Show your calculation. (8 points)Change in working capital = 120,000 – 100,000 = 20,000Cash flow from working capital = -20,000Depreciation Expense = 1,000,000/5 = 200,000Pre-tax Operating Cash flow = (20,000 x 45) – (20,000 x 23) – 150,000 – 200,000 = 90,000Operating Cash Flow = 90,000 x (1-.35) +200,000 – 20,000 = 238,50013. An investment project costs 2,000,000 in time 0 and has the following payouts: C1 = -250,000; C2 = 600,000, C3 = 900,000, C4 = 1,200,000 and C5 = 1,400,000. Set up the formula for calculating the IRR in as much detail as possible (Note: you do not have to actually solve for the answer) (6 points)0 = -2,000,000 – 250,000/(1+r) + 600,000/(1+r)2 + 900,000/(1+r)3 + 1,200,000/(1+r)4 + 1,400,000/(1+r)5Solve for r to find the IRR14. Which of the following is false about the NPV method of capital budgeting?(a) NPV is flawed because it ignores cash flows after the cut-off(b) A discount rate is required to do the NPV calculation(c) A project with a positive NPV will increase firm value(d) Scenario analysis is a way to determine how bad things can be if several things go wrong with the project at the same time15. You purchased a stock for $50 per share one year ago. During the year, the stock paid a $1 dividend per share and the stock price is now $34 per share. Calculate the actual return on your investment over the last year. Show your calculation (6 points)Return = (34 – 50 + 1)/50 = -.30 or -30%16. AGG Inc.’s