Question

1. The correlation between the Freedom Equity Fund and the S&P 500 index is 1. The expected return on the S&P 500 index is 10%, and the required return on the Freedom Equity Fund is 8%. The risk free return in the U.S. is 3%. Based on this information, the implied beta of the Freedom Equity Fund is:

A).       0.8                  

B).       0.7

C).       0.6                  

D).       0.5      

E).        0.9

2. A firm issues bonds of $550 million, repays bank loans of $200 million, issues shares worth $100 million and pays $50 million in dividends. This represents

A). A net cash inflow of $350 million

B). A net cash inflow of $400 million

C). A net cash inflow of $450 million

D). A net cash inflow of $850 million

E). A net cash inflow of $425 million

3 . Which of the following is relevant in determining cash flow for a capital investment project?

1. Sunk costs
2. Opportunity costs
3. Side effects such as lost sales
4. Changes in employee headcounts

1.          I and II only
2.         III and IV only
3.          II and III only
4. I, II, III, IV

4. Company A is deciding among two mutually exclusive projects. The two projects have the following cash flows:

                              Project A           Project B

               Year           Cash Flow     Cash Flow

                 0             -$40,000            -$30,000

                 1               10,000               8,000

                 2               15,000              12,000

                 3               20,000              20,000

                 4               20,000              15,000

The company's weighted average cost of capital is 10 percent. What is the net present value (NPV) of the project with the highest internal rate of return (IRR)?

a. $ 7,090

b. $ 8,360

c. $11,450

d. $12,462

e. $14,200

Answer 1

1. Implied Beta =(Expected Return-Risk free Rate)/(Market Return-Risk free rate) =(8%-3%)/(10%-3%) =0.7 (Option b is correct option)

2. Net Cash Flow =(550-200)+(100-50) =400 million (Option b is correct option)

3. Option c II and III is correct option.

4.

	A	B
1	-40000	-30000
2	10000	8000
3	15000	12000
4	20000	20000
5	20000	15000
IRR	19.96%	25.76%
Excel formula	IRR(A1:A5)	IRR(B1:B5)
NPV	10174.17	12461.58
Excel formula	NPV(10%,A2:A5)+A1	NPV(10%,B2:B5)+B1

Using Project B NPV =12461.58 (Option d is correct option)