FIN 300 Study Guide - Final Guide: Relative Risk, Accrued Interest, Retained Earnings
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Set up an amortization schedule for a $40,000 loan to be repaid in equal installments at the end of each of the next 5 years. The interest rate is 7%. Round your answers to the nearest cent. Enter "0" if required
| Year | Payment | Repayment Interest | Repayment of Principal | Balance |
| 1 | $ | $ | $ | $ |
| 2 | $ | $ | $ | $ |
| 3 | $ | $ | $ | $ |
| 4 | $ | $ | $ | $ |
| 5 | $ | $ | $ | $ |
| Total | $ | $ | $ | |
How large must each annual payment be if the loan is for $80,000? Assume that the interest rate remains at 7% and that the loan is paid off over 5 years. Round your answer to the nearest cent.
$
How large must each payment be if the loan is for $80,000, the interest rate is 7%, and the loan is paid off in equal installments at the end of each of the next 10 years? This loan is for the same amount as the loan in part b, but the payments are spread out over twice as many periods. Round your answer to the nearest cent.
$
Why are these payments not half as large as the payments on the loan in part b?
-Select- Item 26
I. Because the payments are spread out over a longer time period, more principal must be paid on the loan, which raises the amount of each payment.
II. Because the payments are spread out over a longer time period, less interest is paid on the loan, which raises the amount of each payment.
III. Because the payments are spread out over a longer time period, less interest is paid on the loan, which lowers the amount of each payment.
IV. Because the payments are spread out over a shorter time period, more interest is paid on the loan, which lowers the amount of each payment.
V. Because the payments are spread out over a longer time period, more interest must be paid on the loan, which raises the amount of each payment.
You have a $2 million portfolio consisting of a $100,000 investment in each of 20 different stocks. The portfolio has a beta of 1. You are considering selling $100,000 worth of one stock with a beta of 0.8 and using the proceeds to purchase another stock with a beta of 1.3. What will the portfolio's new beta be after these transactions? Do not round intermediate calculations. Round your answer to two decimal places.
You have observed the following returns over time:
| Year | Stock X | Stock Y | Market |
| 2009 | 12% | 11% | 10% |
| 2010 | 19 | 5 | 9 |
| 2011 | -15 | -8 | -12 |
| 2012 | 5 | 1 | 1 |
| 2013 | 20 | 13 | 13 |
Assume that the risk-free rate is 3% and the market risk premium is 6%. Do not round intermediate calculations.
What is the beta of Stock X? Round your answer to two decimal places.
What is the beta of Stock Y? Round your answer to two decimal places.
What is the required rate of return on Stock X? Round your answer to one decimal place.
%
What is the required rate of return on Stock Y? Round your answer to one decimal place.
%
What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y? Round your answer to one decimal place.
%
Your division is considering two investment projects, each of which requires an up-front expenditure of $25 million. You estimate that the cost of capital is 9% and that the investments will produce the following after-tax cash flows (in millions of dollars):
| Year | Project A | Project B |
| 1 | 5 | 20 |
| 2 | 10 | 10 |
| 3 | 15 | 8 |
| 4 | 20 | 6 |
What is the regular payback period for each of the projects? Round your answers to two decimal places.
Project A years
Project B years
What is the discounted payback period for each of the projects? Round your answers to two decimal places.
Project A years
Project B years
If the two projects are independent and the cost of capital is 9%, which project or projects should the firm undertake?
-Select-Project AProject BBoth projectsItem 5
If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake?
-Select-Project AProject BItem 6
If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake?
-Select-Project AProject BItem 7
What is the crossover rate? Round your answer to two decimal places.
%
If the cost of capital is 9%, what is the modified IRR (MIRR) of each project? Round your answers to two decimal places.
Project A %
Project B %
Gammy is considering building a facility to manufacture cupcakes to distribute nationally. Your assignment involves both the calculation of cash flows associated with the new investment under consideration and the evaluation of several mutually exclusive projects. Grammy wants you to meet with everyone involved and write a meeting report for the board of directors that includes your recommendation. In addition to the recommendation, you have been asked to respond to a number of questions aimed at understanding the capital-budgeting process. Grammy wants to be sure that she and the board of directors understand cash flow and capital budgeting.
We are considering constructing a building to manufacture cupcakes. Currently we are in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital. This project is expected to last 5 years and then, because this is somewhat of a fad product, be terminated. The following information describes the project:
| Cost of new plant and equipment | $7,900,000 |
| Shipping and installation costs | $ 100,000 |
| Unit Sales | Year Units Sold 1 70,000 2 120,000 3 140,000 4 80,000 5 60,000 |
| Sales price per unit | $300/unit in years 1 through 4, $260/unit in year 5 |
| Variable cost per unit | $180/unit |
| Annual fixed costs | $200,000 per year in years 1 – 5 |
| Working-capital requirements | There will be an initial working-capital requirement of $100,000 just to get production started. For each year, the total investment in net working capital will be equal to 10 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5. |
| The depreciation method | Use the simplified straight-line method over 5 years. Assume the plant and equipment will have no salvage value after 5 years. |
5. Answer the following questions:
a. Should you focus on cash flows or accounting profits in making the capital-budgeting decision? Should you be interested in incremental cash flows, incremental profits, total free cash flow, or total profits?
b. How does depreciation affect free cash flow?
c. How do sunk costs affect the determination of cash flows?
d. What is the project’s initial outlay?
e. What are the differential cash flows over the project’s life?
f. What is the terminal cash flow?
g. Draw a cash-flow diagram for this project.
h. What is its net present value?
i. What is its internal rate of return?
j. Should the project be accepted? Why or why not?
k. How does Genesis 47: 18 – 19 relate to this project and cash flow management?