MGFC30H3 Midterm: MGFC30 Test 1 review

progressive hospital is considering the puchase of a new sidewinder scanner, which costs 3,000,000. The new scanner provides a 360 degree internal feature view of the organ or body part being scanned, with no radiation exposure. The medical staff estimates that the technology will last five years before it will need to be replaced with newer technology. The equipment will have no salvage value. Scan volume has been estimated as follows: year 1 10,000 year 2 12,000 year 3 15,000 year 4 15,000 year 5 15,000. average billing price is stimated to be $100 per scan. The scanner will have fixed operating costs of $350,000 per year and variable operating costs of $10 per scan. What is the payback period for the scanner? What is the NPV of the investment assuming a 10 percent hurdle rate for capital investments? What is the IRR for the project? Is the project financially profitable if volume turns out to only be 95 percent of the projection? Would the project be financially profitable at a 95 percent volume level if the equipment had a $500,000 salvage value? Ignoring the conditions in question 4 and 5, what if Progressive hosptial adjusts its 10 percent hurdle rate +2 percent for high risk projects or -2 percent for low risk projects, and the sidewinder project is judged to be low risk? Should the scanner be purchased?

8-13: CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for Stocks X, Y, and Z. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta

X 9.00% 15% 0.8

Y 10.75 15 1.2

Z 12.50 15 1.6

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Fund Q has one-third of its funds invested in each of the three stocks. The risk-free rate is 5 5%, and the market is in equilibrium. (That is, required returns equal expected returns.)

a. What is the market risk premium rM − rRF ?

b. What is the beta of Fund Q?

c. What is the required return of Fund Q?

d. Would you expect the standard deviation of Fund Q to be less than 15%, equal to 15%, or greater than 15%? Explain.

Use your financial calculator, show what the PV,FV,N,I/Y

What can you tell about a stock with beta = 0; with beta = - 2; with beta =2; and with beta = 1