midsamp2solutions - University of California - Berkeley...

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University of California - Berkeley Haas School of Business UGBA 103 Sample Midterm 2 Instructions: This is a 1.5 hour closed book and closed note exam, though you may refer to notes on one side of a 3” x 5” index card. There are a total of 100 points. You may use a calculator, but no computers are allowed. Show all your work. Write down any equation you are using to allow us to provide as much credit as possible. This test contains 4 pages. The last question is #5 . All answers should be written in the space provided under each question. 1. 10 points. You have the following information: Risk free interest rate: r Expected return on market portfolio: R m Beta of stock X: β Assuming the CAPM holds, what is the expected return on stock X? R x = r + β (R m – r) 2. 20 points A project has the following cash flows: Period 0 1 2 CF -100 230 -132 Which, if any, of the following are IRRs for this project? 10%, 15%, 20%, 25%. Are there any other IRRs? Should you undertake the project if the return you expect on other projects with this level of risk is 8%? 0 ) 1 ( 132 1 230 100 2 = + + + = IRR IRR NPV Candidate IRR NPV 10% 0.00 15% 0.189 20% 0.00 25% -0.480 So there are two IRRs: 10% and 20% There can be no other IRRs because two sign changes indicates there are at most two solutions. NPV @ 8% = (r=8%) = -.2, so do NOT undertake the project!
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midsamp2solutions - University of California - Berkeley...

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