FIN 620_Fall 2010_Midsemester Test and Answers_102310

FIN 620_Fall 2010_Midsemester Test and Answers_102310 -...

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Midsemester Test and Answers FIN620 Instructor: Dr. John M. Halstead DUE by 11:59pm ET on Sunday, October 17, 2010 in your Assignment Folder under Mid_test. Note: This test contains 10 questions/problems. Please answer the questions/problems below and please show your work. Each question/problem is worth 10 points. Thank you. 1. Assume that a stock sold for $1.90 on January 1 and ended the year at a price of $2.50. In addition, the stock paid dividends of $0.20 per share. Calculate the stock’s dividend yield, capital gains yield, and total rate of return for the year. Dividend yield = $0.20/$1.90 = 10.53% Capital gain = $0.60/$1.90 = 31.58% Total return = 10.53% + 31.58% = 42.11% 2. Assume that an individual earned a total return of -5% on a stock this year, earned -40% last year, and earned 30% two years ago. Calculate both the three-year holding period return and the average three year return. 1
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3-year holding period return = (0.95) (0.60) (1.30) = 0.741 - 1 = -25.9% Average three-year return = (-.05 + - .40 + .30)/3 = -.15/3 = -5%. 3. A company has traditionally employed a firm wide discount rate for capital budgeting purposes. However, its two divisions - publishing and entertainment - have different degrees of risk given by ßP = 1.0, ßE = 2.0, and the beta for the overall firm is 1.3. The firm is considering the following capital expenditures: 2
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Proposed Project Initial Investment IRR (%) P 1 $1 million 13.0 Publishing P 2 $3 million 12.1 P 3 $2 million 9.0 E 1 $4 million 16.0 Entertainment E 2 $6 million 17.0 E 3 $5 million 14.0 Which projects would the firm accept if it uses the opportunity cost of capital for the entire company? Which projects would it accept if it estimates cost of capital separately
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This note was uploaded on 02/14/2011 for the course FINANCE 620 taught by Professor Halstead during the Fall '09 term at UMBC.

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FIN 620_Fall 2010_Midsemester Test and Answers_102310 -...

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