FIN 302- Exam #1 Solutions(mine)

FIN 302- Exam #1 Solutions(mine) - Exam I Finance 302...

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Exam I Finance 302 Spring 2011 Your Name:____________________________________________________________________ Instructions: Write your name and your unique ID (part before “@” in your MU Ohio email) on the answer form where indicated. Fill in the bubbles under your unique ID. Multiple Choice: 35 questions, equally weighted. Fill in answers on the answer form. Recommended: Additionally, write answers in exam booklet. Formulas: P/E ratio = PRICE/EPS T P 0 = ∑[D t /(1+r) t ] + P T /(1+r) T t=1 P = P 0 = Div 1 /(r-g) P 0 = EPS 1 /r + PVGO per share [R m - R f ] = Market Risk Premium for equity Return = [dollar return on stocks – interest paid]/own money invested Return = (Div 1 + P 1 -P 0 )/P 0 r assets =WACC = (1-T c ) x D/(D+E) x r D + E/(D+E) x r E r assets = D/V x r debt + E/V x r equity Note: V = D+E β assets = D/(D+E) x β D + E/(D+E) x β E β i = Cov i,mkt / σ 2 mkt Cov a,b = ρ a,b σ a σ b variance of a 2-stock portfolio = σ p 2 = x 1 2 σ 1 2 + x 2 2 σ 2 2 + 2 (x 1 ) (x 2 ) ρ 12 ( σ 1 ) ( σ 2 ) where ρ 12 ( σ 1 ) ( σ 2 ) = covariance between stocks 1 and 2 and x 1 and x 2 = proportions invested in stocks 1 & 2 (respectively) Standard deviation of the portfolio , ( σ ) = the square root of variance of the portfolio ___e____1) Your firm accepts projects with higher market risk than in previous years. There is no 1
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change, however your firm's PVGO per share. Consider the stock price formula: P = Which of the following variables would we anticipate to change as a result of your firm's new, higher risk investment strategy? a) E[D t ] will increase b) r will increase c) P will increase d) All of the above are correct e) Exactly two of the above are correct. ______2) Which characteristic would permit firm to pursue a policy that consistently fails to maximize shareholder wealth - and is sustainable in the long-run? a) The firm is an all-equity firm b) The firm operates in a highly competitive market c) The firm has no financial slack d) The firm has adopted takeover deterrents e) The firm is located in a country that prohibits protectionist policies _______3) A firm's stock price is $30 prior to the announcement of a new project. Assume that the market does not anticipate the new project until it is announced. The new project has a positive NPV of $40,000,000. The firm has 20 million shares outstanding. What is the firm’s stock price after the project's announcement? a) $28 b) $30 c) $32 d) $40 e) $50 _______4) The slope of the security market line (SML) would be negative if and only if : a) The risk-free rate was negative b) The return on the market portfolio was negative c) The stock's beta was negative d) The return on the risk-free asset exceeded the return on the market portfolio e) The required rate of return on stock i was less than that of the market porfolio 2
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______5) A negative beta investment is expected to earn: a) less than the risk-free rate b) 0% c) less than 0% d) The risk-free rate e) None of the above is necessarily true ______6) What is the after-tax cash flow for the following Widget project? (Assume all of the cash flows listed below are before-tax cash flows). The firm's tax rate is 30%.
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FIN 302- Exam #1 Solutions(mine) - Exam I Finance 302...

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