FIN 302- Exam #1

# FIN 302- Exam #1 - Your name Class 2PM 3:30PM 5PM FIN 302...

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Your name:_____________________________________ Class: 2PM 3:30PM 5PM FIN 302: Brunarski Spring Semester: 2009 Fill-in your name and your unique ID on the test answer form . You may detach this page and staple it back on to your exam when you turn it in. You are required to turn-in both this text booklet and your answer form. FORM 1 (A) Formulas: 29 NWC = 29 Current Assets - 29 Current Liabilities After-tax proceeds from asset sale = Sale Price – [T c (Sale Price – Book Value)] Depreciation tax shield = T c (\$Depreciation) PV = FV/(1+i) n E[R i ] = R f + β i (R m – R f ) After-tax revenues or expense = (1- T c ) (\$revenues or expense) T P 0 = ∑[D t /(1+r) t ] + P T /(1+r) T t=1 P 0 = Div 1 /(r-g) P 0 = EPS 1 /r + PVGO per share r E = E[R i ] = R f + β i [E(R m ) – R f ] [R m - R f ] = Market Risk Premium for equity Return = [dividends + 29 P – interest paid]/\$invested r assets =WACC = (1-T c )D/(D+E) r D + E/(D+E) r E 5 assets = D/(D+E) 5 debt + E/(D+E) 5 equity Portfolio variance, σ 2 , is the sum of the following boxes, where “x” is the % of the money invested in stocks 1 and 2. variance = x 1 2 Φ 1 2 + x 2 2 Φ 2 2 + 2 (x 1 ) (x 2 ) 12 ( Φ 1 ) ( Φ 2 ) where 12 ( Φ 1 ) ( Φ 2 ) = covariance between stocks 1 and 2 Standard deviation of the portfolio , ( σ ) = the square root of variance of the portfolio 1 2 2 2 2 2 1 12 2 1 12 2 1 2 1 12 2 1 12 2 1 2 1 2 1 ± x ± ± ± x x ± x x 2 Stock ± ± ± x x ± x x ± x 1 Stock 2 Stock 1 Stock = =

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Multiple Choice: 33 questions , equally weighted. Select the best answer and indicate your answer on the test scan form. You may use pencil or pen (pencil recommended). 1) ___________ Investments A and B have a correlation coefficient of 0. This means… a) There is no potential diversification benefit from investing in these two securities b) Both securities must have required rates of return equal to the risk-free rate c) The lowest risk investment is necessarily achieved by placing all of your money in the lowest-variance investment. d) Investments A and B must have the same expected return. e) None of the above is necessarily a valid statement. 2) ___________ For which investment would “variance ” be an appropriate measure of market risk? a) A corporate bond b) A fully-diversified portfolio of stocks with a beta = 0.8 c) Any investment with a symmetric distribution of returns d) A individual stock with a beta = 1.0 e) All of the above Variance = total risk Total risk = unique risk + market risk If the portfolio is “fully diversified”, unique risk has been eliminated, so variance= measure of market risk 3)__________ Project “A” will have a lower beta than the firm’s typical project if, compared to the firm’s typical project, project “A” has: a) Greater cyclicality of the project’s net cash flows b) Less likelihood of potential product-liability lawsuits. c) A higher proportion of operating expenses that varies in proportion to revenues
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FIN 302- Exam #1 - Your name Class 2PM 3:30PM 5PM FIN 302...

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