Finance 301 Exam 2

Topics: Investment, Net present value, Rate of return Pages: 4 (1191 words) Published: February 8, 2015
Finance 301

1. The NPV for the truck and the pulley are $2026.75 and $5586.05 respectively. Since these projects are independent, the company can choose either project. They both will give the company a return higher than 12% as well. (Math is on last page)

2. A. NPV for Alt A is $1892.17 while the payback is 2.86 years. NPV for Alt B is 2289.66 while the payback is 4.62 years. (Math on last page)

B. Since these projects are mutually exclusive only one can be chosen. Since NVP is a better way of estimating value and return, it should be used when picking between two projects. Therefore, the Smith Pie Company should go with alternative B. Even though Alt B has a longer payback period than Alt A, it will look better in the company assets longer and have a better return.

3. CAPM is equal to the cost of capital, which provides a usable measure of risk for the investor and their investment. It let’s investors know if they will get the return they deserve prior to making any decisions. Also, the higher the risk the higher a return could be.

4. A. 11% is the required return on the stock.
B. Beta is .9
C. The company’s cost of capital is 9.8 percent.
D. If the risk of the project is similar to the risk of the other assets, then the appropriate return is the cost of capital, which in this case is 9.8% (Math is on last page)

5. The beta for the portfolio is .5 (Math is on last page)

6. The alpha for this portfolio is 1.79 while the beta is .71. What this mean is that this company is defensive and while it could be considered a safe investment, the company is also outperform the market. This would be a great investment for any investor. (Math is on last page)

7. When investing is a firm outside of the U.S., an investor needs to know about currency changes, the state of the economy, and as well as any political risks the country might incur. All these actions need to be taken into account, as they are systematic risks. One or all...
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