FIN 4305 (Investments) – Test HW3 with Answers – June 2022 (100 out of 100 points)

FIN 4305 (Investments) – Test HW3 with Answers – June 2022 (100 out of 100 points) Questions 1. Use the following information to answer the next three questions. You are evaluating two mutually exclusive projects, A and B. Project A has an initial outlay of 389,000 and is expected to produce cash flows of 242,000 in year one and 294,000 in year 2. Project B has an initial outflow of 199,000 and is expected to generate 131,500 in year one and 172,500 two years from today. The opportunity cost of capital for each project is 8%. Find Project A's internal rate of return. 2. Find the net present value of Project B. Round your final answer to two decimals. Do not use the dollar sign when entering your answer. 3. Which project(s) should you choose based on NPV? 4. Today, you decide to make a one-time deposit into an account that provides a 5% rate of return, compounded quarterly. How much must you place in the account today so that you have $80,000 in 10 years? 5. Use the following information to answer the next two questions. Your little brother is about to go to college. Your parents estimate that his tuition and fees will cost $11,000/year for the next five years. They decide to make a one-time investment today into an account that earns 7% compounded annually to cover these costs. How much must they invest to fully cover your brother's tuition and fees? Round your final answer to two decimals. Do not enter the dollar sign when inputting your answer. 6. Suppose that your parents decide to invest $55,000 today in the account mentioned in the previous question. How much money would be left in the account after 5 years has passed and your brother's tuition and fees were fully paid? 7. You just won a $25 million lottery jackpot. You are offered a choice to receive the $14 million today, or equal installments of $1 million per year for 25 years. Ignoring taxes, which option would you take if your required rate of return is 10%? 8. You invested $25,000 in an account three years ago. How much is in your account today if you earned a 5% annual return? 9. You decide to purchase a $500,000 home. You put 10% down and finance the rest at a 4% rate over 30 years. Find the minimum monthly payment on your loan. Round intermediate steps and your final answer to four decimals. Do not use the dollar sign when inputting your answer. 10. You bought a stock a year ago. Over the course of the year, you received $4/share in dividends. The stock currently sells for $65. How much did you pay for the stock a year ago if your HPR is -12%? 11. You are evaluating a project with the following cash flows. Year Cash Flow 0 -800 1 -125 3 900 5 1050 Find the project's internal rate of return. Round your answer to four decimals and enter it in decimal format (EX: .XXXX). 12. Suppose you find that the present value of the cash inflows that an asset provides equals the present value of the cash outflows associated with investing in it. If you choose to invest in the asset, your rate of return must equal zero. 13. You bought 500 shares of XYZ stock last year for $15/share. Today, XYZ sells for $12/share. What is the total dollar value of the dividends you received over the course of the year if your HPR is 5%? 14. Use the following to answer the next two questions. Year Returns 2014 -.06 2013 .11 2012 .15 2011 -.03 2010 .16 Find the average return for this stock. Round your final answer to four decimals and enter it in decimal format (EX: .XXXX). 15. Find the standard deviation of the return series. 16. An asset had annual returns of 4, 12, and -10, percent, respectively, for the past three years. What is the standard deviation of these returns? 17. When comparing the returns of various-sized investments, percentage returns are typically more useful than dollar returns. 18. ABC Inc. has normally distributed returns with an expected return of 10% and a standard deviation of 6%, while XYZ Inc. has normally distributed returns with an expected return of 12% and a standard deviation of 13%. Which of the following is true: 19. Congratulations! You just won your lawsuit against a major corporation for unethical business practices. As part of the settlement, you have been given two options to receive your money. The first option is receiving $2,000,000 at the beginning of each year for the next 5 years. The second option is that you can receive a lump sum payment today of $8.5 million. If the discount rate that you use to value the annuity is 6%, which option will provide you with the largest cash payout (ignoring taxes)? 20. Assume project A has cash flows over the next four years (in order) as follows: 1000, 1000, 1500, 1500. Project B has the following cash flows (in order) over the same four year period: 1500, 1500, 1000, 1000. If you plan to use the same discount rate for both projects, which of the following can never be true?