FIN 571 Education Specialist

FIN 571 Apply Week 1 Assignment The Stock Market
And The Economy

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Assignment Content
1. Research how financial markets and institutions influence the US

and global economies.
Create an 8- to 12-slide presentation or 350- to 575-word

summary to present your research.
Choose 4 financial markets or institutions. Briefly explain what

each specializes in (mortgages, stocks, government securities, etc.).
Compare how each financial market you identified influences the

US economy and global economy.
Cite references to support your assignment.
Format your citations according to APA guidelines.

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FIN 571 Apply Week 2 Signature Assignment Investor
Presentation (Apple)
FIN 571 Week 2 Apply Signature Assignment Investor Presentation
Select a Fortune 500 company or another company you are familiar

with. Consider pharmaceuticals, computer hardware, retail, or
automotive industries for your selection. If you choose a company that is
not in the Fortune 500, ensure that enough financial information and key
performance indicator results are available to complete the assignment.
Imagine your manager has asked you to help with a presentation on the
company’s financial performance at the company’s annual meeting.
Research financial information and key performance indicators for the

company.
Create a 10- to 16-slide presentation for investors to assess the

company’s financial growth and sustainability.
Identify key performance indicators for the company you selected,
including the following
o The company and its ticker symbol
o Cash flow from operations
o Price-to-earnings ratio
o Stock dividends and the yield, if any
o Earnings per share ratio
o Revenue estimates for the next 12 months
o Revenue from the previous 3 years

o Statement of cash flows and identify net cash from operating,
investing, and financing activities over the past 3 years
o Average trade volume.
o Current stock price, 52-week high, and 1-year estimated stock

price
o Analysts’ recommendations for the stock (buy,sell, hold)
o Market cap for the company
Relate the stock price to price-to-earnings ratio.
Explain the market capitalization and what it means to the investor.

Evaluate trends in stock price, dividend payout, and total stockholders’
equity. Relate recent events or market conditions to the trends you
identified.
Determine, based on your analysis, whether you think the organization is

going to meet its financial goals, the outlook for growth and
sustainability, and explain why you recommend this stock for purchase.
Submit your assignment.
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FIN 571 Apply Week 2 Signature Assignment Investor

Presentation (Pfizer)
FIN 571 Week 2 Apply Signature Assignment Investor Presentation

Select a Fortune 500 company or another company you are familiar
with. Consider pharmaceuticals, computer hardware, retail, or
automotive industries for your selection. If you choose a company that is
not in the Fortune 500, ensure that enough financial information and key
performance indicator results are available to complete the assignment.
Imagine your manager has asked you to help with a presentation on the
company’s financial performance at the company’s annual meeting.
Research financial information and key performance indicators for the

company.
Create a 10- to 16-slide presentation for investors to assess the

company’s financial growth and sustainability.
Identify key performance indicators for the company you selected,
including the following
o The company and its ticker symbol
o Cash flow from operations
o Price-to-earnings ratio
o Stock dividends and the yield, if any
o Earnings per share ratio
o Revenue estimates for the next 12 months
o Revenue from the previous 3 years

o Statement of cash flows and identify net cash from operating,
investing, and financing activities over the past 3 years
o Average trade volume.
o Current stock price, 52-week high, and 1-year estimated stock

price
o Analysts’ recommendations for the stock (buy,sell, hold)
o Market cap for the company
Relate the stock price to price-to-earnings ratio.
Explain the market capitalization and what it means to the investor.

Evaluate trends in stock price, dividend payout, and total stockholders’
equity. Relate recent events or market conditions to the trends you
identified.
Determine, based on your analysis, whether you think the organization is

going to meet its financial goals, the outlook for growth and
sustainability, and explain why you recommend this stock for purchase.

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FIN 571 Apply Week 4 Signature Assignment

Shareholder Analysis (Apple)
FIN 571 Week 4 - Apply Signature Assignment Shareholder Analysis
Continue your work with the company you selected in Week 2.
Research your company’s financial reports for 2017.
Complete a 2- to 3-page FAQ/Shareholder Analysis.
Evaluate economic conditions that influence company performance.

Consider political, environmental, currency (money), global economics,
and government influences on economic conditions.
Compare market conditions with the company’s performance for 2017.
Conclude how the market conditions that year influenced the company’s
performance, such as interest rates, Federal Reserve Bank monetary
policy changes, or other market conditions relevant to the company you
selected.
Analyze year-over-year performance from 2016 and 2017. Consider key

metrics or ratios such as trailing PE ratio, forward PE ratio, price to
book, return on assets, and return on equity in your conclusions.
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FIN 571 Apply Week 4 Signature Assignment

Shareholder Analysis (walmart)
FIN 571 Week 4 - Apply Signature Assignment Shareholder Analysis
Continue your work with the company you selected in Week 2.
Research your company’s financial reports for 2017.
Complete a 2- to 3-page FAQ/Shareholder Analysis.
Evaluate economic conditions that influence company performance.

Consider political, environmental, currency (money), global economics,
and government influences on economic conditions.
Compare market conditions with the company’s performance for 2017.

Conclude how the market conditions that year influenced the company’s
performance, such as interest rates, Federal Reserve Bank monetary
policy changes, or other market conditions relevant to the company you
selected.
Analyze year-over-year performance from 2016 and 2017. Consider key
metrics or ratios such as trailing PE ratio, forward PE ratio, price to
book, return on assets, and return on equity in your conclusions.
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FIN 571 Apply Week 6 Signature Assignment Financial

Plan (Apple)
FIN 571 Week 6 - Apply Signature Assignment Financial Plan
Prepare a financial plan for the company you select for your business
plan. This financial plan will be included in your final business plan in
your capstone course.
Describe the business, including the type of business.
Create the business case.
o Determine why funding is needed for the company.
o Determine the sources of funding. Considerself-funding,

borrowing, equity, venture capital, etc.
o Evaluate the requirements of each funding source you

determined appropriate.
o Analyze the associated risks of each funding source.
o Decide which sources are the best fit for your company based on
the requirements of each. Justify your decision.
o Estimate the cost of capital for both short-term and long-term

funding sources. Research current estimated APRs for your selected
sources of funding. Consider creating a table or chart to display this
information.
Create a profit-and-loss statement for a 3-year period. Project revenue,

stating realistic assumptions, such as growth per year, in your
projections.
Estimate direct costs, including capital, marketing, labor, and supply

costs.
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FIN 571 Apply Week 6 Signature Assignment Financial

Plan (Walmart)
FIN 571 Week 6 - Apply Signature Assignment Financial Plan
Prepare a financial plan for the company you select for your business
plan. This financial plan will be included in your final business plan in
your capstone course.
Describe the business, including the type of business.

Create the business case.
o Determine why funding is needed for the company.
o Determine the sources of funding. Considerself-funding,

borrowing, equity, venture capital, etc.
o Evaluate the requirements of each funding source you

determined appropriate.
o Analyze the associated risks of each funding source.
o Decide which sources are the best fit for your company based on
the requirements of each. Justify your decision.
o Estimate the cost of capital for both short-term and long-term

funding sources. Research current estimated APRs for your selected
sources of funding. Consider creating a table or chart to display this
information.
Create a profit-and-loss statement for a 3-year period. Project revenue,

stating realistic assumptions, such as growth per year, in your
projections.
Estimate direct costs, including capital, marketing, labor, and supply

costs.

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FIN 571 Entire Course (DQs, Assignment, Quiz, Practice

Work)
FIN 571 Apply Week 1 Assignment The Stock Market And The
Economy
FIN 571 Apply Week 2 Signature Assignment Investor Presentation

(Apple)

(Pfizer)
FIN 571 Apply Week 4 Signature Assignment Shareholder Analysis
(Apple)

(walmart)
FIN 571 Apply Week 6 Signature Assignment Financial Plan (Apple)

FIN 571 Apply Week 6 Signature Assignment Financial Plan (Walmart)
FIN 571 Week 1 Practice Quiz
FIN 571 Week 2 Practice
FIN 571 Week 2 Quiz
FIN 571 Week 3 Chapter 5 Quiz
FIN 571 Week 5 Practice Chapter 11 and 12 Question

FIN 571 Week 5 Quiz

FIN 571 Apply Week 1 Assignment The Stock Market And The
Economy

(Apple)

(Pfizer)

(Apple)
(walmart)
FIN 571 Apply Week 6 Signature Assignment Financial Plan (Apple)
FIN 571 Apply Week 6 Signature Assignment Financial Plan (Walmart)

FIN 571 Week 2 Quiz
FIN 571 Week 5 Quiz
FIN 571 Entire Course

FIN 571 Week 1 Discussion Primary and Secondary Markets
FIN 571 Week 2 Discussion ROE and EPS
FIN 571 Week 3 Discussion Capital Budgeting Techniques
FIN 571 Week 4 Discussion Financial Performance Evaluation
FIN 571 Week 5 Discussion Systematic and Unsystematic Risk
FIN 571 Week 6 Discussion Venture Capital
FIN 571 Wk 5 Apply Wk 5 Quiz (with Excel File)
FIN 571 Wk 3 Practice Wk 3 Practice Questions
FIN 571 Wk 3 Apply Wk 3 Quiz

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FIN 571 Week 1 Discussion Primary and Secondary

Markets
You are a new economist for a major financial institution, and you’ve
been invited to speak as a guest lecturer for a Freshman Finance course
at the local university.
Respond to the following in a minimum of 175 words:
Share how you would describe the overall purpose and mechanics of
both primary and secondary markets.
How would you explain the way the performance of your company is
influenced by the activity of the markets you described?
After your initial post, choose a classmate’s approach that is different

from the approach you’d take on the guest lecture. What additional
information might you include in your lecture based on your classmate’s
approach?
Optional Discussion:
Having experience as an executive management I often found myself in

a conflict with operating managers, who might have been eager to fund
product-market strategies. Especially in companies for which equity
financing is unacceptable and in which operating management—
concerned primarily with production, sales, and marketing—is the
dominant force, causing a great pressure to leverage the company with
an even greater percentage of debt. As the CFO what would you do? Is
such leveraging worth fighting over?
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Pollution Busters Inc. is considering a purchase of 10 additional carbon

sequesters for $115,000 apiece. The sequesters last for only 1 year
before becoming saturated. Then the carbon is sold to the government.
o A: Suppose the government guarantees the price of carbon. At this
price, the payoff after 1 year is $136,850 for sure. How would you
determine the opportunity cost of capital for this investment?
o b-1. Suppose instead that the sequestered carbon has to be sold on
the London Carbon Exchange. Carbon prices have been extremely
volatile, but Pollution Busters’ CFO learns that average rates of
return from investments on that exchange have been about 24%.
She thinks this is a reasonable forecast for the future. What is the
opportunity cost of capital in this case?
o b-2. If the expected return on the investment is still 19%, but
instead depends on the price of carbon (so that it is no longer risk-
free), then is the purchase of additional sequesters an attractive
investment for the firm?
Which of the following are investment decisions, and which are

financing decisions?
Which of the following are real assets, and which are financial?
Choose the type of company in each case that best fits the description.
Which of the following statements always apply to corporations?
Which of the following are correct descriptions of large corporations?
Is limited liability always an advantage for a corporation and its

shareholders?
Which of the following statements more accurately describes the

treasurer than the controller?
We claim that the goal of the firm is to maximize current market value.
Could the following actions be consistent with that goal?
Read the following passage and choose the appropriate terms to
complete the sentences.
Here is a simplified balance sheet for Locust Farming:
Locust has 661 million shares outstanding with a market price of $99 a
share.
a. Calculate the company’s market value added. (Enter your answers

in millions.)
b. Calculate the market-to-book ratio. (Round your answer to 2
decimal places.)
c. How much value as the company created for its shareholders as a
percent of shareholders’ equity, that is, the net capital contributed
to the firm by its shareholders? (Enter your answer as a percentage
rounded to the nearest whole number.)
Here are simplified financial statements for Watervan Corporation:
The company’s cost of capital is 8.5%
Calculate Watervan’s economic value added (EVA). (Do not round

intermediate calculations. Enter your answer in millions rounded to 2
decimal places.)
a. Economic value added = Aftertax interest + Net income – (Cost of

capital × Total capitalization)Economic value added = (1 – 0.32) ×
$21 + 62.41 – (8.5% × [$265 + 130]) = $39.07
What is the company’s return on capital? (Use start-of-year rather than

average capital.) (Do not round intermediate calculations. Enter your
answer as a percent rounded to 2 decimal places.)
 What is its return on equity? (Use start-of-year rather than average
equity.) (Enter your answer as a percent rounded to 2 decimal
places.)
 Is the company creating value for its shareholders?
 Home Depot entered fiscal 2017 with a total capitalization of
$21,886 million. In 2017, debt investors received interest income
of $871 million. Net income to shareholders was $8,636 million.
(Assume a tax rate of 21%.)
 Calculate the economic value added assuming its cost of capital is
10%. (Do not round intermediate calculations. Enter your answer
in millions rounded to 2 decimal places.)
 Here are simplified financial statements for Phone Corporation in a
recent year:
Calculate the following financial ratios for Phone Corporation: (Use 365
days in a year. Do not round intermediate calculations. Round your final
answers to 2 decimal places.)
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FIN 571 Week 2 Discussion ROE and EPS

Post a total of 3 substantive responses over 2 separate days for full
participation. This includes your initial post and 2 replies to other
students or your faculty member.
Due Thursday
You are a research analyst for a publicly traded company, and you’ve
been assigned to give a presentation on how a company uses
performance metrics in corporate valuation.
Think about how you would present return on equity (ROE) and
earnings per share (EPS) to a group of investors or senior management.
Explain the use of ROE and EPS in evaluating the value of a company.
Include how to calculate ROE and EPS.
Why is understanding ROE and EPS important to a company’s value?
Share an example of a company whose ROE and EPS you calculated.

What do these results say about the company?
Due Monday
Reply to at least 2 of your classmates or your faculty member. Be

constructive and professional.
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1)Spock Enterprises has a market value of $100 million in debt

outstanding. They also have a market value of equity of $400 million.
Spock's total market value is ______ million.
2. Another name for the WACC is the ___________.
3. The weighted average cost of capital is the expected rate of return

investors would demand on a portfolio of:
4. Vandalay Industries has $30 million of debt and $70 million of

equity outstanding. The market cost of debt is 8% and the cost of
equity is 14%. The firm has a 35% corporate tax rate. What is
Vandalay's WACC?
5. The market value of a firm is equal to:
6. Order the following three components of the firm's capital

structure from riskiest to least risky.
7. Which of the following statements regarding the company cost of

capital are true?
8. The company cost of capital is calculated as a weighted average of

the firm's _______ and _______.
9. True or false: it is acceptable to use book values of debt and equity

to calculate the weights of debt and equity for the company cost of
capital calculation.
10. A project requires a $1 million initial investment and has an

expected after-tax cash flow of $2.4 million per year in perpetuity.
The weighted-average cost of capital (WACC) is 13%. What is the
net present value (NPV) of the project?
11. SkiFree Incorporated has $20 million of debt and $80 million
of equity outstanding. The market cost of debt is 6% and the cost
of equity is 12%. The firm has a 35% corporate tax rate. What is
SkiFree's WACC?
12. Vandalay Industries has $30 million of debt, $10 million of

preferred stock and $60 million of common stock outstanding. The
market cost of debt is 8%, the cost of preferred is 9% and the cost
of common equity is 14%. The firm has a 35% corporate tax rate.
What is Vandalay's WACC?
13. When a project's cash flows are discounted at the WACC and
the NPV is exactly zero, then those cash flows are _________ to
give debtholders and shareholders the returns they require.
14. A project requires a $12 million initial investment and has

expected after-tax cash flows of $2 million in perpetuity. The
weighted-average cost of capital is 15%. What is the project's net
present value (NPV)?
15. There are two costs of debt finance, the _______ cost and the
_______ cost.
16. Increasing the amount debt makes debt ______ risky and
equity _____ risky.
17. The WACC is the appropriate discount rate for use with
______ projects but should be adjusted ______ for higher risk ones
18. The WACC is the appropriate discount rate for use with
______ projects but should be adjusted ______ for lower risk ones.
19. The ______ cost of debt is the increase in the required return
on common equity as the amount of debt borrowed increases.
20. If a firm uses its book value of debt instead of its market
value of debt to calculate its WACC, then its WACC will likely be:
21. If the corporate tax rate is zero, then increasing the

proportion of debt in a firm's capital structure causes the WACC to
_______.
22. On a large and healthy firm, the use of yield to maturity as

the cost of debt when calculating WACC is appropriate because
23. The WACC is the return the company needs to earn after tax
in order to satisfy
24. True or false: the market value and book value of debt are
often very similar, so many financial managers use book value in
WACC calculations.
25. If the corporate tax rate is not zero, increasing the proportion
of debt in the capital structure causes the WACC to _______.
26. The ________ is usually accepted as a firm's cost of debt

capital for WACC calculations.
27. The firm's cost of equity is usually calculated using the

_______ equation.
28. Preferred stock is valued like a perpetuity. The price of a

preferred stock is therefore equal to:
29. To determine the equity value of an entire business, discount

the firm's _____ using the ______ as the discount rate, then
subtract the value of the firm's _____.
30. Potter National Bank has a beta of 1.8. The risk-free rate is
currently quoted at 1.5% and the expected market risk premium is
7.5%. What is Potter's cost of equity?
31. Martin Co. has issued preferred stock with an annual

dividend of $6.00. The current market price per share of this
preferred stock is $47.00. What is the expected return on the
Martin preferred stock?
32. What is one necessary condition to use WACC to value an
entire business?
33. Providers of venture capital are:
34. The two rules of success in venture capital management are

__________, and ___________.
35. An equity issue that makes a privately owned firm public is

called a(n):
36. An investment bank that works with a company to plan and

arrange its IPO is called a(n) ________.
37. Underwriters are compensated for the risk of issuing an IPO

in the form of a(n) _________.
38. An investment bank that underwrites a security issue by

buying the securities for less than the offering price and accepting
the risk that the securities won't sell is using the ______ method.
39. Equity investment in high-risk, high-tech start-up private

companies is called:
40. Wealthy individuals who personally provide equity

investment to start-up firms are called ________.
41. The firm commitment method requires the investment bank

to take on the risk of unsold securities and act as a(n) ______.
42. Statistically, the number of firms that provide venture

capitalists with the large payoff they require is approximately
_______.
43. The main motivation for a firm to undertake an IPO is that
_________.
44. The difference between the public offer price and the price
paid by the underwriter is known as the underwriter's Spread.The
first public equity issue made by a firm is called a(n) ___.
45. The group of underwriters that is assembled to sell a very

large issue of stock is referred to as a ________.
46. The type of underwriting used for risky issues of stock that
may not sell out completely is called _________ underwriting.
47. The three roles usually played by underwriters for their client
companies are _______, ________ and ________.
48. Firms looking to raise funds will file registration statements

with the:
49. The most common method used in the U.S. to determine

demand for and price of a stock in an IPO is called the ________
method
50. In firm commitment underwriting, the underwriters receive

payment in the form of a _______ representing the difference
between the price they pay the firm for the shares, and the price
they charge investors for them.
51. In the U.S., underwriting of securities issues is dominated by

________.
52. An underwriter unwilling to take on the risk of firm

commitment underwriting may issue an IPO on a _________ basis.
53. A document required by the SEC for new public issues that
contains the issuing firm's financial information, financial history,
and details of the existing business is known as the ___.
54. True or false: the advantage of the bookbuilding method is

that it allows underwriters to reward investors whose bids are most
helpful in setting the issue price.
55. Which of the following are three of the banks that dominate
the underwriting industry in the United States?
56. True or false: flotation costs are higher for issuing equity
than for issuing debt.
57. The type of underwriting used for risky issues of stock that
may not sell out completely is called _________ underwriting.
58. Stock prices decline at the announcement of a new issue

because investors believe that managers are signaling that the stock
price is currently __________.
59. Any additional issue of stock by a company that is already

publicly traded is called a __________.
60. A private placement allows a firm to sell securities to:
61. Which of the following statements best describes shelf

registration?
62. The issue costs are higher for equity than for debt securities
for which of the following reasons?
63. When a company sells an entire issue of securities to a small
group of institutional investors like life insurance companies,
pension funds, etc., it is called a(an):
64. Shelf registration is more often used for the:
65. True or false: flotation costs are higher for issuing equity
than for issuing debt.
66.
67. ...................................................................................................
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FIN 571 Week 2 Quiz

What is a firm's weighted-average cost of capital for a firm that is

financed 45% by debt? The debt has a 10% required return and the
equity has a 17% required return. The tax rate is 21%.
The company cost of capital is the return that is expected on a portfolio

of the company's:
Plasti-tech Inc. is financed 60% with equity and 40% with debt.
Currently, its debt has a pretax interest rate of 12%. Plasti-tech's
common stock trades at $15.00 per share and its most recent dividend
was $1.00. Future dividends are expected grow by 4%. If the tax rate is
21%, what is Plasti-tech's WACC?
A project requires an investment of $10 million and offers an annual
after-tax cash flow of $1,250,000 indefinitely. If the firm's WACC is
12.5% and the project is riskier than the firm’s average projects, should
it be accepted?
If a company's WACC is less than the required return on equity, then the
firm:
The weighted-average cost of capital for a firm with a 65/35 debt/equity

split, 8% pre-tax cost of debt, 15% cost of equity, and a 21% tax rate is:
Increasing debt financing will do all of the following except:
What return on equity do investors expect for a firm with a $55 share
price, an expected dividend of $4.60, a beta of 0.9, and a constant
growth rate of 3.5%?
XYZ Company issues common stock at a price of $25 a share. The firm
expects to pay a dividend of $2.20 a share next year. If the dividend is
expected to grow at 2.5% annually, what is XYZ's cost of common
equity?
How much will a firm need in cash flow before tax and interest to satisfy
debtholders and equity holders if the tax rate is 21%, there is $10 million
in common stock requiring a 12% return, and $6 million in bonds
requiring an 8% return?
Issue costs for equity are higher than those for debt for all of the
following reasons except:
What was the market price of a share of stock before a rights issue, if
one share of new stock could be purchased at $100 for every four shares
that were previously owned? The stock price after the successful rights
issue was $200.
Stock underwriters are:
What direct expense is required to market stock if the issuer incurs $1

million in other expenses to sell 3 million shares at $40 each to an
underwriter and the underwriter sells the shares at $43 each?
One reason for an underwriters' syndication is to:
If a new stock offering were overpriced and could be sold, then the:
Bottom of Form
An investor exercises the right to buy one additional share at $20 for
every five shares held. How much should each share be worth after the
rights issue if they previously sold for $50 each?
A firm has just issued $250 million of equity which caused its stock
price to drop by 3%. Calculate the loss in value of the firm's equity
given that its market value of equity was $1 billion before the new issue.
A rights issue offers the firm's shareholders one new share of stock at
$40 for every three shares of stock they currently own. What should be
the stock price after the rights issue if the stock sells for $80 per share
before the issue?
Companies offering smaller security issues may prefer to issue them

through a:
An investment offers to pay $100 a year forever starting at the end of

year 6. If the interest rate is 8%, what is the investment’s value
today?
The present value of a perpetuity can be determined by:
If the effective annual rate of interest is known to be 16.08% on a debt

that has quarterly payments, what is the annual percentage rate?
Suppose you take out a 30-year mortgage for $100,000 with annual
payments. The interest rate on the mortgage is 8%. When you have paid
off half the mortgage, so that the value of the remaining payments is
reduced to $50,000, how many more payments need to be made?
If the five-year discount factor is d, what is the present value of $1

received in five years’ time?
A credit card account that charges interest at the rate of 1.25% per
month would have an annually compounded rate of _____ and an APR
of ____.
One way to increase the NPV of a project is to decrease the:
If a project costs $72,000 and returns $18,500 per year for 5 years, what
is its IRR?
A project's opportunity cost of capital is:
The profitability index selects projects based on the:
The modified internal rate of return can be used to correct for:
You can continue to use your less efficient machine at a cost of $8,000
annually. Alternatively, you can purchase a more efficient machine for
$12,000 plus $5,000 annual maintenance. If the new machine lasts 5
years and the cost of capital is 15%, you should:
A project can have as many different internal rates of return as it has:
Capital budgeting projects typically assume that all cash flows transpire
at the end of the year. The reason for this is that:
Assume your firm has an unused machine that originally cost $75,000,
has a book value of $20,000, and a market value of $25,000. Ignoring
taxes, what is the opportunity cost of using this machine?
You are considering the introduction of a new product that will require
an investment in new machinery. Which one of these will lower the net
present value of that project?
Which one of the following would not be expected to affect the decision
of whether to undertake an investment?
The recovery of an additional investment in working capital is likely to:
A new inventory system will immediately reduce inventory levels by

$100,000. If this reduction is permanent and the cost of capital is 13%,
how does the net working capital change affect company value?
When the real rate of interest is less than the nominal rate of interest,
then:
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A dollar invested today at 7.5 percent interest compounded annually will

be worth _______ one year from now.
Joseph signs a contract with a company that will pay him $25,000.
Following the principles of the time value of money, Joseph would be
best off if he received payment:
Real-world investments often involve many payments received or paid

over time. Managers refer to this as a ___________________.
You put $100 in the bank now, $200 in the bank a year from now, and
$300 in the bank in two years. How much money will you have
available 3 years from now if you earn a 7.5% rate of interest?
(Calculate the future value of this stream of cash flows. Refer to
Example 5.6.)
Today you deposit $1000 in an account paying 6% interest. At the end

of years 1, 2 and 3 you will deposit $100 in that account. What is the
present value of that stream of cash flows?

be worth _______ three years from now.
The time value of money concept states that a dollar today is worth
_______ a dollar tomorrow.
True or false: The time value of money functions that are provided by
your financial calculator are also available as functions in an Excel
spreadsheet.

of years 1, 2 and 3 you will deposit $100 in that account. How much will
you have at the end of year 4?
You will receive $100 in 1 year, $200 in 2 years and $300 in 3 years. If
you can earn a 7.5% rate of interest, what is the present value of this
stream of cash flows? (Please note that you receive nothing immediately
- there is no initial payment).
be worth _______ one year from now.
In Excel, cash inflows are recognized as ______ values and cash

outflows are recognized as ______ values. Interest rates should be
entered as ______.
Which of the following is a perpetuity?
You put $100 in the bank now, $200 in the bank a year from now, and
$300 in the bank in two years. How much money will you have
available 3 years from now if you earn a 7.5% rate of interest?
(Calculate the future value of this stream of cash flows. Refer to
Example 5.6.)
$200 at the end of each year forever at 10% per year is worth how much
today?

of years 1, 2 and 3 you will deposit $100 in that account. What is the
present value of that stream of cash flows?
A fixed stream of cash flows that ends after a specified number of years
is called a(n):
A perpetuity is a constant stream of cash flows for a(n) ______ period of

time.
Find the future value of an annuity of $100 per year for 10 years at 10
percent per year.
An ordinary annuity is a series of level payments that begin ____.
A traditional (non-growing) annuity consists of a(n) ________ stream of

cash flows for a fixed period of time.
What is the present value of an annuity consisting of 20 end of year
payments of $500 when the interest rate is 11 percent? Use your
financial calculator.
The interest rate on the financial calculator is expressed as a
Which of the following is a proper definition for the effective annual

interest rate?
Thefuture value of an annuity that lasts n years is equal to
A series of level payments that begins immediately for a specified period

of time is called a(n):
Inflation can be defined as
What is the future value of a series of $2000 end of year deposits into an
IRA account paying 5 percent interest, over a period of 35 years? Use
your financial calculator.
The effective annual interest rate is also known as the ______________.
True or false: the nominal interest rate can be defined as an interest

rate quoted today by a financial institution on a loan or investment, such
as an APR or a periodic rate.
Find the future value of an annuity of $100 per year for 10 years at 10
percent per year.
An annuity due is a series of level payments that begin ____.
Real cash flow must be discounted by the
The best known price index used by economists who measure inflation
is ________.
To use your financial calculator to solve annuity problems, you use the
_____ key for entry of the constant payment C.
Which type of interest rate is generally quoted for loans and by banks
and other financial institutions?
Which of the following statements are true regarding the present value
of a stream of cash payments?
....................................................................................................................
..........................................

To calculate net present value, you need to discount _________.
The term incremental cash flow can best be defined as:
An opportunity cost arises in a project whenever:
A benefit or cash flow foregone as a result of an action is called:
When calculating NPV, why are cash flows discounted instead of

accounting profits?
Incremental cash flow is equal to:
Some examples of indirect effects that could affect incremental cash

flows would be:
Some examples of opportunity costs that should be included in project
analysis are:
To calculate net present value, you need to discount _________.
The term incremental cash flow can best be defined as:
Which of the following are commonly made mistakes that managers

make in regard to working capital and forecasting project cash flows?
Indirect effects on cash flows may be positive or negative.
An opportunity cost arises in a project whenever:
A benefit or cash flow foregone as a result of an action is called:
When calculating NPV, why are cash flows discounted instead of

accounting profits?
Which of the following are true regarding the inclusion of working

capital in project cash flows?
Which of the following statements about nominal versus real cash flows
are correct?
By keeping costs such as interest and principal payments on debt out of

project cash flows, you are following a fundamental principle of
corporate finance known as the separation of investment and
___________ decisions.
Cash flows from capital investments + operating cash flows + cash

flows from changes in working capital =
Which of the following are commonly made mistakes that managers

make in regard to working capital and forecasting project cash flows?
The difference between the nominal discount rate and the real discount
rate is ________.
The initial capital investment in a project requires a ______ cash flow.

The salvage value from a project involves a ________ cash flow.
The Tax Cuts and Jobs Act allows companies to take bonus depreciation
sufficient to write off what percent of investment immediately?
Which of the items below are the elements which must be included in
the calculation of a project's total cash flow?
Smith Industries plans to sell an asset at the end of a 5 year project for
$250,000. The book value of the asset at that time will be $125,000. The
marginal tax rate is 35 percent. How much tax will Smith pay on the
sale, and what will be its net proceeds (cash inflow)?
Which of the following are true regarding the inclusion of working

capital in project cash flows?
A project generates revenues of $5,000, costs of $3,000 and taxes of

$700. What is the project's operating cash flow?
The initial capital investment is a cash outflow at the start of the project
that includes which of the following types of outflows:
Which of the following will correct the effect of depreciation?
At the end of a project, a firm's investment has a salvage value of $4

million. The firm will pay taxes of $.5 million on the sale of the
equipment from the investment. What is the net cash flow to the firm?
A project's operating cash flow can be calculated using which of the

following equations:
Which of the following formulas can be used to ensure that depreciation
is not included in a project's operating cash flows?
Financing costs like interest and principal payments on borrowed funds

must be included in the incremental cash flows for the project.
Which of the following statements about working capital is correct?
A project generates revenues of $1.4 million, cash expenses of $1

million, and taxes of $100,000. What is the operating cash flow?
Which of the following will correct the effect of depreciation?
A project generates a net profit of $1.8 million and depreciation of

$200,000. What is the project's operating cash flow?
....................................................................................................................
..........................................
FIN 571 Week 3 Discussion Capital Budgeting

Techniques

Due Thursday
You are a Finance Manager for a major utility company.
Think about some of the capital budgeting techniques you might use for
some upcoming projects.
Discuss at least 2 capital budgeting techniques and how your company

can benefit from the use of these tools.
Compare your approaches to other students’ responses. How were they

similar or different? Why might you use the different approaches shared
by your classmates?
Due Monday
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.........................................
FIN 571 Week 4 Discussion Financial Performance

Evaluation

Due Thursday
You are writing a book on how to evaluate performance evaluation for a

company.
Think about some of the influences and measures of company

performance that you read about this week.
Explain the use of return on assets (ROA) and the price-to-earnings (PE)
ratio in evaluating the performance of a company.
Write about how to calculate ROA and PE ratio and how market
conditions can affect these metrics.
Share the ROA and PE ratio for a company you are familiar with. What
do these metrics tell you about the financial health of the company?
.....................................................................................................................
.........................................

How the firm raises the money required for its investments and
operations is known as the
A corporation is a legal entity that has the rights to do which of the

following?
Shareholders have limited liability which means that they can

A disadvantage of a partnership is
Intangible assets include which of the following?
The chief financial officer is involved in
The financing decision involves
The purpose of the business and how it is to be managed, financed, and

governed is set out in the
Shareholders cannot be held personally responsible for the corporation's

debt because the shareholders have
When managers seek their own interests rather than the interests of the
shareholders, the company is said to have:
A business organization owned by two or more individuals is known as

a
To provide executives with an incentive to maximize the company's

stock value, corporations should provide some compensation in the form
of _____ stock.
The chief financial officer oversees the work of all
A firm with good corporate _______ will have few agency problems.
The financial objective of the corporation's financial managers is to
Good corporate governance includes which of the following?
One of the commonly cited problems with having profit maximization as

a corporate objective is that it fails to consider:
Which of the following types of businesses is least likely to encounter
agency problems due to the fact that the owner's personal wealth is tied
to the value of the business?
Unethical managers run the risk of damaging the company's
Unethical managers run the risk of damaging the company's
The laws, regulations, institutions, and corporate practices that protect

investors is known as
Financial analysts are not responsible for monitoring and controlling

risk.
Which of the following relies, in part, on well-designed management

compensation packages?
Treating customers and employees fairly can help maximize the value of
the firm.
To provide executives with an incentive to maximize the company's

stock value, corporations should provide some compensation in the form
of _____ stock.
The worst stock market crash in history in which stock prices fell by
almost 90% happened in the year
The job of financial analysts may include which of the following?
One of the commonly cited problems with having profit maximization as

a corporate objective is that it fails to consider:
Which of the following are the principal themes of the study of

corporate finance?
History came close to repeating the stock market crash of 1929 in the
year
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.........................................
FIN 571 Week 5 Discussion Systematic and Unsystematic

Risk

Due Thursday
You are the Chief Risk Officer for a company and you’ve been tasked
with identifying the areas where your company is exposed to systematic
and unsystematic risks.
Based on the information you learned this week, what approach would
you take in explaining how systematic and unsystematic risks affect risk
planning?
Describe your approach.
Name 3 or more systematic or unsystematic risks your company might

face.
Think of some implications if your company decides not to be proactive

and plan for these risks.
Due Monday

.....................................................................................................................
.........................................

If an investor purchases a security for $12.30, then sells it at a later date

for $14.10, her capital gain would be ____________.
An investor purchases a share of stock today for $27.50 and holds it for
a year. During the year the stock pays $4.50 in dividends. The investor
sells the stock at the end of the year for $29.25. What is her percentage
return? (Record your answer as a percent rounded to one decimal place.)
U.S. Treasury bills are nearly a risk-free investment because:
If an investor purchases a security today for $9.00 and sells it tomorrow

for $7.50, his capital gain will be _________.
Which of the following expressions correctly calculates an investor's

percentage return on a share of stock?
Which of the following stock indexes includes the stocks of 500 major
companies in proportion to the number of their shares that have been
issued to investors?
Which of the following statements is true regarding the risks undertaken

by investors in U.S. Treasury bills?
The extra annual return from investing in long versus short-term

Treasury securities is known as:
Which of the following statements are true regarding the risks

undertaken by investors in common stock?
The expected return on the stock market can be expressed as the sum of
the _________ and a __________.
The appropriate cost of capital to be used to discount risk-free projects is

________.
Variance and standard deviation are measures of __________.
Beating the performance of which of the indexes below is usually the

definition of success for professional investors?
The difference in returns between short-term and long-term Treasury

securities is called the "bond time premium"
To estimate the future risk of a stock investment, analysts will calculate

the _________ and assume it is a reasonable estimate of future risk.
If the expected return on Treasury bills for 2015 is 0.25 percent and the
market risk premium for the U.S. is 7.50 percent, what is the expected
return on the U.S. stock market for 2015?
Diversification of a stock portfolio can be achieved by __________.
The appropriate cost of capital to be used to discount average risk

projects is _________.
A major limitation of using standard deviation of historical stock returns

to predict future investment risk is ________.
Select all of the terms below that are related to the riskiness of an asset
investment.
Diversification works best when portfolio stock returns are ______

correlated.
The appropriate cost of capital to be used to discount risk-free projects is
________.
Once you have added about ______ or more diversified stocks to your
portfolio, you have removed about as much specific risk as you possibly
can.
Which of the following stock indexes tracks the performance of a

portfolio consisting of 1 share each of 30 "blue chip" stocks?
Individual projects which seem risky to a firm do not contribute much

risk to the portfolio of a diversified investor.
The standard deviation of returns is a useful measure of risk for

individual assets in isolation, but is a misleading risk measure for assets
in a portfolio due to the ________ effect caused by ________.
Which of the following industries have less-than-average exposure to

macro and market risk?
For a well-diversified investor, the only type of risk that matters is

_______.
The most important measure of risk in a well-diversified portfolio is
Investors holding well-diversified portoflios are most concerned with
Which of the following is the relevant risk to investors of a single stock

held in a diversified portfolio?
The impact of macroeconomic news is tracked by the rate of return on a

_____________ of all securities.
The fitted line's _______ measures a stock's market risk.

If the market portfolio return decreases by 2%, then each firm's stock
return will ________ by about _______ percent.
A firm can have high total risk but a low beta if its _______ is high.
In principle the market portfolio should contain all assets in the world
economy. In practice, financial analysts use _______ as a proxy for the
market portfolio.
If you invest 50 percent of your funds in a stock with beta=1.5, 30

percent in a stock with beta=0.9 and 20 percent in a stock with beta=0.3,
your portfolio beta will be _______.
Plot a firm's stock returns versus the market portfolio returns using data
for a fixed period of time. The slope of the straight line fitted to those
points is called:
If the market portfolio return increases by 1%, then each firm's stock
return will ________ by about ________ percent.
The measure of market risk for a security is its _________.
The average of the betas of the individual securities in a portfolio,

weighted by the investment in each security, is called the:
The total risk of a well-diversified portfolio of stocks can be calculated

as the product of the ________ times the _________.
A beta of 0 indicates that a security is _________ by what happens in

the market.
The total risk of a security investment consists of _______ plus

_______.
The total risk of a diversified portfolio of stocks is determined by the
_________, since all ________ has been diversified away.
The CAPM assumes that the stock market is composed of _______

investors.
The CAPM assumes that the stock market is composed of _______

investors.
If you construct an investment portfolio by investing 75% of your funds

in the market portfolio (r = 14%) and 25% of your funds in Treasury
bills (r = 3%), what is the expected return of your portfolio according to
the CAPM?
What is the CAPM formula?
The CAPM predicts that the difference in return between stock A and
stock B should be due only to the difference in the _______ of the two
stocks.
XYZ Industries is considering the following list of projects. For each,

the project cost of capital and expected return are given. Which of these
projects should the firm accept?
The security market line describes the expected returns and risks from
dividing a portfolio between _________ and _________.
According to the CAPM, what is the expected return on a stock if its

beta is equal to zero?
Firms may use a ____________ to discount the cash flows of their

average risk projects.
The minimum acceptable expected rate of return for a project is called

the ________________.
Projects with high fixed costs will tend to have earnings that vary
_______ with any change in revenues
A sensible way for a manager to account for overoptimistic cash-flow

forecasts is to adjust the discount rate.
The opportunity cost of capital for investment in the firm as a whole is

called the:
The risk of undertaking a project can be described by its __________.
Projects with high fixed costs will tend to have _______ betas than other
projects.
If cash-forecasts are prepared properly then which of the following are

true?
Suppose the risk-free rate is 5%, the market rate of return is 10%, and
beta is 2. Find the expected rate of return using the CAPM.

If an investor purchases a security today for $9.00 and sells it tomorrow

for $7.50, his capital gain will be _________.
- An investor purchases a share of stock today for $27.50 and holds

it for a year. During the year the stock pays $4.50 in dividends. The
investor sells the stock at the end of the year for $29.25. What is her
percentage return? (Record your answer as a percent rounded to one
decimal place.)
- Beating the performance of which of the indexes below is usually

the definition of success for professional investors?
- U.S. Treasury bills are nearly a risk-free investment because:
- Rank the following in order of risk, from least risky to most

risky.
- If an investor purchases a security for $12.30, then sells it at a

later date for $14.10, her capital gain would be ____________.
- The extra annual return from investing in long versus short-term

Treasury securities is known as:
- Which of the following expressions correctly calculates an

investor's percentage return on a share of stock?
The Standard & Poor's Composite Index is also referred to as the "S&P
500" index.
- Which of the following statements is true regarding the risks

undertaken by investors in U.S. Treasury bills?
- Which of the following statements are true regarding the risks

undertaken by investors in common stock?
The difference in returns between short-term and long-term Treasury

securities is called the "bond time premium"
- If the expected return on Treasury bills for 2015 is 0.25 percent

and the market risk premium for the U.S. is 7.50 percent, what is the
expected return on the U.S. stock market for 2015?
- The appropriate cost of capital to be used to discount average risk

projects is _________.
- Which of the following stock indexes includes the stocks of 500
major companies in proportion to the number of their shares that have
been issued to investors?
- U.S. Treasury bills are nearly a risk-free investment because:
- The expected return on the stock market can be expressed as the

sum of the _________ and a __________.
- The square root of variance is called standard ______
- The appropriate cost of capital to be used to discount risk-free

projects is ________.
- To estimate the future risk of a stock investment, analysts will

calculate the _________ and assume it is a reasonable estimate of future
risk.
- Diversification of a stock portfolio can be achieved by

__________.
- Variance and standard deviation are measures of __________.
- The standard deviation of returns is a useful measure of risk for

individual assets in isolation, but is a misleading risk measure for assets
in a portfolio due to the ________ effect caused by ________.
- A major limitation of using standard deviation of historical stock

returns to predict future investment risk is ________.
- For a well-diversified investor, the only type of risk that matters

is _______.
- Individual projects which seem risky to a firm do not contribute

much risk to the portfolio of a diversified investor.
- Diversification works best when portfolio stock returns are
______ correlated.
- Select all of the terms below that are related to the riskiness of an
asset investment.
- Investors holding well-diversified portoflios are most concerned

with
- Once you have added about ______ or more diversified stocks to

your portfolio, you have removed about as much specific risk as you
possibly can.
- The principal of ______ demonstrates that a single stock that

appears very risky may not contribute much to the overall risk of a well-
diversified portfolio.
- Which of the following industries have less-than-average

exposure to macro and market risk?
- Which of the following is the relevant risk to investors of a single

stock held in a diversified portfolio?
- In principle the market portfolio should contain all assets in the

world economy. In practice, financial analysts use _______ as a proxy
for the market portfolio.
- Rank the following stocks from lowest risk to highest risk.
- The fitted line's _______ measures a stock's market risk.
- If the market portfolio return decreases by 2%, then each firm's

stock return will ________ by about _______ percent.
- The total risk of a security investment consists of _______ plus
_______.
- The impact of macroeconomic news is tracked by the rate of

return on a _____________ of all securities.
- The average of the betas of the individual securities in a portfolio,

weighted by the investment in each security, is called the:
- The average beta for all stocks (the beta of the market portfolio)
is ____.
- Plot a firm's stock returns versus the market portfolio returns

using data for a fixed period of time. The slope of the straight line fitted
to those points is called:
- If the market portfolio return increases by 1%, then each firm's

stock return will ________ by about ________ percent.
- The measure of total risk for a security is its ________.
- If you invest 50 percent of your funds in a stock with beta=1.5,

30 percent in a stock with beta=0.9 and 20 percent in a stock with
beta=0.3, your portfolio beta will be _______.
- A firm can have high total risk but a low beta if its _______ is
high.
- The total risk of a well-diversified portfolio of stocks can be

calculated as the product of the ________ times the _________.
- U.S. Treasury securities are considered to be a risk-free

investment that is fixed and not affected by movements in the market.
Such a security would naturally have a beta of ______,
- The CAPM assumes that the stock market is composed of
_______ investors.
- If you construct an investment portfolio by investing 75% of your

funds in the market portfolio and 25% of your funds in Treasury bills,
what is the beta of your portfolio?
- The total risk of a diversified portfolio of stocks is determined by

the _________, since all ________ has been diversified away.
- A beta of 0 indicates that a security is _________ by what

happens in the market.
- For well-diversified investors, the only relevant measure of

investment risk is their __________.
- Suppose the risk-free rate is 5%, the market rate of return is 10%,
and beta is 2. Find the expected rate of return using the CAPM.
- If you construct an investment portfolio by investing 75% of your

funds in the market portfolio (r = 14%) and 25% of your funds in
Treasury bills (r = 3%), what is the expected return of your portfolio
according to the CAPM?
- According to the CAPM, what is the expected return on a stock if

its beta is equal to zero?
- The CAPM predicts that the difference in return between stock A

and stock B should be due only to the difference in the _______ of the
two stocks.
- The risk of undertaking a project can be described by its

__________.
- Firms may use a ____________ to discount the cash flows of
their average risk projects.
- Projects with high fixed costs will tend to have _______ betas
than other projects.
- Value stocks here are defined as those with __________ ratios of

book value to market value; growth stocks are those with __________
ratios of book to market value.
- The security market line describes the expected returns and risks
from dividing a portfolio between _________ and _________.
- If cash-forecasts are prepared properly then which of the

following are true?
- The minimum acceptable expected rate of return for a project is

called the ________________.
- The opportunity cost of capital for investment in the firm as a

whole is called the:
- Projects with high fixed costs will tend to have earnings that vary
_______ with any change in revenues
- A sensible way for a manager to account for overoptimistic cash-

flow forecasts is to adjust the discount rate.

.....................................................................................................................
.........................................
FIN 571 Week 5 Quiz
Although Standard and Poor's Composite Index contains a limited

number of U.S. publicly traded stocks, the Index represents:
"Dow up 14. Story at 6:00." This means that:
Although several stock indexes are available to inform investors of

market changes, the Dow Jones Industrial Average:
In a year in which common stocks offered an average return of 12% and

Treasury bills offered 3%. The risk premium for common stocks was:
Companies that are exposed to the business cycle:
What is the standard deviation of a portfolio's returns if the mean return

is 15%, and the variance of returns is 184?
The variance of a stock's returns can be calculated as the:
What is the typical relationship between the standard deviation of an

individual common stock and the standard deviation of a diversified
portfolio of common stocks?
Which one of the following concerns is likely to be most important to

portfolio investors seeking diversification?
The major benefit of diversification is the:

Risks that affect only a single firm are called:
Which one of the following risks is most important to a well-diversified

investor in common stocks?
Which one of these is a specific risk?
.....................................................................................................................
.........................................
FIN 571 Week 6 Discussion Venture Capital


Due Thursday
You are a business consultant who works with new business owners. A
new client wants to start a bakery and seeks your advice.
Based on what you’ve learned from the readings, discuss the advantages
and disadvantages of using venture capital as startup funding for a
business.
Describe what approach you would recommend for the client by using
the information you researched.
How does your approach differ from the recommendations of your

classmates?
How might your recommendation change after reading your classmates
recommendations?
Due Monday

.....................................................................................................................
.........................................

Short-term and long-term financing are used to meet the firm's
XYZ company has current liabilities of $100,000 and current assets of

$175,000. The company's net working capital is _____.
Starting in 2018 with a reduced tax rate in place, U.S. corporations no

longer have an incentive to leave profits abroad.
Holdings of marketable securities are best at at what investment for a

taxpaying firm?
Which of the following items is a current liability on the balance sheet?
If the firm is a short-term lender
Net working capital is equal to
Starting in 2018, the United States moved to a territorial system with a

corporate tax rate of:
The financial statement used to report changes that took place in the
cash account is the
There are advantages to holding a reservoir of cash for smaller firms,

who may face higher costs to raise funds on short notice.
Financial mangers use _____ to anticipate future sources and uses of

cash.
Short-term borrowing is classified as
A sales forecast enables financial mangers to determine
The financial statement of cash flows shows the increases and decreases
in cash corresponding to which of the following activities?
Which of the following are purposes for forecasting future sources and
uses of cash?
Mahan Corporation had sales on account of $30,000 in January, $40,000

in February, and $37,000 in March. 75% is collected in the month of the
sale and 25% is collected in the month following the sale. The amount of
cash collected in March is anticipated to be _____.
If the firm is a short-term borrower
The financial statement used to report changes that took place in the
cash account is the
Which of the following are identified as uses of cash for forecasting

purposes?
Financial mangers use _____ to anticipate future sources and uses of

cash.
Mahan Corporation had sales on account of $30,000 in January, $40,000

in February, and $37,000 in March. 75% is collected in the month of the
sale and 25% is collected in the month following the sale. The amount of
cash collected in February is anticipated to be _____.
When long-term financing more than covers the cumulative capital

requirement, the firm has a surplus of _____ available for short-term
financing
Based on the cash forecast, Mahan Corporation has a cash deficit of
$30,000 in January, requires a minimum operating cash balance of
$5,000, and has a beginning cash balance of $2,000. How much will
Mahan Corporation need to borrow?
The second step in preparing a cash budget is to:

When a company puts off paying its bills, it is using a form of short-term
financing called:
Based on the cash forecast, Mahan Corporation has a beginning cash

balance of $5,000 in February, requires a minimum operating cash
balance of $5,000, and has a net cash inflow of $25,000. How much will
Mahan Corporation need to borrow?
A bank loan that is 3% per quarter has an annual rate of
Which of the following are considered sources of short-term financing?
Stretching payables can be a costly term of short-term financing

because:
When firms need short-term financing, which strategy is most common?
With _______, a firm can borrow up to a certain amount with an agreed

upon interest rate.
If a supplier offers a 1% discount monthly, and we forego the discount

to stretch payables, this suggests an annualized rate of borrowing of
Using a bank loan to its limit is typically preferable to stretching

payables.
The best way for a firm to determine its short-term financing plan is
through:
Which of the following are questions financial managers ask when

determining the appropriate short-term financial plan for their firm?
Which of the following relates to short-term planning, but not long-term
planning?
Which of the following are components included in financial plans?

A company's financial planners expect sales to increase by 20% over the
next year and expect costs to be a fixed proportion of sales. Given this
information, the financial planners will use the _____ model.
Which of the following relates to long-term planning, but not short-term

planning?
Which of the following are benefits of building financial plans?
Which of the following are reasons why financial planners use financial
planning models?
What is the first step managers take to determine how much external
capital a firm requires?
Mahan Corporation expects total sales to increase by 20% over the next
year. The corporation has no spare capacity and must increase plant and
equipment by 20%. The corporation currently has $100,000 in assets,
$40,000 in debt, and $60,000 in equity. The corporation desires to
maintain the debt-equity ratio. The corporation's equity will be _____.
A planning model in which sales forecasts are the driving variables and
most other variables are proportional to sales.
Which of the following are included in a firm's total uses of cash

calculation?
All forecasted variables will be proportional to the level of sales.
What is the correct order a firm should follow to determine how much
external capital will be required to finance operations?
year. The corporation has no spare capacity and must increase plant and
equipment by 20%. The corporation currently has $100,000 in assets,
$40,000 in debt, and $60,000 in equity. The corporation desires to
maintain the debt-equity ratio. The corporation's debt will be _____.
A firm has investments in fixed assets totaling $1.2 million, investments
in net working capital totaling $400,000, and dividend payments totaling
$200,000. What is the firm's total use of cash?
Percentage of sales models assume that forecasts are proportional to the

forecasted level of sales, but which of the following variables contradict
this assumption?
year from this year's level of $50,000. Current costs of $35,000 are
expected to increase proportionately The total amount of next year's
costs is _____.
Which of the following cannot be provided by financial planning

models?
Mahan Corporation ended the year with $70,000 of sales and $35,000 of
net assets. The corporation's managers forecast that sales will increase
by 10% in the coming year. The corporation has reinvested earnings of
$2,000. Assuming the ratio of net assets to sales remains constant, the
corporation's required external financing will be _____.
Mahan Corporation anticipates an expected growth rate of 20%. The

corporation currently has $30,000 in assets. The amount of the new
investment is _____.
The amount of external financing that a firm will require depends on the
firm's projected _______.
Mahan Corporation ended the year with $70,000 of sales and $35,000 of
net assets. The corporation's managers forecast that sales will increase
by 10% in the coming year. The corporation has no earnings to reinvest.
Assuming the ratio of net assets to sales remains constant, the
corporation's required external financing will be _____.
The formula for internal growth rate is
Mahan Corporation anticipates an expected growth rate of 10%. The

corporation currently has $100,000 in assets and $4,500 of reinvested
earnings. The amount of required external financing is _____.
Which of the following are methods a firm can use to achieve a higher
growth rate without raising external capital?
The sustainable growth rate is equal to
Mahan Corporation has assets of $100,000 and reinvested earnings of

$50,000. The corporation's internal growth rate is _____.
Mahan Corporation has reinvests 25% of its earnings back into the firm.
It has a return on equity of 15%. The corporation's sustainable growth
rate is _____.
Which one of the following is not a reason for compiling financial

plans?
All of the following are part of the financial planning process except:
A percentage-of-sales model forecasts that cost of goods sold will

remain at 80% of sales. If sales revenues are expected to grow by 20%
next year, cost of goods sold:
A planner's percentage of sales model forecasts that sales will grow by

20% next year. If costs of goods sold are proportionate at 70% of sales,
then costs of goods sold will:
Which one of the following is not typically included among the three
major components of a financial planning model?
A financial planning model will generally include all of the
following except the:
If a firm with an asset base of $3 million recently added $150,000 to

retained earnings after a dividend payment of $100,000, then its internal
growth rate is:
The sustainable growth rate:
What is the sustainable growth rate for a firm with net income of $2.5
million, cash dividends of $1.5 million, and return on equity of 18%?
What is the maximum internal growth rate for a firm reporting net
income of $500,000, a dividend payout ratio of 40%, and total assets of
$10 million?
Which one of the following is more likely for a firm practicing the
relaxed strategy of long-versus short-term borrowing at the height of
sales demand?
Which one of these is most associated with a disadvantage of the relaxed

strategy of long- versus short-term financing?
When internally generated cash is temporarily insufficient to meet a

firm’s cash need, the firm following a middle-of-the-road policy for
long- versus short-term financing will:
Which of the following would increase the firm’s cash balance?
A firm starts the week with payables of $172,000, it pays $$80,000 of

outstanding bills, and purchases $44,000 of raw materials on one
month’s credit. What is the change in its cash balance over the week?
Managers are alerted to projected cash shortages by means of the:

Clopton Inc. forecasts cash sales of $18 million in January, $23 million
in February and $25 million in March. Credit sales in these three months
are forecast at $80 million, $110 million and $145 million. On average
50% of credit sales are paid for in the current month, 30% in the next
month, and the remainder in the following month. What is the expected
cash inflow in March?
Which of the following statements is not true of short-term financial

planning?
There are three steps to constructing a cash budget. Which of the

following is not one of those steps?
Managers who "stretch their payables" are attempting to:
.....................................................................................................................
.........................................
FIN 571 Wk 3 Apply Wk 3 Quiz

You can buy property today for $2.0 million and sell it in 4 years for
$3.0 million. (You earn no rental income on the property.)
a. If the interest rate is 12%, what is the present value of the sales price?
(Do not round intermediate calculations. Enter your answer in millions
rounded to 3 decimal places.)
b. Is the property investment attractive to you?
c-1. What is the present value of the future cash flows, if you also could
earn $100,000 per year rent on the property? The rent is paid at the end
of each year. (Do not round intermediate calculations. Enter your answer
in millions rounded to 3 decimal places.)
c-2. Is the property investment attractive to you now?
a. Present value million
b. Is the property investment attractive to you?

c-1. Present value million
c-2. Is the property investment attractive to you now?
A factory costs $440,000. You forecast that it will produce cash inflows
of $140,000 in year 1, $200,000 in year 2, and $340,000 in year 3. The
discount rate is 11%.
a. What is the value of the factory? (Do not round intermediate
calculations. Round your answer to 2 decimal places.)
Value of the factory $754.80selected answer incorrect
b. Is the factory a good investment?
Yes
•
No
Find the interest rate implied by the following combinations of present

and future values: (Do not round intermediate calculations. Enter your
answers as a percent rounded to 2 decimal places. Leave no cells blank -
be certain to enter "0" wherever required.)
a. Calculate the NPV for both projects if the discount rate is 12%. (Do
not round intermediate calculations. Round your answers to 2 decimal
places.)
Project NPV
Project A
Project B
b. Suppose that you can choose only one of these projects. Which would
you choose?
•
Project B
Project A
Neither
5
Compute the future value of a $185 cash flow for the following
combinations of rates and times. (Do not round intermediate
calculations. Round your answers to 2 decimal places.)
a. r = 8%; t = 10 years
b. r = 8%; t = 20 years
c. r = 4%; t = 10 years
d. r = 4%; t = 20 years
Future Value
a.
b.
c.
d.
6
Johnny’s Lunches is considering purchasing a new, energy-efficient
grill. The grill will cost $33,000 and will be depreciated straight-line
over 3 years. It will be sold for scrap metal after 5 years for $8,250. The
grill will have no effect on revenues but will save Johnny’s $16,500 in
energy expenses. The tax rate is 30%.
Required:
a. What are the operating cash flows in each year?
b. What are the total cash flows in each year?
c. Assuming the discount rate is 10%, calculate the net present value
(NPV) of the cash flow stream. Should the grill be purchased?
Complete this question by entering your answers in the tabs below.

• Required A
• Required B
• Required C
What are the operating cash flows in each year? (Do not round
intermediate calculations. Round your answers to 2 decimal places.)
Year Operating Cash Flows
What are the total cash flows in each year? (Negative amounts should
be indicated with a minus sign. Do not round intermediate calculations.
Round your answers to 2 decimal places.)
Time Total Cash Flows
3
Assuming the discount rate is 10%, calculate the net present value
(NPV) of the cash flow stream. Should the grill be purchased? (Do not
round intermediate calculations. Round your answer to 2 decimal
places.)
NPV of cash flow stream
Should the grill be purchased?

7
Old Time Savings Bank pays 3% interest on its savings accounts. If you
deposit $1,200 in the bank and leave it there: (Do not round intermediate
calculations. Round your answers to 2 decimal places.)
a. How much interest will you earn in the first year?
First year interest

b. How much interest will you earn in the second year?
Second year interest 1,273.08
c. How much interest will you earn in the 10th year?
Tenth year interest 15,131.00

8
Your landscaping company can lease a truck for $7,100 a year (paid at
year-end) for 7 years. It can instead buy the truck for $38,000. The truck
will be valueless after 7 years. The interest rate your company can earn
on its funds is 8%.
a. What is the present value of the cost of leasing? (Do not round
intermediate calculations. Round your answer to 2 decimal places.)
b. Is it cheaper to buy or lease?
c. What is the present value of the cost of leasing if the lease payments
are an annuity due, so the first payment comes immediately? (Do not
places.)
d. Is it now cheaper to buy or lease?

a. Present value of lease
b. Is it cheaper to buy or lease?
c. Present value of lease
d. Is it now cheaper to buy or lease?

9
The following are the cash flows of two independent projects:
a. If the opportunity cost of capital is 10%, calculate the NPV for both
projects. (Do not round intermediate calculations. Round your answers
to 2 decimal places.)
Project NPV
Project A
Project B
b. Which of these projects is worth pursuing?
Project A
Project B
Both
•
Neither
10
The owner of a bicycle repair shop forecasts revenues of $176,000 a

year. Variable costs will be $54,000, and rental costs for the shop are
$34,000 a year. Depreciation on the repair tools will be $14,000.
a. Prepare an income statement for the shop based on these estimates.

The tax rate is 20%.
INCOME STATEMENT
Revenueselected answer correct
Variable costsselected answer correct
Rental costsselected answer correct
Depreciationselected answer correct
Pretax profitselected answer correct
ormula-based calculation is incorrect; no points deducted.

b. Calculate the operating cash flow for the repair shop using the three
methods given below:
Now calculate the operating cash flow.
i. Dollars in minus dollars out.
ii. Adjusted accounting profits.
iii. Add back depreciation tax shield.

Methods of Calculation Operating Cash Flow
i. Dollars in Minus Dollars Out
ii. Adjusted Accounting profits
iii. After tax Operating Cash flow
11
If you insulate your office for $24,000, you will save $2,400 a year in
heating expenses. These savings will last forever.
a. What is the NPV of the investment when the cost of capital is 8%?
10%?
Cost of Capital NPV
b. What is the IRR of the investment? (Enter your answer as a whole

percent.)
IRR 8selected answer incorrect %

c. What is the payback period on this investment?
Payback period 5selected answer incorrect years
12
a. What is the present value of a 3-year annuity of $270 if the discount

rate is 7%? (Do not round intermediate calculations. Round your answer
to 2 decimal places.)
Present value $330.00selected answer incorrect
b. What is the present value of the annuity in (a) if you have to wait an
additional year for the first payment? (Do not round intermediate
calculations. Round your final answer to 2 decimal places.)
Present value $353.00selected answer incorrect
13
A new furnace for your small factory will cost $41,000 and a year to
install, will require ongoing maintenance expenditures of $3,500 a year.
But it is far more fuel-efficient than your old furnace and will reduce
your consumption of heating oil by 3,800 gallons per year. Heating oil
this year will cost $3 a gallon; the price per gallon is expected to
increase by $0.50 a year for the next 3 years and then to stabilize for the
foreseeable future. The furnace will last for 20 years, at which point it
will need to be replaced and will have no salvage value. The discount
rate is 10%.
a. What is the net present value of the investment in the furnace? (Do not
round intermediate calculations. Round your answer to the nearest whole
dollar.)
b. What is the IRR? (Do not round intermediate calculations. Enter your
answer as a percent rounded to 2 decimal places.)
c. What is the payback period? (Do not round intermediate calculations.

Round your answer to 2 decimal places.)
d. What is the equivalent annual cost of the furnace? (Do not round
e. What is the equivalent annual savings derived from the furnace? (Do
not round intermediate calculations. Round your answer to 2 decimal
places.)
f. Compare the PV of the difference between the equivalent annual cost

and savings to your answer to part (a). Are the two measures the same or
is one larger?
a. NPV
b. IRR
c. Cumulative cash flows are positive in:
d. Equivalent annual cost
e. Equivalent annual savings
f. Are the two measures the same or is one larger?

14
Revenues generated by a new fad product are forecast as follows:
Expenses are expected to be 40% of revenues, and working capital

required in each year is expected to be 30% of revenues in the following
year. The product requires an immediate investment of $70,000 in plant
and equipment.
Required:
a. What is the initial investment in the product? Remember working

capital.
b. If the plant and equipment are depreciated over 4 years to a salvage

value of zero using straight-line depreciation, and the firm’s tax rate is
20%, what are the project cash flows in each year? Assume the plant
and equipment are worthless at the end of 4 years.
c. If the opportunity cost of capital is 10%, what is the project's NPV?
d. What is project IRR?

• Req A
• Req B
• Req C and D
• What is the initial investment in the product? Remember

working capital.
Initial investment $70,000selected answer incorrect

If the plant and equipment are depreciated over 4 years to a salvage
value of zero using straight-line depreciation, and the firm’s tax rate is
20%, what are the project cash flows in each year? Assume the plant and
equipment are worthless at the end of 4 years. (Do not round
intermediate calculations.)
c. If the opportunity cost of capital is 10%, what is the project's NPV?

(A negative value should be indicated by a minus sign. Do not round
d. What is project IRR? (Do not round intermediate calculations. Enter

your answer as a percent rounded to 2 decimal places.)
15
Bottoms Up Diaper Service is considering the purchase of a new

industrial washer. It can purchase the washer for $2,400 and sell its old
washer for $800. The new washer will last for 6 years and save $700 a
year in expenses. The opportunity cost of capital is 21%, and the firm’s
tax rate is 21%.
a. If the firm uses straight-line depreciation over a 6-year life, what are
the cash flows of the project in years 0 to 6? The new washer will have
zero salvage value after 6 years, and the old washer is fully depreciated.
(Negative amounts should be indicated by a minus sign.)
b. What is project NPV? (Do not round intermediate calculations. Round

your answer to 2 decimal places.)
c. What is NPV if the firm investment is entitled to immediate 100%
bonus depreciation? (Do not round intermediate calculations. Round
a. Annual operating cash flow in year 0
Annual operating cash flow in years 1 to 6
b. NPV
b. NPV
.....................................................................................................................
.........................................
What happens over time to the real cost of purchasing a home if the
mortgage payments are fixed in nominal terms and inflation is in
existence?
Multiple Choice
The real cost is constant.
The real cost is increasing.
•
The real cost is decreasing.
The price index must be known to answer this question.
How much more would you be willing to pay today for an investment
offering $10,000 in 4 years rather than in 5 years? Your discount rate is
8%.
Multiple Choice
$544.47
•
$681.48
$740.74
$800.00
3
What is the annually compounded rate of interest on an account with an
APR of 10% and monthly compounding?
Multiple Choice
10.00%
10.47%
•
10.52%
11.05%
Explanation
EAR = [1 + (0.10 / 12)] 12 − 1 = 0.1047, or 10.47%
An amortizing loan is one in which:

Multiple Choice
the principal remains unchanged with each payment.
accrued interest is paid regularly.
the maturity of the loan is variable.
the principal balance is reduced with each payment.

5
Suppose you take out a 30-year mortgage for $100,000 with annual
payments. The interest rate on the mortgage is 8%. When you have paid
off half the mortgage, so that the value of the remaining payments is
reduced to $50,000, how many more payments need to be made?
Multiple Choice
Approximately 15 payments
•
Explanation
Solve first for the annual payment: $100,000 = PMT(1 / 0.08 − 0.08 ×
1.0830). PMT = $8,882.74
PV = PMT [(1 / r) − 1 / r(1 + r)t]

$50,000 = 8,882.74{1 / 0.08−1 / (0.08 × 1.08t}
Either use logs or trial and error to find t ≈ 8
Eighteen years from now, 4 years of college are expected to cost

$150,000. How much more must be deposited into an account today to
fund this expense if you can earn only 8% on your savings rather than
the 11% you hope to earn?
Multiple Choice
$12,211.18
•
$13,609.21
$14,006.41
$14,614.03
Explanation
Additional deposit = $150,000 / 1.0818 − $150,000 / 1.1118
Additional deposit = $14,614.03
Projects A and B are mutually exclusive lending projects. Project A has

an IRR of 20% while Project B has an IRR of 30%. You would be more
likely to choose B unless:
Multiple Choice
Project B has a longer life than Project A.
•
Project A has more risk than Project B.
Project A is twice the size of Project B.
Project B has a larger cash inflow in Year 1 than Project A.
8
If the IRR for a project is 15%, then the project's NPV would be:
Multiple Choice
negative at a discount rate of 10%.
positive at a discount rate of 20%.
negative at a discount rate of 20%.
•
positive at a discount rate of 15%.
A project costing $20,000 generates cash inflows of $9,000 annually for

the first 3 years, followed by cash outflows of $1,000 annually for 2
years. At most, this project has ________ different IRR(s).
Multiple Choice
one
•
two
three
five
10
You can continue to use your less efficient machine at a cost of $8,000
annually. Alternatively, you can purchase a more efficient machine for
$12,000 plus $5,000 annual maintenance. If the new machine lasts 5
years and the cost of capital is 15%, you should:
Multiple Choice
buy the new machine and save $600 in equivalent annual costs.
buy the new machine and save $388 in equivalent annual costs.
keep the old machine and save $388 in equivalent annual costs.
•
keep the old machine and save $580 in equivalent annual costs.
Explanation
NPV = −$12,000 − $5,000[(1 / 0.15) − 1 / 0.15(1.15)5] = −$28,760.78
Using a financial calculator:
N = 5; I = 15%; PV = −$28,760.78; FV = 0; CPT PMT = $8,579.79
Change in annual cost = $8,579.79 − 8,000 = $579.79

11
What is the minimum cash flow that could be received at the end of year
3 to make the following project "acceptable"? Initial cost = $100,000;
cash flows at end of years 1 and 2 = $35,000; opportunity cost of capital
= 10%.
Multiple Choice
$29,494
$30,000
•
$39,256
$52,250
Explanation
NPV = 0 − $100,000 + ($35,000 / 1.1) + $35,000 / 1.12 + $x / 1.13; x =

$52,250
A cash flow of $52,250 received in year 3, and discounted at 10%,

would increase the NPV to zero.
12
Soft capital rationing:
Multiple Choice
is costly to shareholders.
is used to evaluate mutually exclusive projects.
should be costless to the shareholders of the firm.

•
solves the problem of investment timing.
13
If a project costs $72,000 and returns $18,500 per year for 5 years, what
is its IRR?
Multiple Choice
•
8.98%
7.39%
8.50%
7.67%
Explanation
Using a financial calculator: n = 5; PV = −$72,000; PMT = $18,500; FV
= 0; CPT i = 8.98%
14
When calculating cash flow from operations, one should:
Multiple Choice
subtract depreciation since it represents the cost of replacing worn-out

equipment.
deduct the depreciation tax shield from after-tax profit.
•
use after-tax profit and ignore depreciation.
add depreciation to after-tax profit.
15
Corporate income statements are designed primarily to show:
Multiple Choice
•
cash flows during a period.
account balances at the end of a period.
performance during a period.
market values of assets and liabilities.

16
The NPV of an investment proposal becomes negative solely as a result

of allocating a portion of the corporation president's salary. It is most
likely the case that:
Multiple Choice
the project should be accepted.
rejecting the project is the decision.

•
the allocation should be postponed until the project is accepted.
the salary should be considered an opportunity cost of the project.
17
If inflation is forecast to increase, which of the company’s following

cash flows is most likely to change?
Multiple Choice
•
The depreciation tax shield.
Labor costs.
Costs of raw materials purchased on a fixed price contract.
Interest payments on its long-term debt.

18
Which of the following ly adjusts for depreciation when calculating a

project’s operating cash flow?
Multiple Choice
(revenues − cash expenses) × (1 − tax rate) + (tax rate × depreciation).
pretax profit + depreciation tax shield.

•
after-tax profit − depreciation.
ignore depreciation since it is not a cash flow.
19
A proposed project requires an initial investment of $8,500 in current

assets, 75% of which will be financed with accounts payable. The
project will have:
Multiple Choice
•
an initial cash outflow of $8,500 at time zero for net working capital.
a cash outflow for net working capital at the end of the project.
a cash inflow at the end of the project from net working capital.
a cash outflow for net working capital every year of the project's life.
20
New projects or products can provide positive indirect effects as well as

negative effects. Which one of the following appears to be a negative
indirect effect?
Multiple Choice
The new machine required for the project uses less electricity than the
existing machine.
Orders for your complementary products are expected to increase.
•
Customer orders of supplies for the firm’s existing products are expected
to decrease.
Variable costs are expected to decrease since the firm can order larger
quantities.
.....................................................................................................................
.........................................
FIN 571 Wk 5 Apply Wk 5 Quiz (with Excel File)

This Tutorial contains Excel file which can be used for any values
1
Top hedge fund manager Sally Buffit believes that a stock with the same
market risk as the S&P 500 will sell at year-end at a price of $41. The
stock will pay a dividend at year-end of $2.00. Assume that risk-free
Treasury securities currently offer an interest rate of 1.6%.
Average rates of return on Treasury bills, government bonds, and

common stocks, 1900–2017 (figures in percent per year) are as follows.
Portfolio Average Annual
Rate of Return (%) Average Premium (Extra return
versus Treasury bills) (%)
Treasury bills 3.8

Treasury bonds 5.3 1.5
Common stocks 11.5 7.7
________________________________________
a. What is the discount rate on the stock? (Enter your answer as a

percent rounded to 2 decimal places.)
Discount Rate: 10%

b. What price should she be willing to pay for the stock today? (Do not
places.)
Stock Price: 51.82
2
Assume these are the stock market and Treasury bill returns for a 5-year
period:
Year Stock Market Return (%) T-Bill Return (%)
2013 33.20 0.11
2014 12.70 0.11
2015 −3.20 0.11
2016 14.40 0.06
2017 23.50 0.08
________________________________________
Required:
a. What was the risk premium on common stock in each year?
b. What was the average risk premium?
c. What was the standard deviation of the risk premium? (Ignore that the
estimation is from a sample of data.)
What was the risk premium on common stock in each year? (Do not
round intermediate calculations. Enter your answers as a percent
Year Risk Premium
2013 %
2014 %
2015 %
2016 %
2017
What was the average risk premium? (Do not round intermediate
calculations. Enter your answer as a percent rounded to 2 decimal
places.)
Average risk premium %
What was the standard deviation of the risk premium? (Ignore that the
estimation is from a sample of data.) (Do not round intermediate
places.)
Standard deviation
3
A stock is selling today for $75 per share. At the end of the year, it pays
a dividend of $3 per share and sells for $84.
Required:
a. What is the total rate of return on the stock?
b. What are the dividend yield and percentage capital gain?
c. Now suppose the year-end stock price after the dividend is paid is
$69. What are the dividend yield and percentage capital gain in this
case?
What is the total rate of return on the stock? (Enter your answer as a
whole percent.)
Rate of return
What are the dividend yield and percentage capital gain? (Enter your
answers as a whole percent.)
Dividend yield %
Capital gains yield %
Now suppose the year-end stock price after the dividend is paid is $69.
What are the dividend yield and percentage capital gain in this case?
(Negative amounts should be indicated by a minus sign. Enter your
answers as a whole percent.)
Dividend yield %
Capital gains yield %

4
You purchase 100 shares of stock for $50 a share. The stock pays a $2
per share dividend at year-end.
a. What is the rate of return on your investment if the end-of-year stock

price is (i) $48; (ii) $50; (iii) $55? (Leave no cells blank - be certain to
enter "0" wherever required. Enter your answers as a whole percent.)
Stock Price Rate of Return
48 %
50 %
55 %
b. What is your real (inflation-adjusted) rate of return if the inflation rate

is 3%? (Do not round intermediate calculations. Enter your answers as a
percent rounded to 2 decimal places. Negative amounts should be
indicated by a minus sign.)
Stock Price Real Rate of Return
48 %
50 %
55 %
Consider the following scenario analysis:
Rate of Return
Scenario Probability Stocks Bonds
Recession 0.20 −4 % 19 %
Normal economy 0.40 20 % 9 %
Boom 0.40 26 % 8 %
________________________________________
a. Is it reasonable to assume that Treasury bonds will provide higher

returns in recessions than in booms?
No
•
Yes
b. Calculate the expected rate of return and standard deviation for each
investment. (Do not round intermediate calculations. Enter your answers
as a percent rounded to 1 decimal place.)
Expected Rate of Return Standard Deviation
Stocks % %
Bonds % %
c. Which investment would you prefer?
Stock Bond
Which investment would you prefer?

6
In a recent 5-year period, mutual fund manager Diana Sauros produced

the following percentage rates of return for the Mesozoic Fund. Rates of
return on the market index are given for comparison.
1 2 3 4 5
Fund −1.3 +25.0 +41.0 +12.0 +0.4
Market index −1.0 +17.0 +32.0 +11.3 −0.8
________________________________________
a. Calculate (a) the average return on both the Fund and the index, and
(b) the standard deviation of the returns on each. (Do not round
intermediate calculations. Round your answers to 2 decimal places.)
b. Did Ms. Sauros do better or worse than the market index on these
measures?
Mesozoic Fund Return Market Portfolio Return
a. Average return
Standard deviation
b. Did Ms. Sauros do better or worse than the market index on these
measures?
7
Consider the following scenario analysis:
Rate of Return
Scenario Probability Stocks Bonds
Recession 0.2 -5 % 13 %
Normal economy 0.5 14 9
Boom 0.3 23 4
________________________________________
Assume a portfolio with weights of 0.60 in stocks and 0.40 in bonds.
a. What is the rate of return on the portfolio in each scenario? (Enter

your answer as a percent rounded to 1 decimal place.)
Rate of Return
Recession %
Normal economy %
Boom %
b. What are the expected rate of return and standard deviation of the
portfolio? (Do not round intermediate calculations. Enter your answer as
a percent rounded to 2 decimal places.)
Expected return %
Standard deviation %
c. Would you prefer to invest in the portfolio, in stocks only, or in bonds

only? Explain the benefit of diversification.
Invest in
8
Here are the returns on two stocks.
Digital Cheese Executive Fruit
January +17 +9
February −2 +1
March +4 +5
April +6 +15
May −3 +2
June +2 +5
July −1 −2
August −7 −1
________________________________________
Required:
a-1. Calculate the variance and standard deviation of each stock.

a-2. Which stock is riskier if held on its own?
b. Now calculate the returns in each month of a portfolio that invests an

equal amount each month in the two stocks.
c. Is the variance more or less than halfway between the variance of the
two individual stocks?
• Req A1
• Req A2
• Req B
• Req C
Calculate the variance and standard deviation of each stock. (Do not
round intermediate calculations. Round your answers to 2 decimal
places.)
Digital Cheese Retum Executive Fruit Return
Variance % %
Standard deviation
A2
Which stock is riskier if held on its own?
Which stock is riskier if held on its own?

B
Now calculate the returns in each month of a portfolio that invests an

equal amount each month in the two stocks. (Negative amounts should
be indicated by a minus sign. Do not round intermediate calculations.
Round your answers to 2 decimal places.)
Month Portfolio Return
January
February
March
April
May
June
Is the variance more or less than halfway between the variance of the
two individual stocks?
Is the variance more or less than halfway between the variance of
the two individual stocks?
A stock with a beta of 0.9 has an expected rate of return of 10%. If the
market return this year turns out to be 8 percentage points below
expectations, what is your best guess as to the rate of return on the
stock? (Do not round intermediate calculations. Enter your answer as a
percent rounded to 1 decimal place.)
Stock return
10
The risk-free rate is 7% and the expected rate of return on the market
portfolio is 14%.
a. Calculate the required rate of return on a security with a beta of 2.45.
(Do not round intermediate calculations. Enter your answer as a percent
Required return
b. If the security is expected to return 16%, is it overpriced or

underpriced?
•
Overpriced
Underpriced
11
Consider the following two scenarios for the economy and the expected
returns in each scenario for the market portfolio, an aggressive stock A,
and a defensive stock D.
Rate of Return
Scenario Market Aggressive
Stock A Defensive
Stock D
Bust –5 % –7 %
–3 %
Boom 27 35
19
________________________________________
Required:
a. Find the beta of each stock.
b. If each scenario is equally likely, find the expected rate of return on

the market portfolio and on each stock.
c. If the T-bill rate is 4%, what does the CAPM say about the fair
expected rate of return on the two stocks?
d. Which stock seems to be a better buy on the basis of your answers to

(a) through (c)?

• Required A
• Required B
• Required C
• Required D
Find the beta of each stock. (Round your answers to 2 decimal places.)
Beta
Stock A
Stock D
If each scenario is equally likely, find the expected rate of return on the
market portfolio and on each stock. (Enter your answers as a whole
percent.)
Expected Rate of Return

Market portfolio %
Stock A %
Stock D
If the T-bill rate is 4%, what does the CAPM say about the fair expected
rate of return on the two stocks? (Do not round intermediate
calculations. Enter your answers as a percent rounded to 2 decimal
places.)
Expected Rate of Return
Stock A %
Stock D %
D
Which stock seems to be a better buy on the basis of your answers to (a)
through (c)?
Better buy
12
A share of stock with a beta of 0.67 now sells for $42. Investors expect
the stock to pay a year-end dividend of $3. The T-bill rate is 4%, and the
market risk premium is 7%. If the stock is perceived to be fairly priced
today, what must be investors’ expectation of the price of the stock at
the end of the year? (Do not round intermediate calculations. Round
Stock price
13
Suppose that the S&P 500, with a beta of 1.0, has an expected return of
14% and T-bills provide a risk-free return of 5%.
a. What would be the expected return and beta of portfolios constructed

from these two assets with weights in the S&P 500 of (i) 0; (ii) 0.25; (iii)
0.50; (iv) 0.75; (v) 1.0? (Leave no cells blank - be certain to enter "0"
wherever required. Do not round intermediate calculations. Enter the
value of Expected return as a percentage rounded to 2 decimal places
and value of Beta rounded to 2 decimal places.)
Expected Return Beta
(i) 0 %
(ii) 0.25 %
(iii) 0.50 %
(iv) 0.75 %
(v) 1.0 %
b. How does expected return vary with beta? (Do not round intermediate
calculations.)
The expected return by % for a one unit increase in
beta.
14
The Treasury bill rate is 4%, and the expected return on the market
portfolio is 13%. According to the capital asset pricing model:
a. What is the risk premium on the market?
b. What is the required return on an investment with a beta of 1.8? (Do

not round intermediate calculations. Enter your answer as a percent
rounded to 1 decimal place.)
c. If an investment with a beta of 0.9 offers an expected return of 8.3%,

does it have a positive or negative NPV?
d. If the market expects a return of 11.2% from stock X, what is its beta?
(Do not round intermediate calculations. Round your answer to 2
decimal places.)
a. Market risk premium %
b. Return on investment %
c. NPV
d. Beta
15
A project under consideration has an internal rate of return of 18% and a
beta of 0.5. The risk-free rate is 6%, and the expected rate of return on
the market portfolio is 18%.
a. What is the required rate of return on the project? (Do not round
intermediate calculations. Enter your answer as a whole percent.)
b. Should the project be accepted?
c. What is the required rate of return on the project if its beta is 1.50?
(Do not round intermediate calculations. Enter your answer as a whole
percent.)
d. If project's beta is 1.50, should the project be accepted?

a. Required rate of return %
b. Accept the project
c. Required rate of return %
d. Accept the project
16
The Treasury bill rate is 5% and the market risk premium is 8%.
Project Beta Internal Rate of Return, %
P 0.70 12
Q 0.00 8
R 1.00 13
S 0.10 9
T 1.10 15
________________________________________
a. What are the project costs of capital for new ventures with betas of
0.45 and 1.45? (Do not round intermediate calculations. Enter your
answers as a percent rounded to 2 decimal places.)
Beta Cost of Capital
0.45 %
1.45 %
b. Which of the capital investments shown above have positive (non-

zero) NPV's? (You may select more than one answer. Single click the
box with the question mark to produce a check mark for a correct answer
and double click the box with the question mark to empty the box for a
wrong answer.)
• Project P unanswered Incorrect
• Project Q unanswered Incorrect
• Project S unanswered Incorrect
• Project T unanswered Incorrect
• Project R
17
You are considering the purchase of real estate that will provide
perpetual income that should average $60,000 per year. How much will
you pay for the property if you believe its market risk is the same as the
market portfolio’s? The T-bill rate is 5%, and the expected market return
is 7.5%.
Property value
.....................................................................................................................
.........................................

The Dow Jones Industrial Average is:
Multiple Choice
•
the most representative of the stock market indexes.
an index of 500 largest corporate stocks in America.
an index of 30 major stocks.
Correct
an equally weighted index of all stocks traded on the New York Stock
Exchange.
2
Periods of market decline are called:
Multiple Choice
discount factors.
bull markets.
•
coupons.
bear markets.
Which one of the following would you expect to represent the broadest-
based index of U.S. stocks?
Multiple Choice
•
Wilshire 5000
Correct
Dow Jones Industrial Average
Standard and Poor's Composite
Financial Times Index

4
Over a 20-year period an investment of $1,000 in common stocks

returned an average of 11% in nominal terms and 4% in real terms. At
the end of the 20 years, the portfolio value was:
Multiple Choice
$1,800 in real terms.
•
$3,679.19 in real terms.
$7,870.59 in nominal terms.
$8,062.31 in nominal terms.
Explanation
FVNominal = $1,000(1.11)20 = $8,062.31
FVReal = $1,000(1.04)20 = $2,191.12

5
A stock is expected to return 11% in a normal economy, 19% if the

economy booms, and lose 8% if the economy moves into a recessionary
period. Economists predict a 65% chance of a normal economy, a 25%
chance of a boom, and a 10% chance of a recession. What is the
expected return on the stock?
Multiple Choice
11.98%
12.06%
•
11.10%
Correct
11.23%
Explanation
E(R) = (0.65 × 0.11) + (0.25 × 0.19) + (0.10 × −0.08) = 0.1110, or

11.10%
Historical returns (1900-2017) suggest that in a year when Treasury bills

offered 3.8% the approximate return on portfolio of common stocks
should be in the region of:
Multiple Choice
7.5%
9.3%
11.5%
Correct
18.5%
Explanation
3.8% + 7.7% (historical risk premium on common stocks) = 11.5%
The fact that historical returns on Treasury bonds are less volatile than
common stock returns indicates that:
Multiple Choice
the variance of Treasury bond returns is zero.
the standard deviation of Treasury bond returns is negative.
the real return on Treasury bonds has been negative.
common stocks should offer a higher return than Treasury bonds.

8
The major benefit of diversification is the:
Multiple Choice
increased expected return.
•
removal of all negative risk assets from the portfolio.
reduction in the portfolio's market risk.
reduction in the portfolio's total risk.

9
A stock investor owns a diversified portfolio of 15 stocks. What will be

the most likely effect on the portfolio's standard deviation if one more
stock is added?
Multiple Choice
A slight increase will occur.
A large increase will occur.
A slight decrease will occur.

Correct
A large decrease will occur.
10
Which one of the following concerns is likely to be most important to

portfolio investors seeking diversification?
Multiple Choice
•
Total volatility of individual securities
Standard deviation of individual securities
Correlation of returns between securities
Correct
Achieving the risk-free rate of return

11
Which one of the following risks can be progressively eliminated

by adding stocks to a portfolio?
Multiple Choice
Systematic risk
Specific risk
Correct
•
Market risk
Inflation rate risk
12
Risks that affect only a single firm are called:
Multiple Choice
market risks.
specific risks.
Correct
systematic risks.
•
risk premiums.
13
Which one of the following companies is most likely to be exposed to

the least amount of macro risk?
Multiple Choice
A producer of dog biscuits

Correct
A regional airline
A major commercial bank
A machine tool manufacturer

14
The following table shows betas for several companies. Calculate each
stock’s expected rate of return using the CAPM. Assume the risk-free
rate of interest is 8%. Use a 10% risk premium for the market portfolio.
(Do not round intermediate calculations. Enter your answers as a percent
Company Beta Cost of Capital
Caterpillar 1.83 +/-1%26.30 %
Apple 1.47 +/-1%22.70 %
Johnson & Johnson 0.66 +/-1%14.60 %
Consolidated Edison 0.38 +/-1%11.80 %

Explanation
We can use the CAPM to derive the cost of capital for these firms:
r = rf + β(rm − rf) = 8% + (β × 10%)
15
The Treasury bill rate is 6%, and the expected return on the market
portfolio is 10%. According to the capital asset pricing model:
a. What is the risk premium on the market?

b. What is the required return on an investment with a beta of 1.4? (Do
not round intermediate calculations. Enter your answer as a percent
rounded to 1 decimal place.)
c. If an investment with a beta of 0.8 offers an expected return of 9.0%,

does it have a positive or negative NPV?
d. If the market expects a return of 11.0% from stock X, what is its beta?
(Do not round intermediate calculations. Round your answer to 2
decimal places.)
a. Market risk premium +/-1%4 %
b. Return on investment +/-1%11.6 %

c. NPV Negative
d. Beta +/-1%1.25
Explanation
a.
Market risk premium = expected return on market-rf rate
Market risk premium = 10% – 6% = 4%
b.
CAPM = rf + β(MRP) = 6% + 1.4 × (4%) = 11.6%
c.
CAPM = 6% + 0.8 × (4%) = 9.20% > 9.00%
As per CAPM, stock should return more (9.20%) than what is expected
(9.0%), so this is a negative NPV investment.
d.
CAPM = rf + β(MRP) = 6% + β × (4%) = 11.0%
Solving for β, we derive the stock should have a beta of 1.25.

16
Suppose that the Treasury bill rate is 6% rather than 4%, as we assumed
in Table 12.1, and the expected return on the market is 12%. Use the
betas in that table to answer the following questions.
a. When you assume this higher risk-free interest rate, what makes sense
for how you should modify your assumption about the rate of return on
the market portfolio? (Do not round intermediate calculations. Enter
your answer as a percent rounded to 1 decimal place.)
b. Recalculate the expected return on the stocks in Table 12.1. (Do not
round intermediate calculations. Enter your answer as a percent rounded
to 1 decimal place.)
c. Suppose now that you continued to assume that the expected return on
the market remained at 12%. Now what would be the expected returns
on each stock? (Do not round intermediate calculations. Enter your
answer as a percent rounded to 1 decimal place.)
d. Ford offer a higher or lower expected return if the interest rate is 6%

rather than 4%?
e. Walmart offer a higher or lower expected return if the interest rate is

6% rather than 4%?
a. Market return would have to fall
b. Expected return +/-1%24.1 %
c. Expected return +/-1%6.6 %
d. Ford's expected return Lower

e. Walmart's expected return Higher
Explanation
a-c.
Using CAPM, the expected return (“Exp(R)”) for each stock is as

follows:
(a) If all other things remain the same, the market return would have to
fall.
(b&c) The highest return is provided by the stock with the highest beta,
namely U.S steel at 24.1%, while the lowest is provided by the lowest
beta, Newmont Mining at 6.6%.
d-e.
The recalculated expected returns for Ford and Walmart are as follows:
Ford, a high beta stock, offers a lower return when the risk-free rate is
6%.
Walmart, a low beta stock, offers a higher return when the risk-free rate
is 6%
17
A stock with a beta of 1.1 has an expected rate of return of 16%. If the
market return this year turns out to be 10 percentage points below
expectations, what is your best guess as to the rate of return on the
stock? (Do not round intermediate calculations. Enter your answer as a
percent rounded to 1 decimal place.)
Stock return +/-1%5.0 %
Explanation
Beta tells us how sensitive the stock return is to changes in market
performance. The market return was 9% less than your prior
expectation. Therefore, the stock would be expected to fall short of your
original expectation by:
1.1 × 10% = 11.0%
The “updated” expectation for the stock return is 16% − 11.0% = 5.0%.
18
You are a consultant to a firm evaluating an expansion of its current

business. The cash-flow forecasts (in millions of dollars) for the project
are as follows:
Years Cash Flow
0 – 100
1 - 10 + 18
________________________________________
On the basis of the behavior of the firm’s stock, you believe that the beta
of the firm is 1.45. Assume that the rate of return available on risk-free
investments is 6% and that the expected rate of return on the market
portfolio is 14%.
a. What is the project IRR? (Do not round intermediate calculations.

Enter your answer as a percent rounded to 2 decimal places.)
IRR +/-1%12.41 %
b. What is the cost of capital for the project? (Do not round intermediate
places.)
Cost of capital +/-1%17.60 %
c. Does the accept-reject decision using IRR agree with the decision
using NPV?
•
Yes
Correct
No
Explanation
a. and b.
The appropriate discount rate for the project is:

r = rf + β(rm – rf) = 6% + 1.45 × (14% – 6%) = 17.60%
Therefore:
NPV = –$100 + [$18 × annuity factor (17.60%, 10 years)]
= −$100+ $18× [10.1760− 10.1760 × (1.1760)10 ] = - 17.94 (in

millions)= −$100⁢+ $18⁢× [10.1760⁢− 10.1760⁢ ⁢× (1.1760)10 ] = -
17.94 (in millions)
Since the NPV is negative, you should reject the project.
Find the discount rate (r) at which:
$18 × annuity factor (r, 10 years) = $100
$ 18 × [1r − 1r × (1 + r)10] = $100$⁢ 18⁢ × [1r⁢ − 1r⁢ × (1⁢ + r)10] =
$100
c.
Solving this equation using trial and error or a financial calculator, we

find that the project IRR is 12.41%. The IRR is less than the opportunity
cost of capital (17.60%). Therefore, you should reject the project, just as
you found from the NPV rule.
19
You are a consultant to a firm evaluating an expansion of its current

business. The cash-flow forecasts (in millions of dollars) for the project
are as follows:
Years Cash Flow
0 – 100
1-10 + 20
________________________________________
On the basis of the behavior of the firm’s stock, you believe that the beta
of the firm is 1.36. Assuming that the rate of return available on risk-free
investments is 3% and that the expected rate of return on the market
portfolio is 15%, what is the net present value of the project? (Negative
amount should be indicated by a minus sign. Do not round intermediate
calculations. Enter your answer in millions of dollars rounded to 2
decimal places.)
Net present value +/-1%$(14.18) million

20
The Treasury bill rate is 5% and the market risk premium is 8%.
Project Beta Internal Rate of Return, %
P 0.70 12
Q 0.00 8
R 1.00 13
S 0.10 9
T 1.10 15
________________________________________
a. What are the project costs of capital for new ventures with betas of
0.45 and 1.45? (Do not round intermediate calculations. Enter your
answers as a percent rounded to 2 decimal places.)
Beta Cost of Capital
0.45 +/-1%8.60 %
1.45 +/-1%16.60 %
b. Which of the capital investments shown above have positive (non-

zero) NPV's? (You may select more than one answer. Single click the
box with the question mark to produce a check mark for a correct answer
and double click the box with the question mark to empty the box for a
wrong answer.)
• Project P checked
• Project Q checked
• Project S checked
• Project T checked
• Project R unchecked
Explanation
a.
Beta Cost of Capital (from CAPM)
0.45 5% + (0.45 × 8%) = 8.60%
1.45 5% + (1.45 × 8%) = 16.60%
________________________________________
b.
Project Beta Cost of Capital IRR NPV
P 0.70 10.60 % 12 % +
Q 0.00 5.00 % 8 % +
R 1.00 13.00 % 13 % -
S 0.10 5.80 % 9 % +
T 1.10 13.80 % 15 % +

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FIN 571 Apply Week 1 Assignment The Stock Market

And The Economy

1. Research how financial markets and institutions influence the US

Create an 8- to 12-slide presentation or 350- to 575-word

Choose 4 financial markets or institutions. Briefly explain what

Compare how each financial market you identified influences the

Cite references to support your assignment.

Format your citations according to APA guidelines.

FIN 571 Week 2 Apply Signature Assignment Investor Presentation

Select a Fortune 500 company or another company you are familiar

Research financial information and key performance indicators for the

Create a 10- to 16-slide presentation for investors to assess the

o The company and its ticker symbol

o Cash flow from operations

o Stock dividends and the yield, if any

o Earnings per share ratio

o Revenue estimates for the next 12 months

o Revenue from the previous 3 years

o Average trade volume.

o Current stock price, 52-week high, and 1-year estimated stock

o Analysts’ recommendations for the stock (buy,sell, hold)

o Market cap for the company

Relate the stock price to price-to-earnings ratio.

Explain the market capitalization and what it means to the investor.

Determine, based on your analysis, whether you think the organization is

Cite references to support your assignment.

Format your citations according to APA guidelines.

Submit your assignment.

FIN 571 Apply Week 2 Signature Assignment Investor

FIN 571 Week 2 Apply Signature Assignment Investor Presentation

Research financial information and key performance indicators for the

Create a 10- to 16-slide presentation for investors to assess the

o The company and its ticker symbol

o Cash flow from operations

o Stock dividends and the yield, if any

o Earnings per share ratio

o Revenue estimates for the next 12 months

o Revenue from the previous 3 years

o Average trade volume.

o Current stock price, 52-week high, and 1-year estimated stock

o Analysts’ recommendations for the stock (buy,sell, hold)

o Market cap for the company

Relate the stock price to price-to-earnings ratio.

Explain the market capitalization and what it means to the investor.

Determine, based on your analysis, whether you think the organization is

Cite references to support your assignment.

Format your citations according to APA guidelines.

FIN 571 Apply Week 4 Signature Assignment

FIN 571 Week 4 - Apply Signature Assignment Shareholder Analysis

Continue your work with the company you selected in Week 2.

Research your company’s financial reports for 2017.

Complete a 2- to 3-page FAQ/Shareholder Analysis.

Evaluate economic conditions that influence company performance.

Analyze year-over-year performance from 2016 and 2017. Consider key

Cite references to support your assignment.

Format your citations according to APA guidelines.

Submit your assignment.

FIN 571 Apply Week 4 Signature Assignment

FIN 571 Week 4 - Apply Signature Assignment Shareholder Analysis

Continue your work with the company you selected in Week 2.

Research your company’s financial reports for 2017.

Complete a 2- to 3-page FAQ/Shareholder Analysis.

Evaluate economic conditions that influence company performance.