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Finance club

Q 1) You invest 50% of your money in security A with a beta of 1.6 and the rest of your money in security B with a beta of 0.7. The beta of the resulting portfolio is A) 1.40 B) 1.15 C) 0.36 D) 1.08 E) 0.80

Q 2) Your opinion is that security C has an expected rate of return of 0.106. It has a beta of 1.1. The risk-free rate is 0.04 and the market expected rate of return is 0.10. According to the Capital Asset Pricing Model, this security is A) underpriced. B) overpriced. C) fairly priced. D) cannot be determined from data provided. E) none of the above.

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A companys 2005 sales were $100 million. If sales grow at 8% per year, how large will they be 10 years later, in2015, in millions?? Suppose a U.S. government bond will pay $1,000 three years from now. If the going interestrateon3yeargovernmentbondsis4%,howmu chisthebondworthtoday?? Whats the present value of a perpetuity that pays $100 per year if the appropriate interest rate is 6%? Suppose you inherited $200,000 and invested it at 6% per year. How much could you withdraw at the end of each of the next 15years?

Capital budgeting
The process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing.

Methods
Payback period Discounted Payback period ARR NPV IRR Profitability Index

PAYBACK METHOD

DISCOUNTED PAYBACK

ARR
ARR= PAT/Book value of investment

NPV
The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. Procedure: NPV is the present value of all cash flows generated by a project. 1) Find the PV of each cash flow (both inflows and outflows) 2) Add up all the PVs to get NPV. 3) Accept the project if NPV > 0. If two projects are mutually exclusive, pick the one with the higher positive NPV.

We will consider projects S and L, and their projected cash flows. Both projects are equally risky.

Year (t) 0 (today) 1 2 3 4

Project S ($1,000) 500 400 300 100

Project L ($1,000) 100 300 400 600

Internal Rate of Return IRR


IRR is the discount rate at which NPV is zero When the cost of capital equals the IRR, NPV=0 When k > IRR, NPV < 0, Reject When k < IRR, NPV > 0, accept

Profitability Index
The profitability index is the ratio of the sum of present values of the project divided by the initial cost of the investment. It is a relative measure of the value (present value) of a project compared to its cost. The higher profitability index projects have higher PVs relative to the scarce capital invested. PI = NPV /Investment