QUESTION

The exam will consist of *ten (10) questions*. The exam will cover the material from *Modules 1 through 5*. The exam consists of both short answer and quantitative questions. The short answers are just that "short". Typically 4 to 6 sentences (maximum) should be enough for a complete response. Some of the short answer questions are true/false/uncertain and explain your response. Make sure you provide an explanation. The quantitative problems are similar to homework problems you have completed. Make sure to show your work for all of the quantitative problems. Simply providing a response will result in no points being awarded.

1. The IRS is reevaluating the asset life categories used for ACRS depreciation. The trucks that JK Industries use are currently classified by the IRS as having an asset life of 7 years. Because these trucks actually last for 10 years, the firm’s managers would prefer the IRS to reclassify them as 10-year assets so the firm can keep them longer, spread the cost of depreciation over more years and hence increase earnings. (True, False, Uncertain and explain your response)

2. If a firm uses the Discounted Payback rule, it will never accept a negative NPV project. (True, False, Uncertain and explain your response)

3. Managers’ desire for job security and firm growth conflict with maximizing value for shareholders. (True, False, Uncertain and explain your response)

4. It is often stated that anyone with a pencil can calculate financial ratios, but it takes a brain to interpret them. What kinds of things should the analyst keep in mind when evaluating the financial statements of a given firm?

5. CAPM implies that the only two assets that matter to every investor in corporate stocks and bonds are the risk-free Treasury Bill and the market portfolio of world-wide wealth. (True, False, Uncertain and explain your response)

6.

JJ Enterprises is considering the purchase of a new machine that will produce thumb drives. The new machine will require an initial investment of $800,000 and has an economic life of five years and will be fully depreciated by the straight line method. The machine will produce 150,000 thumb drives per year with each costing $0.10 to make. Each will be sold at $2.00. Assume JJ Enterprises uses a discount rate of 14 percent and has a tax rate of 34 percent. What is the NPV of the project and should JJ Enterprises make the purchase.

You will upload an Excel spreadsheet that shows all of your work and the solution.

7. You are building a pipeline which will generate its first annual cash flow of $2m exactly 5 years from today. As it ages, the volume it transports, and hence the cash flows it creates, will decline by 3% per year. Exactly 27 years from today, this pipeline will be scrapped, and the Environmental Protection Agency will require you to spend $50m then to dismantle it. The pipeline’s OCC is 9%. What’s the lowest price that you would consider selling it for?

8.

The returns on QRC stock and an investor’s portfolio over three years are given in the table below.

- Based on this data, compute the volatility of the portfolio and briefly describe how to interpret it.
- Based on this data, calculate the correlation between QRC and the portfolio, and briefly describe what it means. Show your work.
- Suppose the portfolio represents the portfolio of all wealth. What is QRC’s market beta?

Year | QRC | Portfolio |

1 | 5.0% | 19.0% |

2 | -3.0% | 14.0% |

3 | 13.0% | 9.0% |

You will upload a Word Document that shows all of your work and the solution.

9.

You are considering buying a bond issued by General Motors with exactly 5.5 years remaining to maturity that just paid a coupon yesterday. It rained on your paper this morning so you do not know what the coupon rate is. However you are able to see that the quoted price is listed as $105-20 and the annualized yield is 7%, with semi-annual compounding. If the coupon is paid semi-annually, what is the quoted annualized coupon rate? Show your work.

You will upload a Word Document that shows all of your work and the solution.

10.

Rau Inc. has 7.0 percent coupon bonds on the market with 9 years to maturity. The bonds make semi-annual payments and currently sell for 80 percent of par. What is the YTM?

You will upload an Excel spreadsheet that shows all of your work and the solution.

TUTORIAL PREVIEW

The IRS is reevaluating the asset life categories used for ACRS depreciation. The trucks that JK

Dated: 9th Feb'18 03:54 PM

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