Part 1:  Calculate the NPV for the following capital budgeting proposal: $100,000 initial cost for equipment, straight-line depreciation over 5 years to a zero book value, $5,000 pre-tax salvage value

New England College

FI6315 Managerial Finance

Summer I 2019

Problem Set 2/Exam 2

Name:

Date:

Part 1 (19 points) ________

Part 2 (15 points) ________

Part 3 (19 points) ________

Part 4 (19 points) ________

Part 5 (14 points) ________

Part 6 (14 points) ________

Total

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Part 1:

Calculate the NPV for the following capital budgeting proposal: $100,000 initial cost for equipment, straight-line depreciation over 5 years to a zero book value, $5,000 pre-tax salvage value of equipment, 35% tax rate, $45,000 additional annual revenues, $15,000 additional annual cash expenses, $8,000 initial investment in working capital to be recouped at project end, and a cost of capital of 11%. Should the project be accepted or rejected? (Show your work computing the NPV.) 
 

Part 2: Essay

Explain why bond prices fluctuate in response to changing interest rates. What adverse effect might occur if bond prices remain fixed prior to their maturity? 
 

Part 3:

A stock offers an expected dividend of $3.50, has a required return of 14%, and has historically exhibited a growth rate of 6%. Its current price is $35.00 and shows no tendency to change. How can you explain this price based on the constant-growth dividend discount model? 
 

Part 4:

Calculate the expected rate of return for the following portfolio, based on a Treasury bill yield of 4% and an expected market return of 13%: (Show your work)
   
 

Part 5: Essay

Discuss the capital asset pricing model in general, the CAPM method of determining expected returns, and how the SML can be used to help predict the movement of a stock's price. 
 

Part 6: Essay

Contrast the Dow Jones Industrial Average and the Standard and Poor's Composite Index. 
 

FI6315ProblemSet2SummerI20193.doc