Smith Corp.

  1. Smith Corp. is considering an investment in a project that requires an initial cash outlay of $900,000 and will deliver incoming cash flows as follows: Year 1: $290,000, Year 2: $270,000, Year 3: $285,000, Year 4: $380,000 and Year 5: $240,000. If Smith uses a discount rate of 5%, compute the NPV of this project and make a recommendation to either accept or reject the project.
  2. Which of the following statements is FALSE?
    A) Common stocks have historically had lower returns than U.S. Government bonds.
    B) Common stocks have historically had higher returns than U.S. Government bonds.
    C) Preferred stocks usually have lower returns than common stocks.
    D) None of the above
    1. Some investors prefer bonds over commons stocks because:
      A) stocks are too risky for their level of risk tolerance.
      B) they are concerned about preservation of wealth.
      C) bond income is more predictable.
      D) all of these
    2. In capital budgeting decisions:
      A) interest expense is typically included
      B) interest expense is typically not included
      C) interest expense is capitalized
      D) interest expense is equal to cash flow
    3. The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually. How much will each semiannual coupon payment be?
      1. 1)
        When the bond price is We say the bond trades
        greater than the face value
        equal to the face value
        less than the face value
        2) When interest rates rise what will happen to bond prices?
  3. 1) A reduction in sales volume of one product as a result of the introduction of a new product by the same company is called:
    2) What type of bond always sells at a discount?

3) The risk-free rate of interest is the interest rate on the 90-day
_____________________________________ bill.
4) The fraction of earnings paid as dividends each year is called the:
5) The loss of a potential gain from other alternatives when one alternative is chosen is called an:
6) What interest rate delivers an NPV of zero?

  1. Explain why net present value (NPV) is considered among the best methods of analyzing a project’s investment return. Also, when analyzing multiple projects using NPV, explain how the projects should be ranked in terms of best to worst projects.(100 WORDS AT LEAST)
  2. Economic analysis is generally viewed as an integral part of the top-down approach to security analysis. In this context, define each of the following and note how each would probably behave in a strong economy.
    a. fiscal policy
    b. interest rates
    c. Industrial production
    d. Retail sales
    e. Producer prices
  3. The High Growth mutual fund earned a return last year of 11% and had a beta of 1.3. The Value Stock fund earned a return of 13% and had a beta of 1.5. The risk-free rate was 2% and the market return was 9%. Did either fund earn an abnormal return?

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