Finance Misc. Problems

(Capital Asset Pricing Model) Levine Manufacturing, Inc., is considering several investments. The rate on Treasury bills is currently 6.75 percent, and the expected return for the market is 12 percent. What should be the required rates of return for each investment (using the CAPM)?

Security Beta
A 1.50
B .90
C .70
D 1.15

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3. (Preferred Stock Valuation) What is the value of a preferred stock where the dividend rate is 14 percent on a $100 par value? The appropriate discount rate for a stock of this risk level is 12 percent.

4. (Preferred Stockholder Expected Return) Solitron preferred stock is selling for $42.16 and pays $1.95 in dividends. What is your expected rate of return if you purchase the security at the market price?

5. (Measuring Growth) Given that a firm’s return on equity is 18 percent and management plans to retain 40 percent of earnings for investment purposes, what will be the firm’s growth rate?

6. (Preferred Stock Valuation) Gree’s preferred stock is selling for $33 in the market and pays a $3.60 annual dividend.
a. What is the expected rate of return of the stock?
b. If an investor’s required rate of return is 10 percent, what is the value of the stock for the investor?
c. Should the investor acquire the stock?

7. (IRR Calculation) Determine the internal rate of return on the following projects:
a. An initial outlay of $10,000 resulting in a single cash flow of $17,182 after 8 years
b. An initial outlay of $10,000 resulting in a single cash flow of $48,077 after 10 years
c. An initial outlay of $10,000 resulting in a single cash flow of $114,943 after 20 years
d. An initial outlay of $10,000 resulting in a single cash flow of $13,680 after 3 years

8. (IRR Calculation) Determine the internal rate of return on the following projects:
a. An initial outlay of $10,000 resulting in a cash flow of $1,993 at the end of each year for the next 10 years
b. An initial outlay of $10,000 resulting in a cash flow of $2,054 at the end of each year for the next 20 years
c. An initial outlay of $10,000 resulting in a cash flow of $1,193 at the end of each year for the next 12 years
d. An initial outlay of $10,000 resulting in a cash flow of $2,843 at the end of each year for the next 5 years

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