Capital Investment Decisions/ Capital Market History

Assignment Requirements

 

Chapters 10 & 12

Chapter 10

1. Six years ago, Global Exporters paid cash for a new packaging machine that cost $287,000. Three years ago, the firm spent $2,900 on repairs and modifications to the machine. The machine is now fully depreciated and has just sat idly in a back corner of the shop for the past 7 months. The estimated value of the machine today is $124,500. The firm is considering using this machine in a new project. If it does so, what value should be assigned to this machine and included in the initial costs of the new project?
2. Glass Blowers, Inc. has a new project in mind that will increase accounts receivable by $18,000, decrease accounts payable by $6,000, increase fixed assets by $36,000, and decrease inventory by $11,000. What is the amount the firm should use as the initial cash flow attributable to net working capital when it analyzes this project?

 

3. You are analyzing a project and have developed the following estimates. The depreciation is $4,200 a year and the tax rate is 34 percent. What is the best case operating cash flow?

 

 

4. Explain the difference between a sunk cost and an opportunity cost and give an example of each.

 

Chapter 12- Some Lessons from Capital Market History

 

1. One year ago, Neal purchased 3,600 shares of Franklin stock for $101,124. Today, he sold those shares for $26.60 a share. What is the total return on this investment if the dividend yield is 1.7 percent?

 

2. Last year, Rita earned 11.6 percent on her investments while U.S. Treasury bills yielded 3.8 percent and the inflation rate was 3.1 percent. What real rate of return did she earn on her investments last year?

 

3. Hilltop Garage pays a constant annual dividend. One year ago, when you purchased shares of that stock at $12 a share, the dividend yield was 2 percent. Over this past year, the inflation rate has been 2.6 percent. Today, the required return on this stock is 8 percent and you just sold all of your shares. What is your total nominal return on this investment?

 

4. Last year, Thomas invested $38,000 in Oil Town stock, $11,000 in long-term government bonds, and $8,000 in U.S. Treasury bills. Over the course of the year, he earned returns of 12.1 percent, 6.3 percent, and 3.9 percent, respectively. What was the nominal risk premium on Oil Town’s stock for the year?

 

6.  You expect the inflation rate to be 2.9 percent and the U.S. Treasury bill yield to be 3.7% for the next year. The risk premium on small-company stocks is 12.6 percent. What nominal rate of return do you expect to earn on small-company stocks next year?

7. Assume large-company stocks returned 11.8 percent on average over the past 75 years. The risk premium on these stocks was 7.9 percent and the inflation rate was 3.2 percent. What was the average nominal risk-free rate of return for those 75 years?
8. Over the past 4 years, large-company stocks and U.S. Treasury bills have produced the returns stated below. During this period, inflation averaged 2.8 percent. What is the average real rate of return on large-company stocks was (in percentage) and what is the average rate of return on Treasury bills.

 

	Year 1	Year 2	Year 3	Year 4
Percentage return on large company stock	15	7	4	18
Percentage return on US Treasury Bills	6	3	2	4

 

9.   You purchased 1,300 shares of LKL stock 5 years ago and have earned annual returns of 7.1 percent, 11.2 percent, 3.6 percent, -4.7 percent and 11.8 percent. What is your arithmetic average return?

 

1. Your portfolio has provided you with returns of 8.6 percent, 14.2 percent, -3.7 percent, and 11.4 percent over the past four years, respectively. What is the geometric average return for this period?

11. Why are returns on investments usually reported in percentages rather than in dollar terms?

 

 

 

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