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Lecture 12

ADM 3415 Lecture 12: finance corp ass 1

4 Pages
115 Views
Fall 2015

Department
Administration - UNBF
Course Code
ADM3415
Professor
Dr.Anne E.Mac Donnell
Lecture
12

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ADM 3415 – 1A Assignment 1
Question 1
You are involved in a project that requires an immediate investment in Net Working
Capital (NWC) of $10,000. At the end of the year the level of NWC is expected to be
$12,000. At the end of year two it is expected to be $5,000. How much is the
inflow/outflow due to NWC in time 0, 1, and 2. Clearly identify the amount and state
whether it is an inflow or an outflow.
Year 0 1 2
NWC 10,000 12,000 5,000
Change in NWC 10,000 2,000 -7,000
Cash flow for
change in NWC
(-10,000)
outflow
(-2,000)
outflow
7,000
inflow
Question 2
Stock A has an expected return of 17%, its beta is 1.5, and the risk-free rate is 5%.
What must be the market risk premium?
E(R) = Rf + ß( Rmarket - Rf )
17% = 5% + 1.5(Rmarket - 5%)
1.5Rmarket = 17% - 5% + 1.5(5%)
1.5Rmarket = 19.5%
Rmarket = 13%
Market Risk Premium = Expected Market Return – Risk Free rate
= 13% - 5%
= 8%
Question 3
Project “git ‘er done” has the following cash flows over its lifetime:
Year 0 -$15,000
Years 1, 2, 3, 4, and
5
$4,700 Each

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Description
ADM 3415 1A Assignment 1 Question 1 You are involved in a project that requires an immediate investment in Net Working Capital (NWC) of 10,000. At the end of the year the level of NWC is expected to be 12,000. At the end of year two it is expected to be 5,000. How much is the inflowoutflow due to NWC in time 0, 1, and 2. Clearly identify the amount and state whether it is an inflow or an outflow. Year012 NWC10,00012,0005,000 Change in NWC10,0002,0007,000 Cash flow for (10,000)(2,000)7,000 change in NWC outflowoutflowinflow Question 2 Stock A has an expected return of 17, its beta is 1.5, and the riskfree rate is 5. What must be the market risk premium? E(R) = R + ( R R) fmarket f 17 = 5 + 1.5(R 5) market 1.5R = 17 5 + 1.5(5) market 1.5R = 19.5 market R = 13 market Market Risk Premium = Expected Market Return Risk Free rate = 13 5 = 8 Question 3 Project git er done has the following cash flows over its lifetime: Year 015,000 Years 1, 2, 3, 4, and 4,700 Each 5
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