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Rachel’s has a $45,000 line of credit with an interest rate of 7.4 percent and a compensating balance requirement of 2.75 percent. The compensating balance is based on the total amount borrowed with funds being held in an interest-free account. What is the effective annual interest rate if the company requires $28,000 of borrowed funds for one year?

What is the beta of the following portfolio? Stock Amount Invested Security Beta A $6,000 1.37 B $17,900 .95 C $2,750 1.48

Suppose the common stock of McLaughlin Corporation has a beta of 1.35 and an expected return of 11.05 percent. The risk-free rate of return is 3.25 percent while the inflation rate is 2.8 percent. What is the expected market risk premium?

Rock Haven has a proposed project that will generate sales of 2,055 units annually at a selling price of $45 each. The fixed costs are $24,400 and the variable costs per unit are $15.15. The project requires $41,800 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the 4-year life of the project. The salvage value of the fixed assets is $11,500 and the tax rate is 21 percent. What is the operating cash flow?

Chapman Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine for $390,000 is estimated to result in $135,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a pretax salvage value at the end of the project of $198,000. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for Years 1 to 6, respectively. Ignore bonus depreciation. The press also requires an initial investment in inventory of $8,000, along with an additional $1,500 in inventory for each succeeding year of the project. The inventory will return to its original level when the project ends. The shop’s tax rate is 21 percent and its discount rate is 16 percent. Should the firm buy and install the machine? Why or why not?

What is the variance of the returns on a portfolio comprised of $4,200 of Stock G and $5,300 of Stock H? State of Economy Probability of State of Economy Rate of Return if State Occurs Stock G Stock H Boom .18 .18 .08 Normal .82 .14 .11

Decker’s is an all-equity financed chain of retail furniture stores. Furniture Fashions produces furniture and is the primary supplier to Decker’s. Decker’s has a beta of 1.62 as compared to Furniture Fashions’ beta of 1.43. The risk-free rate of return is 3.1 percent and the market risk premium is 7.6 percent. What discount rate should Decker’s use if it considers a project that involves the manufacturing of furniture?

You have a portfolio consisting solely of Stock A and Stock B. The portfolio has an expected return of 10.2 percent. Stock A has an expected return of 11.7 percent while Stock B is expected to return 8.3 percent. What is the portfolio weight of Stock A?

BrummittCorporation is evaluating a new 4-year project. The equipment necessary for the project will cost $2,300,000 and can be sold for $293,000 at the end of the project. The asset is in the 5-year MACRS class. The depreciation percentage each year is 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company’s tax rate is 21 percent. What is the aftertax salvage value of the equipment?

What is the expected return of an equally weighted portfolio comprised of the following three stocks? State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Stock C Boom .25 .19 .13 .07 Normal .72 .15 .05 .13 Bust .03 −.29 −.14 .22