Finance 301 Exam 3 Study Guide 2026/2027 COMPLETE QUESTIONS WITH CORRECT DETAILED ANSWERS

Finance 301 Exam 3 Study Guide 2026/2027 COMPLETE QUESTIONS WITH CORRECT DETAILED ANSWERS 1. Find the following values, using the equations and then a financial calculator. Compounding/discounting occurs annually. a. An initial $800 compounded for 1 year at 7 percent. b. An initial $800 compounded for 2 years at 7 percent. c. The present value of $800 due in 1 year at a discount rate of 7 percent d. The present value of $800 due in 2 years at a discount rate of 7 percent a. FV=$856 b. FV=$915.92 c. PV=$743 d. PV =$687 a. FV=$856 b. FV=$915.92 c. PV=$856 d. PV =$915.92 a. FV=$856 b. FV=$915.92 c. PV=$747.66 d. PV =$698.75 a. FV=$856 b. FV=$912 c. PV=$747.66 d. PV =$694.33 - ANSWER a. FV=$856 b. FV=$915.92 c. PV=$747.66 d. PV =$698.75 2. Ultra Space Corporation's 2010 sales were $13 millions. Its 2005 sales were $9 million. At what rate have sales been growing? - ANSWER 7.63% 3. What is the present value of a $120 perpetuity if the Corporation's Interest rate is 9 percent? $750.00 $1,428.57 $1,333,33 $1,080.00 - ANSWER Perpetuity/rate = 120/0.09 = 1,333.33 4. What is capital budgeting? - ANSWER The process of deciding which long-term projects or investments a firm should take 5. What is the main goal of capital budgeting? - ANSWER To choose projects that increase the value of the firm 6. What makes a project profitable? - ANSWER It earns a return greater than the cost of financing it 7. What three key questions are asked about decision methods? - ANSWER Does it consider time value of money; does it consider risk; does it show value creation 8. What is Net Present Value (NPV)? - ANSWER The difference between the present value of future cash inflows and the initial cost 9. NPV formula in words - ANSWER Present value of future cash flows minus initial investment 10. What does a positive NPV mean? - ANSWER The project adds value and increases shareholder wealth 11. What does a negative NPV mean? - ANSWER The project destroys value 12. What is the NPV decision rule? - ANSWER Accept if NPV is greater than 0 and reject if NPV is less than 0 13. Why is NPV the best method? - ANSWER It directly measures value added to the firm 14. T. Martell Inc.'s stock has a 50% chance of producing a 30% return, a 25% chance of producing a 9% return, and a 25% chance of producing a -25% return. What is Martell's expected return? - ANSWER (.50)(.30)+(.25)(.09)+(.25)(-.25)= 11% 15. An investor has a 2-stock portfolio with $50,000 invested in Palmer Manufacturing and $50,000 in Nickles Corporation. Palmer's beta is 1.20 and Nickles' beta is 1.00. What is the portfolio's beta? - ANSWER (.5)(1.20)+(.5)(1.00)= 1.10 16. Niendorf Corporation's stock has a required return of 13.00%, the risk-free rate is 7.00%, and the market risk premium is 4.00%. Now suppose there is a shift in investor risk aversion, and the market risk premium increases by 2.00%. What is Niendorf's new required return? - ANSWER required return = risk free rate + (market risk premium)b 13.00% = 7.00% + (4.00%) b b = 1.5 new required return = 7.00% + (4.00 + 2.00)(1.5) = 7 + (6)(1.5) = 16.00% 17. Consider the following information for three stocks, Stock A, Stock B, and Stock C. The returns on each of the three stocks are positively correlated, but they are not perfectly correlated. (That is, all of the correlation coefficients are between 0 and 1. Expected Standard Stock Return Deviation Beta Stock A 10% 20% 1.0 Stock B 10 20 1.0 Stock C 12 20 1.4 18. Portfolio P has half of its funds invested in Stock A and half invested in Stock B. Portfolio Q has one third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium. What is the market risk premium RPM? - ANSWER 5 19. An investor is forming a portfolio by investing $50,000 in stock A that has a beta of 1.50, and $25,000 in stock B that has a beta of 0.90. The market risk premium is equal to 2% and Treasury bonds have a yield of 4%. What is the required rate of return on the investor's portfolio? - ANSWER 6.6 20. If you deposit $10,000 in a bank account that pays 11 percent interest annually, how much would be in your account after 4 years? - ANSWER $15,180.70 21. What is the present value of a security that will pay $5,000 in 15 years if securities of equal risk pay 8 percent annually? o $1,486.24 o $1,524.73 o $1,645.56 o $1,576.21 - ANSWER $1,576.21