FINA 3000 POPE EXAM 2 QUESTIONS AND CORRECT ANSWERS

Project Selection Rules for NPV and IRR


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One Project
-NPV: invest is NPV is greater than 0
-IRR: invest if r is less than IRR

Comparing One Time Projects
-Project A + B


Independent Projects: Project A and Project B
-take all good projects
-NPV: take projects with highest NPV (if NPV is greater than 0)
-IRR: take project with largest IRR (r is less than IRR)




What weaknesses do you see in its calculations?

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Beta= regression coefficient
x: returns on S&P 500
y: returns on individual stock


Historical spread b/w market returns and debt

Problem: using the past to predict the future




HIGH non diversifiable risk


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HIGH return




IRR (Pros/Cons)


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Pros:
-Easy to explain

Cons:
-Doesn't use cost of capital
-Assume a cash flows are reinvested at IRR rate (unrealistic)




Correlation falls between...


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, -1 and 1




The greater the variance,


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then the greater the volatility or risk of the investment




Beta=1.00


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same risk as average investment; moves the same as market on average




IPO: Initial Public Offering


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higher success in a Bull Market (everything sells for higher prices) ; market
high, the amount of of IPO's increase




Zero Correlation


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