1. Sinan is considering investing in a project with an initial cost of $44,000 a
ID: 2657316 • Letter: 1
Question
1. Sinan is considering investing in a project with an initial cost of $44,000 and a four-year life span. Sinan will depreciate the assets to zero on a straight-line basis over those four years. The projected net income from the project is $1,500, $1,600, $1,900, and $4,500 a year for the next four years, respectively. What is the project's average accounting return?
52.27 percent
21.59 percent
10.80 percent
5.40 percent
9.26 percent
2. Nagla'a has invested her money in Widget Inc.'s common stock. She believes that the stock's expected return is 13.4 percent. What is the stock's beta given that the risk-free rate is 9 percent and the market risk premium is 10 percent? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
3. Jimmy has equally split his investments between a risk-free asset and two stocks (so Jimmy has 1/3 of his portfolio invested in each asset). One stock, Stock A, has a beta of 1.08 and the portfolio's beta is equal to one. What must the beta be for Stock B, the other stock in Jimmy's portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
Calculate the expected return. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
5. Consider the following information:
1. Sinan is considering investing in a project with an initial cost of $44,000 and a four-year life span. Sinan will depreciate the assets to zero on a straight-line basis over those four years. The projected net income from the project is $1,500, $1,600, $1,900, and $4,500 a year for the next four years, respectively. What is the project's average accounting return?
Explanation / Answer
Answer to Question 1:
Average Net Income = ($1,500 + $1,600 + $1,900 + $4,500) / 4
Average Net Income = $9,500 / 4
Average Net Income = $2,375
Average Investment = ($44,000 + $0) / 2
Average Investment = $22,000
Average Accounting Return = Average Net Income / Average Investment
Average Accounting Return = $2,375 / $22,000
Average Accounting Return = 10.80%
Answer to Question 2:
Expected Return = Risk-free Rate + Beta * Market Risk Premium
13.40% = 9% + Beta * 10%
4.40% = Beta * 10%
Beta = 0.44
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