Question 1:
Freeman Corp. is considering investing in a project that will last three years. The project will require an immediate capital expenditure of $600,000 which will be depreciated on a straight line basis over the life of the project. Freeman estimates that the revenues from this project will be $500,000 during the first year and that the revenues will grow at a rate of 10 percent per year. Variable costs are expected to be 50 percent of revenues each year, and fixed costs are expected to be $20,000 per year. A one-time net working capital investment of $20,000 is required immediately and will be recovered at the end of the project's life. Freeman's marginal tax rate is 35 percent. What is the IRR of this project?
Question 2: There are three different potential states of the economy next year. The chart below shows you the returns for stocks Green and Wave under each potential economic situation, along with the probability of each situation occurring (note that the probabilities are not all the same). These are the only two stocks in the economy.
| Economic State |
Probability |
Green |
Wave |
| Boom |
0.4 |
14% |
8% |
| Average |
0.4 |
1% |
5% |
| Bust |
0.2 |
-4% |
-3% |
Green and Wave can be combined on a 50/50 basis to form Portfolio Green Wave. Consider Portfolio Green Wave to be the market portfolio. Based on the information above, calculate the following. Give your answers in the specified units. To help you out, the standard deviation of Green is 7.413501% and its covariance with Portfolio Green Wave is .004012. Be certain to show your work. Please carry out your final
answer at least 4 decimal places for B, C, D, F and G.
A. Expected Return of Wave (percent)
B. Standard Deviation of Wave (percent)
C. Covariance between Green and Wave (decimal)
D. Correlation Coefficient between Green and Wave (decimal)
E. Expected Return of Portfolio Green Wave (percent)
F. Standard Deviation of Portfolio Green Wave (percent)
G. Beta of Green (decimal)