The Jones Company purchased assets costing $200,000 which will be depreciated over 5 years using straight-line depreciation and no salvage value. Jones also purchased land and other assets, which are not depreciable, at a cost of $200,000. It is estimated that in 5 years, the value of these assets will be unchanged. Assume that annual cash profits are $80,000 and, for return on investment (ROI) calculations, the company uses end-of-year asset values. What is the ROI for each year using net book value? Year 1 Year 2 Year 3 Year 4 A. 11.1% 12.5% 14.3% 16.7% B. 10.0% 10.0% 10.0% 10.0% C. 10.0% 8.9% 7.3% 6.5% D. 11.1% 11.5% 12.5% 12.3%

How will decreases in the following items affect residual income? Decrease in Expenses Decrease in Inventory A. Decrease RI Decrease RI B. Decrease RI Increase RI C. Increase RI Decrease RI D. Increase RI Increase RI

How will increases in the following items affect residual income? Increase in Sales Increase in Equipment A. Decrease RI Decrease RI B. Decrease RI Increase RI C. Increase RI Decrease RI D. Increase RI Increase RI

To reduce risk as much as possible, you should combine assets that have one of the following correlation relationships?

Harvey-Danielson’s stock is currently trading at a market price of $44.48.  The company just paid an annual dividend (D0) of $1.47.  The current risk-free rate is 2.98% annually, and you can expect a market return of 11%.  The stock’s Beta is 0.9.  What is the market’s implied growth expectation for Harvey-Danielson’s dividends if all market participants use a constant-growth dividend discount model? Report your answer in decimal form and round to at least 4 decimals.

Paul Corporation is a publicly traded stock that has consistently paid an annual dividend to its investors.  In fact, Paul Corporation has historically grown its dividends by exactly 2% every year.  The company just paid an annual dividend of $4.50, and you are looking to buy the stock and hold it for the foreseeable future.  The stock has a Beta of 1.76, and the annual market return is 12%.  The current risk-free rate is 5%.   Based on the information above, how would you best characterize the risk level of Paul Corporation stock?

Consider a world with risky assets and a risk-free rate.  The optimally risky portfolio has a Sharpe Ratio of 1.2, an expected return of 14%, and a standard deviation of 8%.  An investor would like to have a portfolio that returns exactly 13.2% and has a standard deviation of 7% or less.  Does such a portfolio exist in this world?

You hold the following two stocks:  40% invested in Stock A and 60% invested in Stock B.   Company Beta Stock A 1.2 Stock B 0.8 What is the portfolio Beta? Round to two decimal places.

The Fish House increases its dividend each year.  The next annual dividend is expected to be $2.21 a share.  Future dividends will increase by 3.5% annually.  What is the current value of this stock if the discount rate is 12%? Round to the nearest cent.

What are the key assumptions of the Gordon Growth Model? Select all that apply.