1. Alaa works for a pharmaceutical company that has developed a new drug. The patent on the drug will last 17 years. She expects that the drugs profits will be $2 million in its first year and that this amount will grow at a rate of 5% per year for the next 17 years. Once the patent expires, other pharmaceutical companies will be able to produce the same drug and competition will likely drive profits to zero. What is the present value of the new drug if the interest rate is 10% per year? (Ref: BMA, 13/e, Ch 2) Answer: The following data apply to the next two problems (Q2&Q3): Maryam Industries must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000; the firm's cost of capital is 15 percent.

2. Using the internal rate of return (IRR) approach to ranking projects, which projects should the firm accept? (Ref: BMA, 13/e, Ch 2,5&6) A) 1, 2, 3, 4, and 5 B) 1, 2, 3, and 5 C) 2, 3, 4, and 6 D) 1, 3, 4, and 6 Answer:

3. Using the net present value (NPV) approach to ranking projects, which projects should the firm accept? (Ref: BMA, 13/e, Ch 2&5) A) 1, 2, 3, 4, and 5 B) 1, 2, 3, 5, and 6 C) 2, 3, 4, and 5 D) 1, 3, 5, and 6 Answer:

4. Reem Design wishes to estimate the value of its outstanding 25-year bond with the following features. The annual coupon rate for the first 10 years will be 5% of the face value of $1,000. After 10 years, the annual coupon rate will increase to 8% for the remaining 15 years. What is the value of this bond, if Reem Design is rated BBB. (BBB-rated bonds are trading at a default spread of 0.75% over the Treasury bond rate of 7.00%.) (Ref: BMA, 13/e, Ch 3) Answer:

5. A firm with unlimited funds must evaluate five projects. Projects 1 and 2 are independent and Projects 3, 4, and 5 are mutually exclusive. The projects are listed with their returns. Project Status Return (%) 1 Independent 14 2 Independent 12 3 Mutually Exclusive 10 4 Mutually Exclusive 15 5 Mutually Exclusive 12 A ranking of the projects on the basis of their returns from the best to the worst according to their acceptability to the firm would be: (Ref: BMA, 13/e, Ch 2&5) a. 4, 1, 2 or 5, and 3. b. 4, 1, and 2. c. 3, 2 or 5, 1, and 4. d. 4, 1, 5, and 3. Answer:

6. Noora owns her own business and is considering an investment. If she undertakes the investment, it will pay $4000 at the end of each of the next three years. The opportunity requires an initial investment of $1000 plus an additional investment at the end of the second year of $5000. What is the NPV of this opportunity if the interest rate is 2% per year? Should Noor take it? (Ref: BMA, 13/e, Ch 2&5) Answer:

7. Sayed International is a mature manufacturing firm. The company just paid a $5.30 dividend, but management expects to reduce the payout by 10%, indefinitely. If you require a 12% return on this stock, what will you pay for a share today? (Ref: BMA, 13/e, Ch 4) a. $17.98 b. $18.65 c. $19.71 d. $21.68 Answer: