1. An independent film maker is considering producing a new movie. The initial cost for making this movie will be $20 million today. Once the movie is completed, in one year, the movie will be sold to a major studio for $25 million with complete certainty. Rather than paying for the $20 million investment entirely using its own cash, the film maker is considering raising additional funds by issuing a security that will pay investors $11 million in one year. Suppose the risk-free rate of interest is 10%. Without issuing the new security, the NPV for this project is closest to what amount? Should the film maker make the investment? A) $1.7 million; Yes B) $1.7 million; No C) $2.7 million; Yes D) $2.7 million; No E) None of the above 2. Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently, college tuition, books, fees, and other costs, average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year. Assuming that college costs continue to increase an average of 4% per year during her college years,, that she receives a lump sum from her parents at the age of 18 and that she invests all her college savings in an account paying 7% interest, then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to: A) $97,110 B) $107,532 C) $101,291 D) $50,000 E) None of the above 3. Your son is about to start kindergarten in a private school. Currently, the tuition is $12,000 per year, payable at the start of the school year. You expect annual tuition increases to average 6% per year over the next 13 years. Assuming that your son remains in this private school through high school and that your current interest rate is 6%, then the present value of your son's private school education is closest to: A) $106,230 B) $156,000 C) $137,900 D) This problem cannot be solved. E) None of the above Feedback assignment 3 4. The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually. Assuming that this bond trades for $1112, then the YTM for this bond is closest to: A) 3.4% B) 6.8% C) 8.0% D) 9.2% E) None of the above. 5. Consider the following investment alternatives: Investment Rate Compounding A 6.25% Annual B 6.10% Daily C 6.125% Quarterly D 6.120% Monthly Which alternative offers you the highest effective annual rate of return? A) Investment A B) Investment B C) Investment C D) Investment D E) Investment B and C 6. If the current inflation rate is 5%, then the nominal rate necessary for you to earn an 8% real interest rate on your investment is closest to: A) 13.0% B) 13.4% C) 4.9% D) 3.0% E) None of the above 7. Wyatt Oil is considering drilling a new oil well that is initially expected to produce oil at a rate of 10 million barrels per year. Wyatt has a long-term contract that allows them to sell the oil at a profit of $2.50 per barrel. The initial cost of the drilling rig is $175,000,000. If the rate of oil production from the rig declines by 3% per year and the discount rate is 9% per year, then the NPV of this new oil well is closest to: A) -$333,333,000 B) $28,128,000 C) $33,333,000 D) $39,340,000 E) None of the above Feedback assignment 4 8. You have saved $250,000 for a cash down payment to buy a house. You are currently prepared to pay up to $3,000 per month for a 20-year mortgage, and your bank is currently charging 4% p.a. interest, compounded monthly. What amount is closest to the maximum you can pay for a house? A) $633,453 B) $745,066 C) $824,204 D) $1,205,365 E) None of the above 9. You have just accepted a job offer, which came with a signing bonus of $5,000 to be paid today in your retirement account. Your employer will also contribute an extra $10,000 at the end of each full year (you start work tomorrow!). If this account is expected to earn 10% p.a. compounded semi-annually, which number is closest to the amount of money will you have in that account after five years? (including the payment for that year). A) $59,500 B) $65,500 C) $69,500 D) $72,500 E) None of the above 10. Which of the following is/are an advantage of being a publicly listed company? A) Access to capital markets B) Limited liability C) Unlimited life D) All of the above E) None of the above 11. A bond with 15 years to maturity is paying 6% coupons semi-annually, and the last coupon has just been paid. The face value is $1,000 and the yield to maturity is 8% p.a. What is the price today closest to: A) $827.08 B) $932.95 C) $1,000.00 D) $1,324.32 E) None of the above Feedback assignment 5 12. Company HDE is expected to pay an interim dividend of $1.00 six months from now and a final dividend of $2.10 one year from now. HDE is then expected to repeat the same pattern every year for the foreseeable future with no growth in dividends. Given that the appropriate effective discount rate is 7.0% p.a., what is the stock price of HDE closest to today? A) $30 B) $35 C) $40 D) $45 E) None of the above 13. Which of the following statements is FALSE? A) The process of moving a value or cash flow forward in time is known as compounding. B) The effect of earning interest on interest is known as compound interest. C) It is only possible to compare or combine values at the same point in time. D) A dollar in the future is worth more than a dollar today. E) Interest paid only on the principal is simple interest. 14. Consider the following four alternatives: 1. $132 received in two years. 2. $160 received in five years. 3. $200 received in eight years. 4. $220 received in ten years. The ranking of the four alternatives from most valuable to least valuable if the interest rate is 7% per year would be: A) 1, 2, 3, 4 B) 4, 3, 2, 1 C) 3, 4, 2, 1 D) 3, 1, 2, 4 E) 3, 1 = 2, 4