1. Barney Gumble is considering buying a new snowplow. The plow costs $20,000. With the plow, Barncy cxpccts to clcar $5,000 per ycar for six ycars. At the end of that pcriod, the plow ill havc cndcd its useful life and have no salvage value Market interest rates are 6.0% a. What is thc prescnt valuc of thc cash flows Barncy cxpects to reccivc from this projcct? b. Should he pursue this project? Briefly explain 2. Your first task in your new job at an investment bank is to price a new stock issue. You expect the stock will pay a dividend of $2 per share starting 1 year after issue and that dividends will grow at 3.0% per year thereafter. The return on similar stocks is 5.5% a. What price would you assign to the stock? b. How much do you expect the price of the stock will increase during the first ycar? 3. A faculty member in Art History discovers you are taking Monetary Economics and hires you to determine whether it would make sense for him to refinance his mortgage. (Knowledge acquired in Monctary Economics pays off quickly.) Thc faculty mcmbcr recently took out a $250,000 20-ycar fixed rate mortgage to finance a home purchase with a 4.5% interest rate and annual payments. Interest rates on 20-year fixed rate mortgages have since declined to 4.0% What are the annual payments on the current 4.5% mortgage? b. What would be the annual payments on a 4.0% mortgage? c. If thc cost of refinancing is S6,000, is it worthwhilc to refinancc to gct thc lowcr rate? (If the mortgage is refinanced, the proceeds from a new 4.0% mortgage will be used to repay the original 4.5% mortgage Assume the faculty member plans to live in the house for at least 20 years and does not plan to pay the mortgagc off carly.) 4. The yield to maturity on l-year zero-coupon bonds is currently 7%, the YTM on 2-year zeros is 8%. The Government plans to issuc a 2-ycar maturity coupon bond, paying coupons oncc per ycar with a coupon rate of 9%. The face value of the bond is $100 a. At what price will the bond scll? b. What will the yield to maturity on the bond be? (Hint: Use a financial calculator to get the YTM) c. If the expectations theory of the yield curve is correct, what is the market expectation of the price that the bond will sell for next year? dRecalculate your answer to (c) ifyou belicve in the liquidity preferencc theory and you believe that the liquidity premium is 1%