1. Explain the following key terms:

Capital rationing Dividend discount model plowback ratio

Par value, face value, maturity value nominal interest rate

Statement of cash flows

5. Consider the following cashflow stream and a bank account paying 3% annual interest. What is the present value? Is the account value ever negative?

Year Cashflow

0 8

1 2

2 4

3 -15

4 16

6. Consider a 30-year mortgage with a 5% interest rate and a 20% down payment. If you can afford a $1000 monthly payment, how expensive a house can you buy? How large is the down payment?

7.What is the effective annual interest rate in each situation?

a. A savings account with 4% annual interest rate compounded daily (assume a year consists of 365

days)?

b. A savings account with 4% annual interest rate compounded monthly?