In the past seven years, Kathy's uncle has been paying her monthly allowance of $1,000 in arrear, directly deposited into Kathy's bank account, with an interest rate of 6% p.a. compounded monthly. Today, Kathy decides to use the accumulated sum of the monthly allowances her uncle pays for a cash down payment to buy a house. Kathy is currently prepared to pay up to $1,500 at the end of each month for a 20-year mortgage, and her bank is currently charging 4% p.a. interest, compounded monthly. What is the maximum house price Kathy can afford?

a.

$2,246,914

b.

$28,779

c.

$370,795

d.

$351,607

2. Chemist Corporation is expected to pay a dividend of $1.80 per share at this year's end and a dividend of $2.40 per share at the end of the following year. It is expected that the price of Chemist' stock will be $44 per share after two years. If Chemist has an equity cost of capital of 10%, what is the maximum price that a prudent investor would be willing to pay for a share of Chemist stock today?

a.

$39.98

b.

$40.35

c.

$36.67

d.

$43.98

3. A motor company plans to launch a new type of SUV. Advertising for the new product will be heavy and will cost the company $15 million, although the company expects general revenues of $280 million next year from sources other than sales of the new SUV. If the company has a corporate tax-rate of 30% on its pretax income, what effect will the advertising for the new SUV have on its taxes?

a.

It will have no effect on taxes.

b.

It will reduce taxes by $15 million.

c.

It will increase taxes by $4.5 million.

d.

It will reduce taxes by $4.5 million.

4. A $1,000 bond with a coupon rate of 5.4% paid semi-annually has five years to maturity and a yield to maturity of 7.5%. If interest rates rise and the yield to maturity increases to 7.8%, what will happen to the price of the bond?

a.

Rise by $9.82

b.

Fall by $11.58

c.

Fall by $9.82

d.

Rise by $12.16

5. The British government has an outstanding perpetual bond (aka "consol") paying $100 per quarter forever. Assuming an effective annual rate (EAR) of 4.0604%, the value of the bond immediately before a payment is made is closest to ________.

a.

$10,100

b.

$9,851

c.

$10,000

d.

$9,951