Name: Econ 202 - Principles of Macroeconomics Chapter 14(27) Homework Problems - The Basic Tools of Finance 1. A company has an investment project (create a new technology) that would cost $10 million today and yield a payoff of $15 million in 4 years. The interest rate you can earn on other investments is 11%. Should the firm undertake the project? What if the interest declines from 11 to 8 percent? 2. Your bank account pays 8 percent interest. You are considering buying a share of stock for $110. At the end of each year, it will pay a dividend of $5. You expect to sell the stock at the end of three years for $120. Is buying the stock a good investment? (Support your answer with calculations.) 3. Explain why diversification in stocks can reduce risk. 4. If a mutual fund outperforms the market... a. the mutual fund manager is highly skilled at picking stocks. b. the mutual fund was lucky. c. the mutual fund manager had inside information. d. All of the above are possible. e. None of the above are possible