Problem 1: (10 points)

You have an investment opportunity that requires an initial investment of $5000 today and will pay $10000 in one year. What is the IRR of this opportunity?

Problem 2: (20 points)

You are considering investing in a start-up company. The founder asked you for $200,000 today and you expect to get $1,000,000 in nine years. Given the riskiness of the investment opportunity, your cost of capital is 20%. What is the NPV of the investment opportunity? Should you undertake the investment opportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

Problem 3: (40 points)

Bill Clinton reportedly was paid $10 million to write his book My Way. The book took three years to write. In the time he spent writing, Clinton could have been paid to make speeches. Given his popularity, assume that he could earn $8 million per year (paid at the end of the year) speaking instead of writing. Assume his cost of capital is 10% per year.

a. What is the NPV of agreeing to write the book (ignoring any royalty payments)? (30 points)

b. Assume that, once the book is finished, it is expected to generate royalties of $5 million in the first year (paid at the end of the year) and these royalties are expected to decrease at a rate of 30% per year in perpetuity. What is the NPV of the book with the royalty payments? (10 points)

Problem 4: (30 points)

You are given the following information for XYZ Corp.

Long-term debt outstanding: EUR 300,000

Current yield to maturity (R_d) 8%

Number of shares of common stock 10,000

Price per share EUR 50

Book Value per share EUR 25

Expected rate of return on stock (R_e) 15%

1. Calculate XYZs company cost of capital (R_a). Assume no taxes. (20 points)

2.How would R_e and the cost of capital change if XYZ's stock price rises to EUR 75 due to surge in profits? Business risk is unchanged. (10 points)

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