Q1

A homeowner has $200,000 home with a 30-year mortgage, paid monthly at 7.25% nominal annual rate. After five years he receives $40,000 as an inheritance. If he pays this $40,000 toward his mortgage along with his regular payment, by approximately how many years will it reduce the amount of time it takes him to pay off his mortgage?

11.8

13.7

10.1

15.5

Q2

Which of the following costs should not be included in the allocated costs of the project?

The wage costs related to producing the new product

The cost of water and electricity connections in the new plant

The portion of the cost of leasing the office space for the firm's human resources department

The operating costs associated with the proposed new plant

Question 3 It is important to use only incremental cash flows in capital investment decisions because:

they are easy to identify

they indicate the change in a firm's overall future cash flow from taking on a project

net cash flows are not easy to identify

incremental cash flows are marginal cash flows

Question 4 A maker of kitchenware is planning on selling a new chef-quality kitchen knife. The manufacturer expects to sell 1.6 million knives at a price of $120 each. These knives cost $80 each to produce. Selling, general, and administrative (SG&A) expenses are $500,000. The machinery required to produce the knives cost $1.4 million, depreciated by straight-line depreciation over five years. The maker determines that the EBIT break-even point for units sold and sale price is less than these estimates and that the EBIT break-even point for costs per unit, SG&A, and depreciation are greater than these estimates, so decides to go ahead with manufacturing the knife. Was this the correct decision?

Yes, since a positive EBIT ensures that the project will have a positive net present value (NPV).

No, since the cost per unit should be greater than the EBIT break-even point for cost of goods if the project is to have a positive EBIT.

Yes, since if the estimates for each parameter are correct, the EBIT will be positive.

It cannot be determined whether the decision was correct, since other factors contributing to the project's net present value (NPV), such as the upfront investment, have not been included in the analysis.

Question 5

Assume that ABC Ltd has a current growth rate of 10% p.a. that is expected to be maintained for only another three years and then fall to 5% p.a., where it is expected to remain indefinitely. Given that the required return on ABC's shares is 12% and that the last dividend of 80 cents has just been paid, the price of ABC's shares will be:

15.02

8.33

13.68

10.29

Question 6

Shares in Rioja Enterprises were priced at $4.54 at the beginning of the year. At the end of the year the price had dropped to $4.30 and the company had paid a dividend of $0.26. What is the capital gains yield?

5.84%

-3.37%

-5.28%

-0.53%

Question 7

Matthew saves $12,000 at the end of each month for the next 25 years, after which he retires. During the first five years of retirement, he withdraws $60000 at the start of each month, after which he dies.

His son, Sean, inherits the remainder of Matthew's savings. It is further stipulated in Matthew's will that Sean will be paid the money in equal payments, at the start of every month, for the next 20 years. Given a fixed interest rate of 9% p.a., calculate the monthly payment that Sean will receive.

$129,781

$184,034

$204,444

$188,656

$173,258

$147,389