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2. Thomas is considering the purchase of two different annuities. The first begins in three years and pays $1,000 per year for five years. The second begins in 10 years and pays $2,500 per year for seven years. Thomas is currently very risk-averse as he has a young family and little income, and thus his current opportunity cost of capital is 4%. In nine years, Thomas expects to be more financially secure and his cost of capital will increase to 9% from then on. If each annuity costs $5,000 today, which annuity (or annuities), if any, should Thomas purchase? How much value will Thomas realize from his purchase(s), if he makes any purchases?

Answer: He should purchase the second annuity; he will realize $3,840.21 in value

3. Jenna owns a 7% bond that has an 8.2% yield to maturity and 10 years to maturity. If the yield to maturity on the bond increases to 9.2%, how much will the bond change in value?

Answer: Decrease by $61.03

4. The XYZ Corp. issued 12% bonds several years ago at $975. The bonds currently have an 8.5% yield to maturity and have eight years to maturity. What is the current price of the bonds?

Answer: $1,200.21

5. TechNo Corp is a rapid-growth IT firm. TechNo expects to grow at 25% for the next four years. After year four, growth will moderate at 4.75%. TechNo expects to pay a dividend of $1.59 per share next year. If TechNos required return is 13.2% and the stock is currently selling at $45.77 per share, is the stock fairly valued? If not, by how much is it over- or under-valued?

Answer: No, the stock is over-valued by $15.71 per share.

6. NewTech is considering a variety of new research a development projects. The projects provide the following cash flows:

0 1 2 3 4

Project A -14,000 5,000 5,000 5,000 5,000

Project B -15,000 10,000 5,000 3,000 0

Project C -6,000 2,000 2,000 2,000 2,000

Which project(s) should NewTech accept if its cost of capital is 5.4%? What if its cost of capital is 18.2%?

Answer: All of them; None of them