1. Suppose your employer offers you a choice between a $6,000 bonus and 200 shares of the company stock. Whichever one you choose will be awarded today. The stock is currently trading for $34 per share.
   1. Suppose that if you receive the stock bonus, you are free to trade it. Which form of the bonus should you choose? What is its value?

Stock bonus is $6,800 and you should choose the stock bonus.

2. Suppose that if you receive the stock bonus, you are required to hold it for at least one year. What can you say about the value of the stock bonus now? What will your decision depend on?

The stocks value will depend on what you expect it to be worth in one year and what you consider the risk level involved with holding onto the stock is. Therefore, you wont know what is the better decision until you take the risk and hold onto the stock. Looking into the companys growth ect can help you make a better judgement.

2. You have an investment opportunity in Japan. It requires an investment of $1 million today and will produce a cash flow of 125 million in one year with no risk. Suppose the risk-free interest rate in the United States is 2%, the risk-free interest rate in Japan is 4%, and the current competitive exchange rate is 128 per $1. What is the NPV of this investment? Is it a good opportunity?
3. Consider two securities that pay risk-free cash flows over the next two years and that have the current market prices shown here:

Security	Price Today	Cash Flow in 1 Year	Cash Flow in 2 Years
B1	$92	$100	$0
B2	$84	$0	$100

3. 1. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $100 in two years?
   2. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $400 in two years?
   3. Suppose a security with cash flows of $100 in one year and $50 in two years is trading for a price of $130. What arbitrage opportunity is available?
4. If you put $2,000 into an investment account that will earn you 8 percent per year, how much will you have in your account at the end of 10 years?
5. Suppose you are offered a security that will pay you $4,000 in five years.
   1. If you can earn 12 percent on an investment with similar risk, how much is this security worth to you today?
   2. Should you purchase this security at a price of $2,300?
6. Your buddy in mechanical engineering has invented a money machine. The main drawback of the machine is that it is slow. It takes one year to manufacture $1,000. However, once built, the machine will last forever and will require no maintenance. The machine can be built immediately, but it will cost $12,000 to build. Your buddy wants to know if he should invest the money to construct it.
   1. If the interest rate is 8 percent per year, what should your buddy do?
   2. Suppose now that the machine takes one year to build. How would this change your answer?
7. You are thinking of building a new machine that will save you $50,000 in the first year. The machine will then begin to wear out so that the savings decline at a rate of 2.5 percent per year forever. What is the present value of the savings if the discount rate is 8 percent per year?
8. You work for a company that has developed a new product. You expect that the products profits will be $3 million in its first year and that this amount will grow at a rate of 4% per year for the next 10 years. After that, competition from knock-off competitors will likely drive profits to zero. What is the present value of the product if the interest rate is 13 percent per year?