Which of the following statements is true?

Question 1 options:

	Both Sunk Costs and Opportunity Costs should be taken into account when calculating NPV
	Neither Sunk Costs nor Opportunity Costs should be taken into account when calculating NPV
	Sunk Costs should be ignored while Opportunity Costs should be taking into account when calculating NPV
	Opportunity Costs should be ignored while Sunk Costs should be taking into account when calculating NPV

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Question 2 (1 point)

A bond sold by NVDIA Corp. has a face value on $100, a coupon payment of $6 per year, and a maturity of 4 years. The first coupon payment occurs a year from now. The market price is $80, what is the YTM?

You can use Excels IRR function to solve this one. There will be 4 cash flows for the 4 years of $6, $6, $6 and $106.

Answer should be a number given as a %. That is, for example 3.18% should be answered as 3.18 rather than 3.18% or 0.0318

Your Answer:

Question 2 options:

Answer

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Question 3 (1 point)

ABC Inc. bonds have a $1,000 face value. The promised annual coupon is $82. The bonds mature in 8 years. There are 8 coupon payments of $82 each starting a year from now, and the last payment 8 years from now is coupon plus face.

The markets required return for these bonds is 6%. What is the price of these bonds?

This question will require you to use Excel's PV function (to find the present value of an annuity). You can use the PV formula to find discounted value of coupons. For discounted value of Face Value payment, you have to use the /(1+r)^N.

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Question 3 options:

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Question 4 (1 point)

XYZ Corp has bonds on the market with 7.5 years to maturity, a YTM of 6 percent, and a current price of $970. The face value is $1,000. The bonds make semiannual payments. What must be the dollar coupons (dollar amount, not percentage) paid every six-months on XYZs bonds?

Hint: A YTM of 6% for a semiannual bond is a reporting convenience. It implies the actual 6 month return is 3%.

You need to use the annuity formula to solve this one.

Your Answer:

Question 4 options:

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Question 5 (1 point)

Perpetual bond, which is also known as a perpetual or just a perp, is a bond with no maturity date. Issuers pay coupons on perpetual bonds forever, and they do not have to redeem the principal. Perpetual bond cash flows are, therefore, those of a perpetuity.

A perpetual bond pays coupons of 4% every year on a face value of $1,000. The rate of return on the bond is 9.80% every year. What is the price of the bond?

Hint: Use the perpetuity formula. Remember the rate of discount and rate of return are one and the same thing.

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Question 5 options:

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Question 6 (1 point)

Two analysts are calculating the value of the same stock. They projections for the stock's future dividends are the same. They also use the same discount rate.

However, one analyst discounts future dividends to calculate the price, whereas the other analyst discounts next periods dividends and price (again based on future dividends) to calculate the price.

The prices calculated by the two analysts will be:

Question 6 options:

	different only if the dividends are increasing with time.
	different only if the dividends are decreasing with time.
	different or the same, there is not enough information to decide.
	the same.

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Question 7 (1 point)

Which of the following statements is FALSE?

Question 7 options:

	The "clean price" of a bond is always less than or equal to the "dirty price".
	A "Sinking Fund Provision" requires the firm to repay the entire issue at one time.
	A cap on the interest rate for floaters is an example of an embedded option in a bond.
	In a margin buying arrangement part of the purchase money is borrowed by the buyer from the broker.

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Question 8 (1 point)

Suppose a stock will pay $9 per share dividend in one year's time. The dividend is projected to grow at 8% the following year, and then 4% per year indefinitely after that.

To clarify, dividend at beginning of year 1 (that is, one year from today) is:

$9

Beginning of year 2 (2 years from today) is:

$9 * 1.08

Beginning of year 3 (3 years from today) is:

$9 * 1.08 * 1.04

and a 4% rate of growth every year after that.

The required return is 8%. What is the stocks price today?

Your Answer:

Question 8 options:

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Question 9 (1 point)

A firm is evaluating a product. The market demand for the product can be low or high.

The product requires an investment of $1,230.

If the market demand is high, then there is a 30% chance that the product will sell for $1000 and a 70% chance it will sell for $1,500.

What is the NPV of the project if the market demand is high?

Remember, if your answer is negative, then don't forget to put a - sign before your answer. For example, if your answer if negative 100, you should enter -100 in the answer box.

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Question 9 options:

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Question 10 (1 point)

You are evaluating a product. The market demand for the product can be low or high.

The product requires an investment of $1000.

If the market demand is high, the product will have a payoff of $2000. If the market demand is low, the product will have payoff of $910.

You do not know whether the market demand is high or low, but you know the probability that the market demand will be high is 70%, and that it will be low is 30%.

Given the above information, you calculate the NPV to be:

(0.7*2000 + 0.3*910) - 1000

Now, a market research organization offers to do a survey to determine whether the demand will be high or low BEFORE you make the 1000 investment.

What is the value of the survey to you? That is, the maximum amount you would be ready to pay to have the survey conducted?

(Your answer should be positive)