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Assuming that costs continue to increase an average of 4% per year, tuition and other costs for one year for this student after 18 years when she enters college will be closest to:

- $12,500
- $21,500
- $320,568
- $25,323

- You are in the process of purchasing a new automobile worth $25,000. If you pay for the car upfront (t=0), then the dealership would offer you a $1,000 discount. In this case, you would however need to take out a loan over the remaining $24,000 from your local bank, with 60 months-to-maturity and an effective monthly interest rate of 0.625%. Alternatively, the dealership offers you to repay the car in 60 monthly installments at an effective interest rate 0.325% with no discount. Which option would require you to pay a lower monthly installment?

- The offer from the bank over $24,000.
- The offer from the dealership over $25,000.
- Both options require you to make the same monthly installment.
- You don’t have enough information to answer the question.

- Which of the following statements is false?

- In general, the difference between the cost of capital and the IRR is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision.
- The IRR can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital.
- If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.
- If the cost of capital estimate is more than the IRR, the NPV will be positive.

- Which of the following statements is false?

- It is possible that an IRR does not exist for an investment opportunity.
- If the payback period is less than a pre-specified length of time you accept the project.
- The internal rate of return (IRR) investment rule is based upon the notion that if the return on other alternatives is greater than the return on the investment opportunity you should undertake the investment opportunity.
- It is possible that there is no discount rate that will set the NPV equal to zero.

- Consider the following list of projects.

Project |
Investment |
NPV |

A | 135,000 | 6,000 |

B | 200,000 | 30,000 |

C | 125,000 | 20,000 |

D | 150,000 | 2,000 |

E | 175,000 | 10,000 |

F | 75,000 | 10,000 |

G | 80,000 | 9,000 |

H | 200,000 | 20,000 |

I | 50,000 | 4,000 |

Assuming that your capital is constrained, which project should you invest in first?

- Project C
- Project G
- Project B
- Project F

- Which of the following statements is false?

- Sensitivity analysis allows us to explore the effects of errors in our estimated inputs in our NPV analysis for the project.
- To compute the NPV for a project, you need to estimate the incremental cash flows and choose a discount rate.
- Estimates of the cash flows and cost of capital are often subject to significant uncertainty.
- When we are certain regarding the input to a capital budgeting decision, it is often useful to determine the break-even level of that input.

- Which of the following statements is false?

- If the bond trades at a discount, and investor who buys the bond will earn a return both from receiving the coupons and from receiving a face value that exceeds the price paid for the bond.
- Most coupon bond issuers choose a coupon rate so that the bonds will initially trade at, or very near to, par.
- Coupon bonds always trade for a discount.
- At any point in time, changes in market interest rates affect a bond’s yield to maturity and its price.

- Which of the following statements is false?

- Bond prices converge to the bond’s face value due to the time effect, but simultaneously move up and down due to unpredictable changes in bond yields.
- As interest rates and bond yields fall, bond prices will rise.
- Bonds with higher coupon rates are more sensitive to interest rate changes.
- Shorter maturity zero coupon bonds are less sensitive to changes in interest rates than are longer-term zero coupon bonds.

- Consider the following zero-coupon yields on default free securities.

Maturity (years) |
1 |
2 |
3 |
4 |
5 |

Zero-Coupon YTM | 5.80% | 5.50% | 5.20% | 5.00% | 4.80% |

What is the price today of a 3-year default free security with a face value of $1000 and an annual coupon rate of 6%?

(round your answer to a nearest dollar)

- $1000
- $1021
- $1013
- $1005

- Consider the following yields to maturity on various one-year zero-coupon securites (see table below).

Security |
Yield (%) |

Treasury | 4.6 |

AAA corporate | 4.8 |

BBB corporate | 5.6 |

B Corporate | 6.2 |

What is the credit spread of the BBB-rated corporate bond?

- 0%
- 6%
- 6%
- 8%

- The table below summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value).

Maturity (years) |
1 |
2 |
3 |
4 |
5 |

Price (per $100 face value) | 94.52 | 89.68 | 85.40 | 81.65 | 78.35 |

What is the yield to maturity for the two year zero-coupon bond?

(rounded to the nearest tenth)

- 0 %
- 8 %
- 6 %
- 5 %

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- The table below summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value).

Maturity (years) |
1 |
2 |
3 |
4 |
5 |

Price (per $100 face value) | 94.52 | 89.68 | 85.40 | 81.65 | 78.35 |

What is the yield to maturity for the three year zero-coupon bond?

(rounded to the nearest tenth)

- 4 %
- 8 %
- 6 %
- 0 %

- Based upon the information provided in the table below, and your answers to questions 12 and 13, you can conclude:

- that the yield curve is flat.
- nothing about the shape of the yield curve.
- that the yield curve is downward sloping.
- that the yield curve is upward sloping.

- Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of the second year. You expect Von Bora’s stock price to be $25.00 at the end of two years. Von Bora’s equity cost of capital is 10%

Suppose you plan to hold Von Bora stock for only one year.

What is your dividend yield from holding Von Bora stock for the first year?

(round your answer to the nearest tenth)

- 0 %
- 0 %
- 5 %
- 5%

- You expect CCM Corporation to generate the following free cash flows over the next five years (see table below).

Following year five, you estimate that CCM’s free cash flows will grow at 5% per year and that CCM’s weighted average cost of capital is 13%.

What is the enterprise value of CCM corporation?

(rounded to the nearest million)

Year |
1 |
2 |
3 |
4 |
5 |

FCF ($ millions) | 25 | 28 | 32 | 37 | 40 |

- $396 million
- $290 million
- $382 million
- $350 million

- Which of the following statements is false?

- The most common valuation multiple is the price-earnings (P/E) ratio.
- You should be willing to pay proportionally more for a stock with lower current earnings.
- A firm’s P/E ratio is equal to the share price divided by its earnings per share.
- The intuition behind the use of the P/E ratio is that when you buy a stock, you are in sense buying the rights to the firm’s future earnings and differences in the scale of firms’ earnings are likely to persist.