Exam 15: Investment, Time, and Capital Markets

If technological breakthroughs in the computer and software industries cause large numbers of firms to consider investment projects they hadn't previously thought of,

Which is a stock variable?

Use the following statements to answer this question: I. Corporate paper rates are typically less than one percent higher than Treasury bill rates. II) Treasury bill rates may be viewed a short-term, risk-free rates.

Scenario 15.7: Consider the following information: You move to northern California and buy a winery that already holds a stock of some wine in barrels. You are deciding whether to sell the wine now, or keep it until next year. The current price of wine is $20 per bottle, and it costs $2 per bottle to get the wine from barrels to bottles. -Based on the information in Scenario 15.7. You should:

Scenario 15.5: Consider the following information based on a story by Hubert B. Herring that appeared in The New York Times on Catherine has a two-pack-a-day cigarette habit. Cigarettes cost about $2 per pack. Catherine is 20. On a $250,000 life insurance policy, her annual premiums are $1200; a non-smoker's would be $500. Smokers earn from 4 to 8 percent less in income than non-smokers (lower productivity and more absence, among other things). In this case Catherine's income is expected to be $20,500 per year over her lifetime whereas $22,000 is an average non-smoker's salary. Let interest rates are expected to be 3%. -Refer to Scenario 15.5. What formula shows the present value of the amount Catherine would save on life insurance premiums over her lifetime by stopping smoking?

Scenario 15.2: Consider the payment streams listed below that are available from different capital projects for Furry Software. The firm must choose to implement just one out of the three possible projects. -Refer to Scenario 15.2. If the interest rate were 2%, Furry Software should:

When the interest rate is R, the formula for finding the future value of $M two years from now is

A bond has a current market value of $800. The holder of the bond will receive a single payment of $1,000 one year from now. The interest rate is 10 percent. The effective yield on the bond is:

If the interest rate is 10%, the present value of $1 next year is:

A perpetuity for sale at $100,000 that promises a yearly payment of $5,000 has an effective yield of:

Assume that you own an exhaustible resource that is sold competitively. The price of the resource is: P_{t + 1} - C = 1.08(P_t - C), where t = 0 at the beginning of 2005, and It is also known that the demand for the resource is: Q = 1,000,000 - 25,000 P, where Q represents output in tons per year. If the beginning of 2005 price is $30 per ton and the marginal cost of extraction is $10 per ton, what will the price be at the end of 2009? What is the user cost of production in 2009? Is it different from the user cost for 2005? Explain. How much of the resource will be extracted in 2009? What is the market rate of interest on money? Explain.

The authors cite a recent study of MBA programs that compares pre-MBA salaries with post-MBA salaries. For some of the highest ranked schools, the salary difference was roughly $100,000 per year, and the difference was roughly $60,000 for some schools ranked near the bottom of the top 20. Is it possible that the financial returns from an MBA earned at a lower ranked school may actually exceed the returns from a top ranked school?

Your firm is evaluating a potential investment in new machinery, but the manager in charge of the project uses an opportunity cost of capital that is too large. How does this error affect the projected net present value of the firm's investment?

Which of the following questions is addressed when hiring capital, but not addressed when hiring labor?

Nancy is considering forming a 5 year business partnership with Claudia. Nancy believes her portion of the partnership will generate the following profits: Nancy's appropriate discount rate is 6%. To join the partnership, Nancy needs to invest $30,000. Does the partnership offer a rate of return in excess of 6%?

The difference between a Treasury bill and a Treasury bond is that the bill

A "risky" asset will earn a rate of return close to that of "riskless" assets if its risk is:

The present value formula makes it apparent that:

Suppose new oil reserves are discovered that were not previously known. What happens to the user cost of oil?

ABC Corporation has issued a series of bonds maturing in 3 years with face value of $1,000. The bonds make annual interest payments of $120. XYZ Corporation has also issued a series of bonds maturing in 3 years with face value of $1,000. However, XYZ's bonds will make annual interest payments of $60. Currently, in the market, XYZ's bonds offer a yield of 20% while ABC corporation bonds offer a yield of 8%. Calculate the current market prices of each corporation's bonds. Is either corporate bond trading at below face value?