## FNCE10002 Principles of Finance

B. Assignment Questions

1. An independent film maker is considering producing a new movie. The initial cost for making

this movie will be $20 million today. Once the movie is completed, in one year, the movie will

be sold to a major studio for $25 million with complete certainty. Rather than paying for the

$22 million investment entirely using its own cash, the film maker is considering raising

additional funds by issuing a security that will pay investors $11 million in one year. Suppose

the risk-free rate of interest is 5%.

Without issuing the new security, the NPV for this project is closest to what amount? Should

the film maker make the investment?

A) $1.5 million; Yes

B) $1.5 million; No

C) $1.8 million; Yes

D) $1.8 million; No

E) None of the above

2. Kristy has to make rental payments of $1,000 at the start of every month, throughout the fouryear

duration of her university course. Her university fees are $4,000 to be paid at the start of

each year. She earns $1,500 per month (paid at the end of each month) from a part-time job.

Assume a quoted interest rate of 8% per annum with monthly compounding and that she keeps

the part-time job for the next four years. How much money, in present value terms, can she

withdraw each month for the next four years where withdrawals are at the end of each month?

A) $55

B) $126

C) $145

D) $177

E) None of the above

3. Your son is about to start kindergarten in a private school. Currently, the tuition is $15,000 per

year, payable at the start of the school year. You expect annual tuition increases to average 6%

per year over the next 13 years. Assuming that your son remains in this private school through

high school and that your current interest rate is 6%, then the present value of your son’s private

school education is closest to:

A) $106,230

B) $156,000

C) $195,000

D) This problem cannot be solved.

E) None of the above

Feedback assignment 3

4. What is the current market value of a bond that has a required rate of return of 10% per annum

and pays $50 per annum with only two years remaining to maturity, if the face value of the bond

is $1,000 and the required rate of the bond a short time after it was first issued eight years ago

was 6% per annum?

A) $1,421.80

B) $981.67

C) $913.22

D) $826.45

E) None of the above.

5. Consider the following investment alternatives:

Investment Rate Compounding

A 6.25% Annual

B 6.10% Daily

C 6.125 Quarterly

D 6.120 Monthly

Which alternative offers you the lowest effective annual rate of return?

A) Investment A

B) Investment B

C) Investment C

D) Investment D

E) Investment B and C

6. If the current nominal rate is 13.4%, then the inflation rate necessary for you to earn an 8% real

interest rate on your investment is closest to:

A) 13.4%

B) 13.0%

C) 5.0%

D) 3.0%

E) None of the above

7. Beach Oil is considering drilling a new oil well that is initially expected to produce oil at a rate

of 10 million barrels per year. Beach Oil has a long-term contract that allows them to sell the oil

at a profit of $2.50 per barrel (assume at the end of each year). The initial cost of the drilling rig

is $175,000,000 and in 2 year’s time another $20,000,000 is required to be invested to optimize

the production of oil. If the rate of oil production from the rig declines by 3% per year and the

discount rate is 9% per year, then the NPV of this new oil well is closest to:

A) -$333,333,000

B) $16,499,733

C) $33,333,000

D) $39,340,000

E) None of the above

Feedback assignment 4

8. You have saved $250,000 for a cash down payment to buy a house. You are currently prepared to

pay up to $3,000 per month for a 25-year mortgage, and your bank is currently charging 4% p.a.

interest (quoted rate), compounded monthly. What amount is closest to the maximum you can pay

for a house?

A) $633,453

B) $745,066

C) $818,357

D) $1,205,365

E) None of the above

9. You have just accepted a job offer, which came with a signing bonus of $8,000 to be paid today

in your retirement account. Your employer will also contribute an extra $9,000 at the end of each

full year (you start work tomorrow!). If this account is expected to earn 10% p.a. compounded

semi-annually, which number is closest to the amount of money will you have in that account

after five years? (including the payment for that year).

A) $59,500

B) $68,251

C) $69,500

D) $70,009

E) None of the above

10. Which of the following is/are an advantage of a partnership?

A) Infinite life.

B) Limited liability.

C) Easy to setup.

D) All of the above.

E) None of the above.

11. A bond with 10 years to maturity is paying 5% coupons semi-annually, and the last coupon has

just been paid. The face value is $1,000 and the yield to maturity is 7% p.a. What is the price

today closest to:

A) $857.88

B) $866.72

C) $1,000.00

D) $1,224.32

E) None of the above

Feedback assignment 5

12. Company WES is expected to pay an interim dividend of $1.00 six months from now and a final

dividend of $1.05 one year from now. WES is then expected to repeat the same pattern every year

for the foreseeable future with no growth in dividends. Given that the appropriate effective

discount rate is 7.0% per annum, what is the stock price of WES closest to today?

A) $30

B) $35

C) $40

D) $45

E) None of the above

13. Which of the following statements is/are CORRECT (choose most correct answer)?

A) The process of moving a value or cash flow forward in time is known as compounding.

B) The effect of earning interest on interest is known as compound interest.

C) It is only possible to compare or combine values at the same point in time.

D) All of the above.

E) None of the above.

14. Consider the following four alternatives:

1. $132 received in two years.

2. $160 received in five years.

3. $200 received in eight years.

4. $220 received in ten years.

The ranking of the four alternatives from most valuable to least valuable if the interest rate is

7% per year would be:

A) 1, 2, 3, 4

B) 4, 3, 2, 1

C) 3, 4, 2, 1

D) 3, 1, 2, 4

E) 3, 1 = 2, 4