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Question 1:
⦁Assume that you will deposit $4000 at the end of each of the next three years in a St. George bank account paying 8% interest. You currently have $7000 in the account. How much will you have in three years? In four years?

⦁ You are looking into an investment that will pay you $12,000 per year for the next 10 years. If you require a 15% return, what is the most you would pay for this investment?

⦁ A bond has an 8% coupon, paid semi-annually. The face value is $100, and the bond matures in 6 years. If the bond currently sells for $91.137, what is the yield to maturity? What is the effective annual yield?

Question 2:
We have two investment projects A&B. Both projects cost $250, and we require a 15% return of the two investments.

Year                           A                         B
1                            $100                    $100      
2                            $100                    $200
3                            $100                       0
4                           $100                        0

⦁Based on the payback period rule, which project would you pick? Explain.
⦁Based on the NPV rule, which project would you pick? Explain.
⦁Do a) and b) give you the same conclusion? If not, why? Please elaborate.
⦁What other methods can you use to evaluate proposed investments? Please explain.

Question 3:

The ABC Company has a WACC of 20%. Its cost of debt is 12%, which is equal to the risk-free rate of interest. If ABC’s debt to equity ratio is 2, what is the cost of equity capital? ABC’s equity beta is 1.5.

⦁What are the M&M propositions I, II and III, please use graphs/charts and words to explain.
⦁Based on the M&M proposition II, what is the beta of the entire firm?