Reference no: EM132081879

Each of the following question worth 10 marks, please answer all of them. If needed please use Harvard referencing style. There is no word limit, but it is necessary that you provide answers with explanations.

Question 1:

a) 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?

b) 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?

c) 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 effectiveannual 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

a) Based on the payback period rule, which project would you pick? Explain.

b) Based on the NPV rule, which project would you pick? Explain.

c) Do a) and b) give you the same conclusion? If not, why? Please elaborate.

d) 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.

a) 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?