The option to wait: I. may have minimal value if a project relates to a rapidly
ID: 2801959 • Letter: T
Question
The option to wait:
I. may have minimal value if a project relates to a rapidly changing technology.
II. is partially dependent upon the coupon rate applied to the project being evaluated.
III. could have a negative value.
IV. is valued based on a project's EAC.
I and II only
II and IV only
I, II, and III only
I and III only
II, III, and IV only
2.
Which of the following tend to reinforce the argument that the financial markets are efficient?
I. Information spreads rapidly in today's world.
II. There is tremendous competition in the financial markets.
III. Market prices continually fluctuate.
IV. Market prices react suddenly to anticipated news announcements.
II, III, and IV only
I and III only
II and IV only
I, II, and III only
I, II, III, and IV
3
Erickson is considering a project with an initial cost of $623,000. The project will produce cash inflows of $32,900 monthly for 21 months. What is the annual rate of return on this project?
11.52%
13.59%
16.59%
17.42%
18.44%
4.Webster has a 12-year bond issue outstanding that pays a coupon rate of 6.5 percent. The bond is currently priced at $884.94 and has a par value of $1,000. Interest is paid semiannually. What is the yield to maturity?
7.27%
14.07%
8.01%
7.80%
14.56%
5.
Webster has a 12-year bond issue outstanding that pays a coupon rate of 6.5 percent. The bond is currently priced at $884.94 and has a par value of $1,000. Interest is paid semiannually. What is the yield to maturity?
14.07%
7.80%
14.56%
7.27%
8.01%
Explanation / Answer
1) I, II and III are correct. The option to wait has nothing to do with equivalent annualized cost (EAC).
2) I, II and III are correct. Market prices do not react to anticipated news annoucement because that information is already baked in stock prices.
3) On a financial calculator, N = 21, PMT = 32,900, PV = -623,000, FV = 0 => Compute I/Y = 0.96% (monthly)
Annual rate = 0.96% x 12 = 11.52%.
4) On a financial calculator, N = 12 x 2 = 24, PMT = 6.5% x 1000/2 = 32.5, PV = -884.94, FV = 1000
=> Compute I/Y = 4.01% (semi-annual), Annualized YTM = 4.01% x 2 = 8.01%
5) On a financial calculator, N = 12 x 2 = 24, PMT = 6.5% x 1000/2 = 32.5, PV = -884.94, FV = 1000
=> Compute I/Y = 4.01% (semi-annual), Annualized YTM = 4.01% x 2 = 8.01%