Quiz 2 Essay

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Financial Management FNCE90060
Quiz 2
1. You are considering investing in a start up project at a cost of $100,000. You expect the project to return $500,000 to you in seven years. Given the risk of this project, your cost of capital is 20%. The IRR for this project is closest to:
A) 15.60%
B) 18.95%
C) 20.00%
D) 25.85%

Answer: D) IRR = (500/100)^(1/7) - 1 = .25849895
2. Money that has been or will be paid regardless of the decision whether or not to proceed with the project is:
A) cannibalization
B) an externality
C) an opportunity cost
D) a sunk cost

Answer: D
For Questions 3 and 4, suppose the current zero-coupon yield curve for risk-free bonds is as follows: Maturity (years)
YTM

1
5.00%

2
3.00%

3
3.90%

4
4.25%

5
4.40%

3. The price per $100 face value of a three-year, risk-free zero-coupon bond is closest to:
A) $93.80
B) $90.06
C) $89.16
D) $86.39

Answer: C) $100/(1.039)^3 = 89.1566
4. The price per $100 face value of a two-year, risk-free coupon bond paying 10% annual coupons is closest to:
A) $93.35
B) $103.11
C) $113.21
D) $113.39

Answer: C) 10/1.05+110/1.03^2 = 113.21

5. Your client has been offered $14 million to star in the lead role of the next three Larry Boy adventure movies. If your client takes this offer, he will have to forgo acting in other movies that would pay him $5 million at the end of each of the next three years. Assume his personal cost of capital is 10% per year.
The NPV of his three-movie offer is closest to:
A) 3.5 million
B) -3.5 million
C) 1.6 million
D) -1.0 million

Answer: C) NPV = 14 + -5/(1.10)^1 + -5/(1.10)^2 + -5/(1.10)^3 = 1.57
6. The value of currently unused warehouse space that will be used as part of a new

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