Question 1: Consider an investment that costs $100,000 and has a cash inflow of $25,000 every year for 5 years.

The required return is 9% and required payback is 4 years. Required: What is the payback period? What is the discounted payback period? What is the NPV? What is the PI? Should we accept the project? Question 2: We are contemplating the purchase of a $900,000 computer-based customer order management system. The system will be depreciated prime cost to zero for tax purposes over its five-year life. It will however be worth $100,000 at that time. We would save $500,000 before taxes per year in order processing costs. The relevant tax rate is 40 percent and tax is paid in the year of income. The cost of capital is 20% after tax. Required: a. What is the net present value of this project? b. Should the investment be undertaken? Why? OR ABC Ltd has recently completed a $5,000 marketing study. Based on the result, ABC has estimated that 1,000 of its new bikes could be sold annually over the next 4 years at a price of $1,500 each. Variable costs per bike are $1,050 and fixed costs total $100,000 per year. Start up cost includes $480,000 to build production facilities and $150,000 to buy land. The $480,000 facility will be depreciated prime cost to zero over the projects life. At the end of the projects life, the facilities (including the land) will be sold for an estimated $200,000. Finally, ABC Ltd would require to increase its Networking capital by $20,000 at year 0. Assume a tax rate of 30% and a discount rate of 14% after tax. Required: Should ABC produce the bikes? (Use a TABLE to illustrate your workings) Question 3: The following is an extract of financial information of ABC Corp. from Balance Sheet. Liabilities Bank overdraft Debentures ($1,000 - 10% interest per annum) Share capital 10,000,000 ordinary shares $ (000 $) 5,000 10,000 10,000

5,000,000 10% cumulative preference shares issued at 50 cent Reserves General reserve Retained Profits

2,500 1,000 5,000

Additional information: 1. The debentures are redeemable in 5 years. Their current market yield is 18%. 2. The bank overdraft rate is 16% per annum. The usual balance in this account is $5m. 3. The current market price of ordinary shares for ABC Corp. is $3. 4. Preference shares were last traded at 40 cent per share. 5. The current dividend on ABC Corp. ordinary shares is 20 cents. This dividend is expected to grow at 10% indefinitely. 6. The company tax rate is 30%. Required: Calculate the after tax Weighted Average Cost of Capital for ABC Corp. Question 4: a. A stock has returns of 18 percent, 11 percent, -21 percent and 6 percent for the past 4 years. Based on this information, what is the 95 percent probability range of returns for any one given year? b. You bought one of XYZ Co.s 10 percent coupon bonds one year ago for $800. These bonds pay annual payments, have a face value of $1,000 and mature 10 years from now. Suppose you decide to sell your bonds today when the required return on the bonds is 14 percent. The inflation rate over the past year was 3.5 percent. What was your total real return on this investment? Question 5: Consider the following information about three stocks: State of Economy Boom Normal Bust Probability of State of Economy 25 50 ??? Rate of return if state occurs Stock A Stock B Stock C 0.20 0.35 0.42 0.15 0.20 0.05 0.02 -0.05 -0.15

a. If your portfolio is invested 30 percent in A, 25 percent in B and the rest in C. What is the portfolio expected return? The Variance? The Standard deviation? b. If the T-Bill rate is 4.5%. What is the expected risk premium on the portfolio? c. If the inflation rate is 3.5%. What are the approximate and exact expected real returns on portfolio?