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ECON 2I03 (10)
Lecture

# 2I03W13_TT2_V1+Solution.docx

11 Pages
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School
McMaster University
Department
Economics
Course
ECON 2I03
Professor
Usman Hannan
Semester
Winter

Description
Ch 6: Valuing Stocks Spider Gold Mine is decreasing next year’s dividend from \$10 to \$4 per share. The forecast stock price next year is \$106. Equally risky stocks of other companies offer expected rate of return of 10%. Next 2 questions. 1) What should Spider’s common stock sell for? a) \$100 b) \$105 c) \$110 d) \$5 e)\$101 Ans: a) 100 Checkpoint: 6.3 2) Jaguar wants to out-beat the market. He has done a ‘fundamental analysis’ of Spider Corp’s stock and thinks the stock is undervalued. Jaguar may be right if: a) Spider stocks have increased in price last week and the market is weak-form efficient. b) Behavioral financial theory is applicable in the market.. c) The stock market in general showing signs of overconfidence by shareholders right now. d) The market has semi-strong form efficiency. Ans: b) Leture 3) Lion Stock will pay a dividend this year of \$2.40 per share. Its dividend yield is 8 percent. At what price is the stock selling? a) \$2.4 b) \$24 c) \$30 d) \$31 e) \$32 Ans: c) \$30 Problem 2 Donkey & Donkey Inc. is a declining industry. Its sales, earnings and dividends are shrinking at a rate of 10% per year. r = 15% and Di1 = \$3. 4) What is the present value of a share? a) \$8 b) \$9 c) \$10 d) \$11 e) \$12 1 Ans: e) \$12 Ch 7, Problem 17 5) You got \$ 1 million that you can invest in Bermuda for either one of two projects with the following payoffs: Project 1: \$2 Million after one year. Project 2: \$300,000 as long as you can imagine. These investments are not risky, and safe securities are yielding 7.5%. The best one? a) You should use the IRR criterion to decide which project to chose. b) Using NPV criterion, you should invest in Project 1 c) Using NPV criterion, you should invest in Project 2 d) You will invest in the same project whether you use the IRR or the NPV criterion. Ans: c) Using NPV criterion, you should invest in Project 2 Checkpoint 7.5 Gulti corp. is thinking of building a Coal-fired power plant for \$2.2 billion. The plant will produce a cash flow of \$300 million a year for 15 years. But then the plant must be decommissioned after that (in year 15) at the cost of \$900 million. Next 2 questions. 6) What is the project’s NPV if the discount rate is 6%? a) \$0.338 billion b) \$0.624 billion c) \$0.228 billion d) \$\$0.524 billion e) \$0.448 billion Ans: a) 7) What is the project’s NPV if the discount rate is 16%? a) \$0.338 billion b) \$0.624 billion c) \$0.228 billion d) \$\$0.524 billion e) \$0.448 billion Ans: b) Don is thinking of investing in a software project that costs \$10,000. This project provides a cash flow of \$3000 in years 1 and 2 and \$5000 in years 3 and 4. Don thinks the discount rate is 10%. Next 3 questions. 8) NPV of the project = a) \$2,178.25 b) \$2,278.25 2 c) \$2,378.25 d) \$2,478.25 Ans: c Ch 8, Problem 12 9) Profitability index of the project: a) .2375 b) .2376 c) .2377 d) .2378 e) .2379 Ans: d) Ch 8, Problem 12 10) If Don has three other projects in hand aside the one above (four projects in total) and he has \$10,000 to invest, then to decide which project to pursue, he should calculate a) Equivalent annual cost b) Profitability index c) IRR d) NPV Ans: b) Profitability index Problem 12 and Lecture 11) Year Cash Flow 0 \$ 100 1 -65
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