“Question description

1.You
and your business partner just inherited a rental property that has the same
rental income due each year, on the first day of the year, for the next fifty
years, with the first payment to you due immediately. Rather than split the annual
income of \$200, your business partner offers you the following choices. Which
one should you choose? You should use a 10% discount rate assumption in your
calculations, and assume that both of you will survive for the entire 50-year
period.

A.
He offers to pay you \$1,150 today so that he can receive the entire rental
stream going forward

B.
He offers to take the first 15 payments (with you receiving that last 35
payments)

C.
He offers to take the first 10 payments, and the last 10 payments (with you
receiving the rest of the payments)

D.
He offers to pay you \$600 today, and \$1,500 at the end of 10 years so that he
can receive the entire rental stream

E.
He offers to pay you seven payments of \$350 spaced 3 years apart, with the
first payment to be made immediately, so that he can receive the entire
rental stream

2.Â A
local coffee shop is evaluating whether it should add donuts to its menu. To
produce the donuts, the shop has to invest in a new donut machine. The shop
projects that the new machine will last for only 3 years, and generate revenues
of \$20,000 in year one, \$12,000 in year two and \$10,000 in year three. The
company will incur costs of goods sold of 70% of sales, and will need to cover
operating expenses (not including depreciation) of \$500 per year, regardless of
sales volume. The donut machine, which will require an immediate capital
expenditure of \$3,000, will be fully depreciated in equal amounts over the
3-year life. The coffee shop faces a tax rate of 40%. Assuming a cost of
capital of 15%, and assuming no change in net working capital associated with
investing in the new donut machine, what is the Net Present Value of this
opportunity?

A.
\$ 892

B.
\$ 2,761

C.
\$ 3,176

D.
\$ 3,357

E.
\$ 3,861

3.On
the eve of the World Athletic Championship Games, Nike is trying to decide whether
or not to offer a sponsorship contract to Usain Bolt, a sprinter. Nike will pay
Bold a sponsorship fee of \$1 million. If Usain Bolt comes in first in the
100-meter run, Nike will pay an additional bonus fee of \$0.5 million, and it
estimates that the present value of the resulting increase in future sales will
amount to \$6 million. Otherwise, Nike will pay no bonus fee. If Usain Bolt
comes in second, the present value of the increase in future sales will amount
to \$2 million, and if he comes in third, it will amount to \$1 million. How
should Nike value this deal? Assume that the probability of Bolt finishing
first is 10%, and of him finishing second and third is 15% and 20%,
respectively.

A.
\$0.01M

B.
\$0.05M

C.
\$0.1M

D.
\$0.5M

E.
\$0.7M

4.On
November 17, 2015, Pharma Co. paid a dividend of \$0.21 per share. The closing
price of Pharma on the day before the dividend was paid was \$14.15 per share,
and the closing price on the day the dividend was paid was \$13.75. Pharma Co.
did not have a stock split during this period. What was the return on Pharma
Co.’s stock from November 16 to November 17?

A.
-2.42%

B.
-1.34%

C.
0.03%

D.
0.15%

E.
1.20%”

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