Question 1

A client invests $500,000 in a bond fund projected to earn 7% annually. Estimate the value of her investment after 10 years. [5 Marks]

 

Question 2

A bank quotes a rate of 5.89% with an effective annual rate of 6.05%. Does the bank use annual, quarterly, or monthly compounding?          [5 Marks]

 

Question 3

Waldrup Industries has committed to investing C$5,500,000 in a project with expected cash flows of C$1,000,000 at the end of Year 1, C$1,500,000 at the end of Year 4, and C$7,000,000 at the end of Year 5.

 

13. Demonstrate that the internal rate of return of the investment is 13.51%. [5 Marks]

 

1. State how the internal rate of return of the investment would change if Waldrup’s opportunity cost of capital were to increase by 5 percentage points. [5 Marks]

 

Question 4

Over the past 15 years, a company’s annual earnings increased year over year 9 times and decreased year over year 6 times. You decide to model the number of earnings increases for the next 15 years as a binomial random variable.

 

1. What is your estimate of the probability of success, defined as an increase in annual earnings? [2 Marks]

 

For the following parts of this question assume the estimated probability in A. above is the actual probability for the next 15 years.

1. What is the probability that earnings will increase in exactly 8 of the next 15 years?  [4 Marks]
2. Calculate the expected number of yearly earnings increases during the next 15 years.

[2 Marks]

1. Calculate the variance and standard deviation of the number of yearly earnings increases during the next 15 years. [4 Marks]

 

Question 5

Find the reliability factors based on the t-distribution for the following confidence intervals for the population mean (df = degrees of freedom, n = sample size):

 

1. A 99 percent confidence interval, df = 20 [2 Marks]
2. A 90 percent confidence interval, df = 20 [2 Marks]
3. A 95 percent confidence interval, n = 25 [2 Marks]
4. A 95 percent confidence interval, n = 16 [2 Marks]