1. Jack has deposited $6,000 in a money market account with a variable interest rate.

The
account compounds the interest monthly. Jack expects the interest rate to remain at 8%
annually for the first 3 months, at 9% annually for the next 3 months, and then back to
8% annually for the next 3 months. Find the total amount in this account after 9 months.
2. You would like to buy a house that is currently on the market at $85,000, but you cannot
afford it right now. However, you think that you would be able to buy it after 4 years. If
the expected inflation rate as applied to the price of this house is 6% per year, what is its
expected price after four years
3. Assume an ordinary annuity of $1,000 at the end of the next 3 years;
i. What is the present value of the ordinary annuity discounted at 20%?
ii. What is the future value at the end of year 3 if cash flows can be invested at 20%?
4. Kate wishes to purchase five commercial vehicles in 10 years’ time and has estimated
that she will require a weekly income of $2500 from the 5 vehicles, which are expected
to have an economic life of 10. Kate will contribute to a savings account that will enable
her to generate the weekly $2500. The savings account is currently earning 3% per
annum interest compounded weekly and this level of return is expected to remain
unchanged for the next 20 years. Determine the weekly savings that Kate is required to
make to the account over the next 10 years.
5. Suppose you deposit $350 at the beginning of each month in an account that pays 6%
annual interest, compounded monthly. Find the total amount in this account at the end of
25 months.
6. You have just received notification that you have won the $1 million first prize in the
Centenial Lottery. However, the prize will be awarded on your 40th birthday, which is 20
years from now. What is the present value of your windfall if the appropriate discount
rate is13%?
7. Willy has just bought a house. She estimates that the roof will have to be renewed at a
cost of €25,000 after 20 years. To cover these costs, she intends to save an equal amount
of money at the end of each year, earning 6% annual interest rate. How much is such a
yearly annuity?
8. FBC bank is offering $1000 loans at 10% and the loans are authorised over a period of 4
years.
 i. Construct the loan amortisation schedule
9. Delta Ltd paid a dividend of $4.5 per share last year. Its stock is currently selling for $35
per share. Investors expect future earnings and dividends to grow at a constant rate of
4%. Delta Ltd can obtain new financing in the following ways;

 New irredeemable preferred stock with a dividend of $2 per share can be sold the
public at a price of $20 per share.

 $100, 8% irredeemable debentures quoted at $82

Required;

i. From the above information, calculate Delta Ltd’s Weighted Average Cost of Capital
(WACC).
ii. Delta has the following investment opportunities as shown in table below.

Project Cost ($) IRR (%)

1 10,000 17.4

2 20,000 16

3 10,000 14.2

4 20,000 13.7

5 10,000 12

Which projects should be accepted? Justify your answer

10. Suppose X Ltd is expected to pay $2 cash dividend at the end of the year. The required
rate of return of the stock of X Ltd is 15%. If the share of X Ltd is currently selling at
$40, what is the expected growth rate in the dividends of X Ltd.
11. Below is a capital structure for Y Ltd in tabular form;

Book Value $ Market Value $ Cost of capital

Bonds 1,000 1,300 8%

Preferred stock 400 750 9%

Common Stock 600 3,200 14%

Calculate the WACC for Y LTD

12. You are given the probability distributions of stock X and stock Y in the table below.

Probability Returns

Stock X % Stock Y %

0.1 -2 4

0.3 0 8

0.3 5 0

0.2 6 -5

0.1 8 12

Compute:

i. The covariance between returns of stock X and Stock Y

ii. The correlation coefficient between returns of Stock X and stock Y.
13. The cost of capital is 15% and the before tax cost of debt is 9%. The market value of debt
is $50 million and the market value of equity is $50 million. Given that the marginal
income tax rate is 40%, calculate the cost of equity.
14. D Ltd.'s optimal capital structure is; debt: 25%, preferred stock 15%, common stock 60%.
Its expected net income for the year is $35,000. It has established a dividend payout ratio
is 30%, the corporate tax is 40%, the investors expect the future earnings and dividends
to grow at a constant rate of 9%. D Ltd paid a dividend of $3 per share last year and its
stock is currently selling for $40 per share.
The company can obtain new capital as follows;
• New preferred stock with a dividend of $11 per share can be sold for $95 per share.
• Debt can be sold at an interest rate of 12%

i. Calculate the Weighted Average Cost of Capital (WACC).

15. Banc ABC pays interest of 22% compounded annually. CBZ pays 20% compounded
semiannually, FBC pays 19% compounded quarterly and Barclays pays 18%
compounded daily (assuming 365 days per year). Which bank has the highest effective
interest rate?
16. Tim Ltd.’s expected annual net operating income (EBIT) is $500,000. The company has
$2 million worth of 10% debentures outstanding. The equity capitalization rate is 20%
and there are 30,000 shares outstanding.
i. Determine the value of the firm.
ii. Determine the value of each ordinary share capital.
iii. Calculate the weighted average cost of capital.
17. You have been given two projects and their cash flows in the table below.

Time 0 1 2 3 4

Project A -$800 $230 $240 $230 $350

Project B -$600 $150 $250 $300 $200

i. If the cost of capital for all the projects is 10%, calculate the NPV of each project.
ii. Compute the Internal Rate of Return (IRR)
iii. Compute the Modified Internal Rate of Return (MIRR)
iv. If the projects are mutually exclusive which project would you choose under each of the
three approaches and why?
18. Next Ltd has a $250,000, 15%, 5 year bond outstanding. Interest is paid semi-annually
and the required rate of return is 10%. What is the value of the bond if it’s repayable at a
premium of 10%?