Exhibit 1 Suppose that an investor bought a bond last year for $980. The bond pa

Question

Exhibit 1 Suppose that an investor bought a bond last year for $980. The bond pays a 9% annual coupon and has a face value of $1,000. Today, the same bond is selling for S960. Refer to Exhibit 6-1. If the investor sells the bond this morning, what is the total dollar return of the investment? a. $40 b. $30 c. $50 d. $70 0. What is the risk premium? a. It is the risk associated with investing in Treasury bonds. b. It is the difference in annual returns between common stocks and Treasury bills. c. It is the annual return associated with investing in Treasury bonds. d. It is the variance in stock market returns over the last fifty years. 1· The capital budgeting process involves a. analyzing and prioritizing the investments utilizing various decision criteria b. implementing and monitoring the selected investment projects c. estimating a fair rate of return on each investment given its risk d. all of the above The preferred technique for evaluating most capital investments is a. 2. payback period b. discount payback period c. internal rate of return d. net present value Gamma Electronics Gamma Electronics is considering the purchase of testing equipment that will cost $500,000 to replace old equipment. Assume the new machine will generate after-tax savings of $250,000 per year over the next four years. Refer to Gamma Electronics. What's the payback period for the investment? a. 1.8 years b. 2.0 years c. 2.5 years d. 2.8 years 3.

Explanation / Answer

1. $70

Dollar Return = Sell Price + Coupon Received - Purchase Price

Dollar Return = $960 + ($1000 * 9%) - $980

Dollar Return = $70

2. Risk Premium is the difference between annual returns of common stock and treasury bills. It is the premium an investor expects for taking risk by investing in the common stock

3. All of the above. Capital budgeting process involves all the options while taking a decision

4. Net present Value. Preferred method is NPV as it involves decision based on net amount received from investment

5. 2 Years;

Payback Period = Investment / Annual Cash Inflow

Payback Period = $500000 / $250000

Payback Period = 2 Years

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