_Sample_Midterm

_Sample_Midterm - Sample Midterm Q1 A well-known insurance...

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Sample Midterm Q1 A well-known insurance company offers a policy known as the “Estate Creator Six Pay.” Typically, a parent or grandparent buys a policy for a child at the child’s birth. The details of the policy are as follows. The purchaser (say, the parent) makes the following six payments to the insurance company. No payments are made after the child’s sixth birthday. When the child reaches the age of 65, he or she receives $250,000. If the relevant interest rate is six percent for the first six years and seven percent for all subsequent years, is the policy worth buying? Q2. Gates Electronics expects to earn $100 million per year in perpetuity if it does not take on any new projects. The firm has an opportunity that requires an investment of $15 million today and another $5 million in one year. The new investment will begin to generate annual earnings of $10 million two years from now, in perpetuity. The firm has 20 million shares of stock outstanding, and the required return on the stock is 15%. a. What is the current price of the stock?
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This note was uploaded on 01/20/2010 for the course ECON econ134 taught by Professor M. during the Fall '09 term at UCSB.

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_Sample_Midterm - Sample Midterm Q1 A well-known insurance...

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