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# exam notes - You are thinking about investing in a mine...

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You are thinking about investing in a mine that will produce \$10,000 worth of ore in the first year. As the ore closest to the surface is removed it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 8% per year forever. If the appropriate interest rate is 6%, then the value of this mining operation is closest to: A) \$71,429 B) \$500,000 C) \$166,667 D) This problem cannot be solved PV = CF / (r – g) = 10,000 / (0.06 – (-0.08)) = 71,429 Your son is about to start kindergarten in a private school. Currently, the tuition is \$12,000 per year, payable at the start of the school year. You expect annual tuition increases to average 6% per year over the next 13 years. Assuming that you son remains in this private school through high school and that your current interest rate is 6%, then the present value of your son's private school education is closest to: A) \$106,230 B) \$156,000 C) \$137,900 D) This problem cannot be solved As r = g , the growth in the payments is exactly offset by the current interest rate. Therefore the answer is 12,000 × 13 = \$156,000. Tom's portfolio consists solely of an investment in Merck stock. Merck has an expected return of 13% and a volatility of 25%. The market portfolio has an expected return of 12% and a volatility of 18%. The risk-free rate is 4%. Assume that the CAPM assumptions hold in the market. Assuming that Tom wants to maintain the current volatility of his portfolio, then the maximum expected return that

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## This note was uploaded on 08/13/2011 for the course FINC 2012 at University of Sydney.

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exam notes - You are thinking about investing in a mine...

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