Question 1 : An investor estimates that investing 4.5 million in a venture capital project canreturn 35 million at the end of six years if it...
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Question 1:

An investor estimates that investing €4.5 million in a venture capital project can return €35 million at the end of six years if it succeeds; however, she realizes that the project may fail at any time between now and the end of the sixth year. The investor is considering an equity investment in the project and his cost of equity for a project with this level of risk is 11%. In the table below are the investor's estimates of certain probabilities of failure for the project. First, 0.35 is the probability of failure in year 1. The probability that project fails in the second year, given that it has survived through year 1, is 0.30; and so forth:

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Determine the expected net present value of the project and recommend whether the project should be undertaken.Show your work.


Question 2: The market price of a two-year bond is 105% of its nominal value. The annual coupon to be paid in exactly one year is 7%. Its yield-to-maturity (European method) is 4.336%.


(a)       Calculate its simple yield 

(b)       Verify that its yield to maturity is 4.336% (European method)

(c)       Calculate its yield to maturity (U.S. method).

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