1. An analyst estimates that an initial investment of $500,000 in a venture capital project will pay $6 million at the end of five years if the project succeeds and that the probability the project survives to the end of the fifth year is 25%. the required rate of return for the project is 19%. The expected NPV of the venture capital investment is closest to: A. $4,000 B. $128,000 C. $1,125,000 D. $2,014,000 For a decline in interest rates, the price of a callable bond, when compared to an otherwise identical option-free bond, will most likely rise by: A. less because the price of the embedded option falls B. less because the price of the embedded option rises C. more because the price of the embedded option falls D. more because the price of the embedded option rises
  1. An energy analyst forecasts that the price per barrel of crude oil five years from now will range between $75 and $105. Assuming a continuous uniform distribution, the probability that the price will be less than $80 five years from now is closest to: A. 5.6% B. 16.7% C. 44.4% D. 76.2%
  1. B (using expected payout at end of 5 years to be 1.5M, and calculating NPV, subtracting 0.5M). 2. A (pretty much a guess, I didn’t get to callable bonds yet) 3. B. (Uniform distribution gives equal probability to be within the interval. The interval is $30, and there is a $5 sub-interval less than $80, which gives 5/30, or 16.7%)

1)B 2)B - When interest rates decline, the firm will want to call the bonds and re-invest them at a lower rate, so the value of the option increases. Callable Bond = Option Free Bond - Value of Option Since both the value of the Option free bond, and the Option itself increase, the answer is B. 3)B

I haven’t looked at this stuff since june, but in trying to get my brain back in study mode- A, B, B is what I’m going with.

1 D,B ?

Q1: 1.5 / 1.19^5 - .5 = .128547

B, B, B

you guys are right on the 1st one- B. I forgot to multiply the losing 500k by 75% to only lose 375k in that scenario. oops. your way is probably 10x faster than how i did it CPK, but i took the basic CF0 -500k, CF1 0, F1 = 4, CF2 = 6 mil and you get a NPV of answer D. So take that x 25% is 503,574. then take the 75% of fail x the 500k, $375k in the hole… the 503k - 375k = your answer B. nice work you guys. b’s across the board and much like always, breezing through stuff in my case means dumb mistakes! those are all good questions though- don’t take too long if you know how to do them but fair game on the test.

Sounds like you guys have this stuff down… Great job… BBB