Question 1

Wyatt oil is considering drilling a new oil well that is initially expected to produce oil at a rate of 10 million barrels per year.Wyatt has a long-term contract that allows them to sell the oil at a profit of $2.50 per barrel.The cost of drilling the rig is $175,000,000.If the rate of oil production from the rig declines by 3% over the year and the discount rate is 9% per year (EAR),then using continuous compounding,the NPV of this new oil well is closest to:

Accepted Answer

D) r_cc = ln(1 + .09) = .086178 9_cc = ln(1 - .03) = -0.030459 NPV = -175,000,000 + 11ea7e54_8bec_192e_ba34_d9e1e57a87af_TB1620_11 = 39,339,837

Question 2

Which of the following statements is false?

Accepted Answer

For a risk-free project, the opportunity cost of capital should be equal to the interest rate of U.S. Treasury securities with a similar term. Therefore, statement D is false.

Question 3

What is the effective after-tax rate of each instrument,expressed as an EAR?

Accepted Answer

The answer of What is the effective after-tax rate of...

Question 4

Which of the following statements is false?

Accepted Answer

The statement that the highest interest rate, for a given horizon, is the rate paid on U.S. Treasury securities is false. While U.S. Treasury securities are seen as a safe investment, there may be other investments that offer higher returns for the same horizon and similar risk level.

Question 5

You are offered an investment that offers and effective annual rate of 8%.If this investment offers continuous compounding,then the APR for this investment is closest to:

Accepted Answer

A) APR = ln(1 + EAR) = ln(1.08) = 0.076961

Question 6

Use the table for the question(s) below.
Suppose you have the following Loans / Investments
 
-If your income tax rate is 30%,then the after-tax EAR for your home equity loan is closest to:

Accepted Answer

A) Step #1 find the EAR EAR = (1 + .0825 / 12)¹² - 1 = 8.569% Step #2 find the after tax cost aftertax = before tax (1 - T) = .08569 (1 - .3) = .0599 or approximately 6.0%

Question 7

Use the table for the question(s) below.
Suppose you have the following Loans / Investments
 
-If your income tax rate is 30%,then the after-tax return you receive on your money market fund is closest to:

Accepted Answer

C) This is already stated as an EAR, so aftertax = before tax (1 - T) = .051 (1 - .3) = .0357 or approximately 3.6%

Question 8

A tax free municipal bond pays an effective annual rate of 7.2%.If your tax rate is 30%,then the effective annual rate that a comparable corporate bond would have to offer you an equivalent after tax return would be closest to:

Accepted Answer

D) Before tax = after tax/ (1 - T) = .072/(1 - .3) = .10285714

Question 9

You are offered an investment that pays 8% APR compounded continuously.The effective annual rate for this investment is closest to:

Accepted Answer

C) EAR = e^APR - 1 = e^.08 - 1 = .083287

Quiz 5: Interest Rates

Which of the following statements is false?

What is the effective after-tax rate of each instrument,expressed as an EAR?

Which of the following statements is false?

You are offered an investment that offers and effective annual rate of 8%.If this investment offers continuous compounding,then the APR for this investment is closest to:

Use the table for the question(s) below. Suppose you have the following Loans / Investments -If your income tax rate is 30%,then the after-tax EAR for your home equity loan is closest to:

Use the table for the question(s) below. Suppose you have the following Loans / Investments -If your income tax rate is 30%,then the after-tax return you receive on your money market fund is closest to:

A tax free municipal bond pays an effective annual rate of 7.2%.If your tax rate is 30%,then the effective annual rate that a comparable corporate bond would have to offer you an equivalent after tax return would be closest to:

You are offered an investment that pays 8% APR compounded continuously.The effective annual rate for this investment is closest to: