In today’s market, you observe the following yield curve for government securities: Assume that the pure expectations hypothesis holds (i.e., the maturity risk premium = 0).  What does the market expect will be the interest rate on 2-year securities three years from now?  You may solve this problem using either the algebraic or geometric approach.

Jamison Foods is considering the introduction of a new candy bar line.  The project would require a $4.75 million after-tax investment outlay today (t = 0).  The after-tax cash flows would depend on whether the new candy bar is well received by consumers.  There is a 60% chance that demand will be good, in which case the project will produce after-tax cash flows of $3.00 million at the end of each of the next 3 years.  There is a 40% chance that demand will be poor, in which case the after-tax cash flows will be $0.25 million for 3 years.  The project has a WACC of 12%.  The firm will know if the project is successful after receiving the cash flows the first year, and after receiving the first year’s cash flows it will have the option to abandon the project.  If the firm decides to abandon the project the company will not receive any operating cash flows after t = 1, but it will be able to sell the assets related to the project for $2.75 million after taxes at t = 1.  Assuming the company has an option to abandon the project, what is the expected NPV (in millions of dollars) of the project today?  

to be busy

weather

to preapre

to be difficult

many

yesterday

sometimes

tomorrow