Part A: Solve each of the following problems. Each answer is

worth 20 points.

1. Two mutually exclusive investments cost $10,000 each

and have the following cash inflows. The firm’s cost of

capital is 12%.


Cash inflow A B

Year 1 $12,407 —

Year 2 — —

Year 3 — —

Year 4 — $19,390

A. What is the net present value of each investment?

B. What is the internal rate of return of each investment?

C. Which investment(s) should the firm make?

D. Would your answers be different to C if the funds

received in Year 1 for investment A could be reinvested

at 16%? Show your work.


2. Given the following information, answer the following


TR = $3Q

TC = $1,500 + $2Q

A. What is the break-even level of output?

B. If the firm sells 1,300 units, what are its earnings or


C. If sales rise to 2,000 units, what are the firm’s earnings

or losses?

D. If the total cost equation were TC = $2,000 + $1.80Q,

what happens to the break-even level of output units?


3. Determine the current market prices of the following $1,000

bonds if the comparable rate is 10% and answer the

following questions.

XY 5.25% (interest paid annually) for 20 years

AB 14% (interest paid annually) for 20 years

A. Which bond has a current yield that exceeds the yield

to maturity?

B. Which bond may you expect to be called? Why?

C. If CD, Inc., has a bond with a 5.25% coupon and a

maturity of 20 years but which was lower rated, what

would be its price relative to the XY, Inc., bond? Explain.


Part B: Indicate whether the statement is True or False. Each

answer is worth 2 points.

______ 1. Discounting refers to the process of bringing the

future back to the present.

______ 2. An increase in retained earnings is a cash inflow.

______ 3. If a firm doesn’t pay cash dividends, it may

reinvest the earnings and grow.

______ 4. Total revenue equals price times quantity.

______ 5. The internal rate of return equates the present

value of an investment’s cash inflows and its cost


Part C: Select the one best answer to each question. Each

answer is worth 4 points.

1. An investor may place a limit order that

A.limits the amount of commissions.

B.specifies when the stock will be purchased.

C.establishes the exchange on which the security is to be

bought or sold.

D.states a price at which the investor seeks to buy or sell

the stock.

2. Which of the following isnota financial intermediary?

A.New York Stock Exchange

B.Washington Savings and Loan

C.First National City Bank

D.Merchants Savings Bank

3. Using accelerated depreciation

A.initially increases the firm’s profits.

B.initially decreases the firm’s taxes.

C.discourages investment in plant and equipment.

D.increases expenses and decreases cash flow.

4. The current yield on a bond is

A.interest paid divided by the bond’s price.

B.the bond’s coupon.

C.the interest rate stated on the bond.

D.the yield over the lifetime of the bond.

5. The increased use of financial leverage may

I. affect the firm’s credit rating.

II. decrease risk.

III. alter the firm’s earnings.

A.I and II

B.I and III

C.II and III

D.I, II, and III



Part D: Solve each of the following problems. Each answer is

worth 5 points.

1. If a new college graduate wants a car costing $15,000, how

much must be saved annually over the next four years if the

funds earn 5%?

2. You purchase a bond for $875. It pays $80 a year (that is,

the semiannual coupon is 4%), and the bond matures after

10 years. What is the yield to maturity?