1. Two mutually exclusive investments cost $10000 each and have the following cash inflows. The firm s cost of capital is 12%.InvestmentCash inflow A BYear 1 $12407 Year 2 Year 3 Year 4 $19390A. 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 questions:TR = $3QTC = $1500 + $2QA. What is the break-even level of output?B. If the firm sells 1300 units what are its earnings or losses?C. If sales rise to 2000 units what are the firm s earnings or losses?D. If the total cost equation were TC = $2000 + $1.80Q what happens to the break-even level of output units?3. Determine the current market prices of the following $1000 bonds if the comparable rate is 10% and answer the following questions.XY 5.25% (interest paid annually) for 20 yearsAB 14% (interest paid annually) for 20 yearsA. 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 (outflows).Part C: Select the one best answer to each question. Each answer is worth 4 points.1. An investor may place a limit order thatA. limits the amount of commissions.B. specifies when the stock will be purchased.C. establishes the exchange on which the security is to bebought or sold.D. states a price at which the investor seeks to buy or sellthe stock.2. Which of the following is nota financial intermediary?A. New York Stock ExchangeB. Washington Savings and LoanC. First National City BankD. Merchants Savings Bank3. Using accelerated depreciationA. 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 isA. 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 mayI. affect the firm s credit rating.II. decrease risk.III. alter the firm s earnings.A. I and IIB. I and IIIC. II and IIID. I II and IIIPart D: Solve each of the following problems. Each answer is worth 5 points.1. If a new college graduate wants a car costing $15000 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?
