Final Examination Booklet

Financial Management

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Financial Management

EXAMINATION NUMBER:

08173500

Complete the following exam by answering the questions and

compiling your answers into a word-processing document. When

you’re ready to submit your answers, refer to the instructions at

the end of your exam booklet. Be certain to indicate the proper

question number before each of your answers. Remember to

show your work if an answer requires a mathematical solution.

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%.

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.

Investment

Cash inflow A B

Year 1 $12,407 —

Year 2 — —

Year 3 — —

Year 4 — $19,390

Financial Management

2. Given the following information, answer the following questions:

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 losses?

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

(outflows).

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Examination 3

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 is not a 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

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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?

Examination 5

SUBMITTING YOUR ASSIGNMENT You can submit your final exam online:

1. On your computer, save a revised and corrected version

of your project. Be sure to include your student number

and exam number on your saved documents.

2. Go to http:www.takeexamsonline.com and log in.

3. Go to My Courses.

4. Click on Take Exam next to the lesson you’re working on.

5. Enter your e-mail address in the box provided. (Note:

This information is required for online submission.)

6. Attach your file or files as follows:

a. Click on the Browse box.

b. Locate the file you wish to attach.

c. Double-click on the file.

d. Click on Upload File.

e. If you have more than one file to attach, repeat

steps a–d.

7. Click on Submit Files.

Be sure to keep a backup copy of your completed assignment!