eng120-spring05-mt2-Yao-soln - E120: Principles of...

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E120: Principles of Engineering Economics Midterm Exam 2 April 4th, 2005 Instructor: Jian Yao Part 1: Concepts. 1.1) (5%) A bond with a face value of $1,000 has annual coupon payments of $100 and was issued 7 years ago. The bond currently sells for $1,000 and has 8 years remaining to maturity. This bond’s must be 10%. I. yield to maturity II. market premium III. coupon rate a. I only b. I and II only c. III only d. I and III only e. I, II and III Answer: d 1.2) (5%) Which of the following statements is/are True ? I. In the constant dividend growth model with a constant discount rate (greater then the dividend growth rate) forever, the stock price will grow at the same rate as the dividends. II. All else held the same, an increase in the dividend growth rate will increase a stock’s market value. III. All else held the same, an increase in the required return on a stock will increase its market value. a. I only b. II only c. III only d. I and II only e. I, II, and III Answer: d 1.3) (5%) Which capital investment criteria rule has the advantage of taking the time value of money into consideration, but the disadvantage that at times, it may suggest acceptance of projects that actually reduce shareholder wealth? a. Payback period b. Discounted payback c. IRR d. NPV e. AAR Answer: b or c. You get full credit if you answered either b or c. 1.4) (5%) If financial managers only invest in projects that have a profitability index greater than one, I. firm value will increase. II.
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This note was uploaded on 08/30/2008 for the course ENGIN 120 taught by Professor Ilan during the Spring '08 term at University of California, Berkeley.

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eng120-spring05-mt2-Yao-soln - E120: Principles of...

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