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Unformatted text preview: VERSION 1 1 M I M E 3 1 0 E N G I N E E R I N G E C O N O M Y M I M E 3 1 0 E N G I N E E R I N G E C O N O M Y Class Test #2 Thursday, 23 March, 2006 90 minutes PRINT your family name / initial and record your student ID number in the spaces provided below. FAMILY NAME / INITIAL S O L U T I O N S STUDENT ID # This test consists of 22 multiple This test consists of 22 multiple-choice choice questions, and three problems with sub questions, and three problems with sub- questions requiring full solutions. questions requiring full solutions. There are no penalties for incorrect answers. The problems are worth a total of 30 points. MULTIPLE-CHOICE QUESTIONS Circle the correct answer on this test paper and record it on the computer answer sheet. PART 1. True or False Statements Circle the correct answer on this paper and record it on the computer answer sheet. (1.5 points each for a total of 12) Note : There are no penalties for incorrect answers. 1. If a firm has to choose among a number of projects, some of which are mutually exclusive and some of which are independent, it must first determine the best of each group of mu- tually exclusive alternatives. Then, the best of the acceptable independent projects can be selected. A) True B) False 2. To increase its production capacity, a firm is considering three options: 1) to expand its plant; 2) to acquire another company; 3) to contract with another company for production. These three options are examples of independent projects. A) True B) False 3. The specific cost of each source of financing is the after-tax cost of obtaining the financing using the historically based cost reflected by the existing financing on the firm's books. A) True B) False VERSION 1 2 4. An internal rate of return greater than the cost of capital guarantees that the firm earns at least its required return. Such an outcome should enhance the market value of the firm and therefore, the wealth of its shareholders. A) True B) False 5. Preferred stock represents a special type of ownership interest in the firm and thus, the preferred stockholders must receive their stated dividends prior to the distribution of any earnings to common stockholders and bondholders. A) True B) False 6. The acceptance of projects beginning with those having the greatest positive difference between their IRR and the weighted-average cost of capital (WACC), down to the point at which IRR just equals the WACC, should result in the maximum total NPV for all inde- pendent projects accepted. A) True B) False 7. One weakness of the payback period is its failure to recognize cash flows that occur be- yond the payback period. A) True B) False 8. The internal rate of return (IRR) is defined as the discount rate that equates the net pre- sent value of a project with its discounted capital investment....
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- Winter '09