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Second Midterm Fall 2005

# Second Midterm Fall 2005 - VERSION 1 MIME 310 ENGINEERING...

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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 E C O N O M Y Class Test #2 – Thursday, 10 November, 2005 – 90 minutes Record your family name / initial and 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 16 multiple This test consists of 16 multiple-choice choice questions, and three problems with sub questions, and three problems with sub- questions requi questions requiring a full solution. ing a full solution. Multiple-choice questions 1 to 10 are worth 6 points each and multiple-choice questions 11 to 16 are worth 2 points each. There are no penalties for incorrect answers. The problems are worth a total of 28 points. MULTIPLE-CHOICE QUESTIONS Circle the correct answer on this test paper and record it on the computer answer sheet. 1. Consider the following information for a company supplying a competitive market: At zero output, the total production costs are \$6. Each unit is sold for \$9. The marginal costs for units 1 through 3 are, \$6, \$4 and \$2, respectively. There are no taxes. At a sales level of two units, the company’s profit is: A) \$2 B) \$5 C) \$8 D) \$18 2. If the average cost is \$7 at a production rate of 4000 units per period and \$8 at a rate of 4500 units, the incremental cost between rates of 4000 and 4500 units per period is: A) \$8 B) \$16 C) \$500 D) \$8000 At a sales level of 2 units, TC = 6 + 6 + 4 = 16 TR = 2 (9) = 18 \ TP = 18 - 16 = \$2 TC at 4000 units: 4000 (7) = 28 000 TC at 4500 units: 4500 (8) = 36 000 \ IC between 4000 and 4500 units: 36 000 - 28 000 / (4500 - 4000) = \$16

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VERSION 1 2 3. A firm has common stock with a market price of \$55 per share and an expected dividend of \$2.81 per share at the end of the coming year. The dividends paid on the stock over the past five years are as follows: Year Dividend (\$) -5 2.00 -4 2.14 -3 2.29 -2 2.45 -1 2.62 The cost of the firm's existing common equity is: A) 12.1 % B) 12.4 % C) 15.4 % D) 4.1 % E) 5.1 % 4. A firm has determined the cost of each of its sources of capital along with its optimal capi- tal structure expressed as target market value proportions: Source of capital Target Market Proportion (%) After-tax Cost (%) Long-term debt 40 6 Preferred equity 10 11 Common equity 50 15 The weighted-average cost of capital is: A) 11 % B) 15 % C) 10.7 % D) 6 % 5. Five years ago, a firm’s issued 12-year bonds with a face value of \$1000 and a coupon rate of 8 percent paid semi-annually. Issuing expenses amounted to \$50 on an after-tax basis. The bonds now have a market value of \$1106. Using a corporate tax rate of 36 percent, the cost of existing debt to the firm is: A) 5.2 % B) 8.9 % C) 3.4 % D) 6.1 % Semi-annual after-tax interest payment: 1000 (0.08) / 2 (1 - 0.36) = 25.60
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Second Midterm Fall 2005 - VERSION 1 MIME 310 ENGINEERING...

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