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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 multiplechoice
choice questions, and three problems with sub
questions, and three problems with sub
questions requi
questions requiring a full solution.
ing a full solution.
Multiplechoice questions 1 to 10 are worth 6
points each and multiplechoice 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.
MULTIPLECHOICE 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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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
(%)
Aftertax Cost
(%)
Longterm debt
40
6
Preferred equity
10
11
Common equity
50
15
The weightedaverage cost of capital is:
A)
11 %
B) 15 %
C)
10.7 %
D) 6 %
5.
Five years ago, a firm’s issued 12year bonds with a face value of $1000 and a coupon
rate of 8 percent paid semiannually.
Issuing expenses amounted to $50 on an aftertax
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 %
Semiannual aftertax interest payment:
1000 (0.08) / 2 (1  0.36) = 25.60
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 Winter '09
 Jassim
 Net Present Value, 10 000

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