Final exam-Sirish.docx - Name SIRISH PAKKI Date 16 DECEMBER...

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Name: SIRISH PAKKI Date: 16 DECEMBER 2018 New England College FI6310 Finance for Leaders Fall II 2018 Final Exam/Problem Set 2 Instructor: Gordon W. Tuttle Part 1 (17 points) ________ Part 2 (12 points) ________ Part 3 (17 points) ________ Part 4 (17 points) ________ Part 5 (12 points) ________ Part 6 (12 points) ________ Part 7 (13 points) ________ Total =======
Part 1: Calculate the NPV for the following capital budgeting proposal: $100,000 initial cost for equip- ment, straight-line depreciation over 5 years to a zero book value, $5,000 pre-tax salvage value of equipment, 35% tax rate, $45,000 additional annual revenues, $15,000 additional annual cash expenses, $8,000 initial investment in working capital to be recouped at project end, and a cost of capital of 11%. Should the project be accepted or rejected? Please explain. (Show your work computing the NPV.)
Part 2: Essay Explain why bond prices fluctuate in response to changing interest rates. What adverse effect might occur if bond prices remain fixed prior to their maturity?
yields on high yield bonds. High yield bonds have less sensitivity to the general level of interest rates, and more sensitive to the state of the economy. Generally speaking, however, high interest rates tend to result from inflation expectations, de- mand for credit, supply of credit and confidence in getting repaid. Different interest rates respond differently to those things, but interest rates in general go up with inflation expectations and de-

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