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4. The possibility that the issuer of a bond will not pay the contractual interest or
principal payments as scheduled is called maturity risk.
5. The breakeven point in dollars can be computed by dividing the contribution margin
into the fixed operating costs.
Multiple-choice (1point each)
6. The ________ is the extent of an asset's risk. It is found by subtracting the pessimistic
outcome from the optimistic outcome
7. ________ measure(s) the risk of a capital budgeting project by estimating the NPVs
associated with the optimistic, most likely, and pessimistic cash flow estimates
8. If a firm uses an aggressive financing strategy,
9. The two major sources of short-term financing are
10. At the operating breakeven point, ________ equals zero.
Problems (show your work)
(1 Point)
11. Xiao Li wishes to accumulate $50,000 by the end of 10 years by making equal annual
end-of-year deposits over the next 10 years. If Xiao Li can earn 5 percent on her
investments, how much must she deposit at the end of each year?
12. Hayley makes annual end-of-year payments of $6,260.96 on a five-year loan with an
8 percent interest rate. The original principal amount was
13. Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent
annual coupon interest rate. The issue has ten years remaining to the maturity date. Bonds
of similar risk are currently selling to yield a 12 percent rate of return. The current value
of each Hewitt bond is ________.
14. Yong Importers, an Asian import company, is evaluating two mutually exclusive
projects, A and B. The relevant cash flows for each project are given in the table below.
The cost of capital for use in evaluating each of these equally risky projects is 10 percent.
Project A Project B
Initial Investment $350,000 $425,000
Year Cash Inflows (CF)
The NPVs of projects A and B are ________.
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