QUESTION 1

1. Project A generates $5,000.00 in revenue two years from today and costs $4,000.00. Project B generates $4,000.00 (50% probability) or $6,000.00 (50% probability) one year from today and costs $4,500.00. Assuming a discount rate of 12% for both projects, which project does a risk averse manager prefer?

   	a.	Project A
   	b.	Project B
   	c.	Neither project
   	d.	Cannot be determined

QUESTION 2

1. Determine the (after-tax) component cost of a $50 million debt issue that the Mattingly Corporation is planning to place with a large insurance company. Assume the company is subject to a 40% tax rate. This long-term debt issue will yield 12% to the insurance company.

   	a.	4.8%
   	b.	7.2%
   	c.	12.0%
   	d.	None of the above

QUESTION 3

1. Your company is expected to earn $4.0 million in net income next year of which it will pay out 40% in dividends. If equity represents 50% of your capital, what is the breakpoint on the MCC where new stock will have to be issued?

   	a.	$2.4 million
   	b.	$4.8 million
   	c.	$4.0 million
   	d.	$3.2 million
   	e.	$8.0 million