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1. In determining the future value of a single amount, one

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1. In determining the future value of a single amount, one measures
A. the future value of periodic payments at a given interest rate.
B. the present value of an amount discounted at a given interest rate.
C. the future value of an amount allowed to grow at a given interest rate.
D. the present value of periodic payments at a given interest rate.
2. The concept of time value of money is important to financial decision making because
A. it emphasizes earning a return on invested capital.
B. it recognizes that earning a return makes $1 worth more today than $1 received in the future.
C. it can be applied to future cash flows in order to compare different streams of income.
D. all of these
3. As the interest rate increases, the present value of an amount to be received at the end of a fixed period
A. increases.
B. decreases.
C. remains the same.
D. Not enough information to tell.
4. To find the yield on investments which require the payment of a single amount initially, and which then return a single amount some time in the future, the correct table to use is
A. the present value of $1
B. the future value of $1
C. present value of an annuity of $1
D. (a) and (b) above.
5. Increasing the number of periods will increase all of the following except
A. the present value of an annuity.
B. the present value of $1.
C. the future value of $1.
D. the future value of an annuity.
6. As the discount rate becomes higher and higher, the present value of inflows approaches
A. 0
B. minus infinity
C. plus infinity
D. need more information
7. The shorter the length of time between a present value and its corresponding future value,
A. the lower the present value, relative to the future value.
B. the higher the present value, relative to the future value.
C. the higher the interest rate used in the present-valuation.
D. none of these.
8. The higher the rate used in determining the future value of a $1 annuity,
A. the smaller the future value at the end of the period.
B. the greater the future value at the end of a period.
C. the greater the present value at the beginning of a period.
D. none of these - the interest has no effect on the future value of an annuity.
9. A dollar today is worth more than a dollar to be received in the future because
A. risk of nonpayment in the future.
B. the dollar can be invested today and earn interest.
C. inflation will reduce purchasing power of a future dollar.
D. None of these.
10. Football player Walter Johnson signs a contract calling for payments of $250,000 per year, to begin 10 years from now. To find the present value of this contract, which table or tables should you use?
A. the future value of $1
B. the future value of an annuity of $1 and the future value of $1
C. the present value of an annuity of $1 and the present value of $1
D. none of these
11. A bond which has a yield to maturity greater than its coupon interest rate will sell for a price
A. below par.
B. at par.
C. above par.
D. what is equal to the face value of the bond plus the value of all interest payments.
12. Which of the following does not influence the yield to maturity for a security?
A. required real rate of return
B. risk free rate
C. business risk
D. historic yields
13. An increase in the riskiness of a particular security would NOT affect
A. the risk premium for that security.
B. the premium for expected inflation.
C. the total required return for the security.
D. investors' willingness to buy the security.
14. If the inflation premium for a bond goes up, the price of the bond
A. is unaffected.
B. goes down.
C. goes up.
D. need more information.
15. If the yield to maturity on a bond is greater than the coupon rate, you can assume:
A. interest rates have decreased
B. the price is below the par
C. the price is above the par
D. risk premiums have decreased
16. The risk premium is likely to be highest for
A. U.S. government bonds.
B. corporate bonds.
C. utility company stock.
D. either b or c.
17. The return measure that an investor demands for giving up current use of funds, without adjusting for purchasing power changes or the real rate of return, is the
A. risk premium.
B. inflation premium.
C. dividend yield.
D. discount rate.
18. The longer the time to maturity:
A. the greater the price increase from an increase in interest rates.
B. the less the price increase from an increase in interest rates.
C. the greater the price increase from a decrease in interest rates.
D. the less the price decrease from a decrease in interest rates.
19. A higher interest rate (discount rate) would
A. reduce the price of corporate bonds.
B. reduce the price of preferred stock.
C. reduce the price of common stock.
D. all of these.
20. Will an increase in inflation have a larger impact on the price of a bond or preferred stock?
A. The bond.
B. The preferred stock.
C. The impact will be the same.
D. There is not enough information to determine the relative impact.
21. The cost of debt is determined by taking the
A. present value of the interest payments and principal times one minus the tax rate.
B. historical yield on bonds times one minus the tax rate.
C. estimated yield on new bond issues of the same risk times one minus the shareholder marginal tax rate.
D. none of these.
22. A firm's cost of financing, in an overall sense, is equal to its
A. weighted average cost of capital.
B. required yield that investors seek for various kinds of securities.
C. required rate of return that investors seek for various kinds of securities.
D. all of these.
23. The cost of equity capital in the form of new common stock will be higher than the cost of retained earnings because of
A. the existence of taxes.
B. the existence of flotation costs.
C. investors' unwillingness to purchase additional shares of common stock.
D. the existence of financial leverage.
24. If the flotation cost goes up, the cost of retained earnings will
A. go up.
B. go down.
C. stay the same.
D. slowly increase.
25. Why is the cost of debt normally lower than the cost of preferred stock?
A. preferred stock dividends are tax deductions.
B. interest is tax deductible.
C. preferred stock dividends must be paid before common stock dividends.
D. common stock dividends are not tax deductible.
26. If flotation costs go down, the cost of new preferred stock will
A. go up.
B. go down.
C. stay the same.
D. slowly increase.
27. A firm's debt to equity ratio varies at times because
A. a firm will want to sell common stock when prices are high and bonds when interest rates are low.
B. a firm will want to take advantage of timing its fund raising in order to minimize costs over the long run.
C. the market allows some leeway in the debt to equity ratio before penalizing the firm with a higher cost of capital.
D. all of these are accurate statements.
28. In determining the cost of retained earnings
A. the dividend valuation model is inappropriate.
B. flotation costs are included.
C. growth is not considered.
D. the capital asset pricing model can be used.
29. For many firms, the cheapest and most important source of equity capital is in the form of
A. debt.
B. common stock.
C. preferred stock.
D. retained earnings.
30. A firm in a stable industry should use
A. a large amount of debt to lower the cost of capital.
B. no debt at all.
C. preferred stock in place of debt.
D. a limited amount of debt to lower the cost of capital.
31. The reason cash flow is used in capital budgeting is because
A. cash rather than income is used to purchase new machines.
B. cash outlays need to be evaluated in terms of the present value of the resultant cash inflows.
C. to ignore the tax shield provided from depreciation ignores the cash flow provided by the machine which should be reinvested to replace old worn out machines.
D. all of these.
32. An appropriate capital budgeting process requires that the following steps are taken in which order?
a) collection of data
b) reevaluation and adjustment
c) evaluation and decision making
d) search for and discovery of investment opportunities
A. d, a, c, b
B. d, a, b, c
C. d, b, a, c
D. b, d, a, c
33. Which of the following statements about the "payback method" is true?
A. The payback method considers cash flows after the payback has been reached.
B. The payback method does not consider the time value of money.
C. The payback method uses discounted cash-flow techniques.
D. The payback method generally leads to the same decision as other investment selection methods.
34. There are several disadvantages to the payback method, among them:
A. payback ignores the time value of money.
B. payback emphasizes receiving money back as fast as possible for reinvestment.
C. payback is easy to use and to understand.
D. payback can be used in conjunction with time adjusted methods of evaluation
35. The internal rate of return and net present value methods:
A. always give the same investment decision answer.
B. never give the same investment decision answer.
C. usually give the same investment decision answer.
D. always give answers different from the payback method.
36. For acceptable investments, the reinvestment assumption under the internal rate of return is generally
A. higher than under the net present-value method.
B. lower than under the net present-value method.
C. at the cost of capital.
D. below the cost of capital.
37. As the cost of capital increases
A. fewer projects are accepted.
B. more projects are accepted.
C. project selection remains unchanged.
D. None of these.
38. A firm may adopt capital rationing because
A. it is hesitant to use external sources of financing.
B. it wishes to maximize profits.
C. it is fearful of too much growth.
D. a and c.
39. The net present value profile
A. doesn't work if projects have a negative net present value.
B. is a substitute for the IRR.
C. graphically portrays the relationship between the discount rate and the net present value.
D. two of the above.
40. Elective expensing has the following characteristic:
A. it is primarily beneficial to large businesses.
B. it is exclusively used for financial reporting.
C. it allows a more rapid write-off than MACRS depreciation.
D. a and c.
41. The concept of being risk averse-means
A. for a given situation investors would prefer relative certainty to uncertainty.
B. investors would usually prefer investments with high standard deviations and greater opportunity for gain.
C. that the greater the risk the higher the expected return must be.
D. a and c are both true.
42. Using the risk-adjusted discount rate approach, the cost of capital is applied to projects with:
A. normal risk.
B. high risk.
C. no risk.
D. low risk.
43. A correlation coefficient of zero indicates
A. the projects have the same expected value.
B. there is no correlation and no risk reduction when the projects are combined.
C. there is no correlation, but some risk reduction when the projects are combined.
D. the projects have the same standard deviation.
44. In a portfolio, risk is evaluated in a different way than with an individual project. In evaluating portfolio risk we
A. need to consider the impact of a given project on the overall risk of the firm.
B. recognize that a risky investment may create a portfolio with less risk.
C. need to consider how the returns of the projects in the portfolio are correlated.
D. all of these are true.
45. Projects that are negatively correlated
A. reduce the standard deviation of returns for the firm.
B. increase the possible losses of the firm.
C. are generally in the same industry.
D. none of these.
46. A correlation coefficient of _____ provides the greatest possible risk reduction to the firm.
A. 2
B. 1
C. 0
D. +1
47. All of the following are methods of evaluating the risk of a project except:
A. net present value profile
B. Monte Carlo Simulation
C. decision trees
D. coefficient of variation
48. Which of the following combinations of investments would provide the firm with the highest negative correlation?
A. textiles firm and retail firm
B. telecommunications firm and internet firm
C. soft drink manufacturer and healthcare firm
D. airline co. and gasoline manufacturer
49. The "efficient frontier" indicates
A. alternatives with neutral combinations of risk and return.
B. alternatives with the highest returns.
C. alternatives with the best combination of risk and return.
D. alternatives with no risk.
50. A project that carries a normal amount of risk and does not affect the risk exposure of the firm should be discounted back at the:
A. coefficient of variation.
B. beta.
C. risk-free rate.
D. weighted average cost of capital.