Question 1 of 25
4.0/ 4.0 Points
State the “rate of return rule.”
Question 2 of 25
0.0/ 4.0 Points
Using the company cost of capital to evaluate a project is:
I) Always correct
II) Always incorrect
III) Correct for projects that are about as risky as the
average of the firm’s other assets
A.I only
B.II only
C.III only
D.I and III only
Question 3 of 25
4.0/ 4.0 Points
Net Working Capital should be considered in project cash
flows because:
A.Firms must invest
cash in short-term assets to produce finished goods
B.They are sunk costs
C.Firms need positive
NPV projects for investment
D.None of the above
Question 4 of 25
4.0/ 4.0 Points
Briefly explain the functions of financial markets.
Question 5 of 25
4.0/ 4.0 Points
A firm’s investment decision is also called the:
A.Financing decision
B.Liquidity decision
C.Capital budgeting
decision
D.None of the above
Question 6 of 25
4.0/ 4.0 Points
The following are some of the actions shareholders can take
if the corporation is not performing well:
A.Replace the board
of directors in an election.
B.Force the board of
directors to change the management team.
C.Sell their shares
of stock in the corporation.
D.Any of the above
Question 7 of 25
4.0/ 4.0 Points
If the average annual rate of return for common stocks is
11.7%, and for treasury bills it is 4.0%, what is the market risk premium?
A.15.8%
B.4.1%
C.7.7%
D.None of the above
Question 8 of 25
0.0/ 4.0 Points
Suppose you invest equal amounts in a portfolio with an
expected return of 16% and a standard deviation of returns of 20% and a
risk-free asset with an interest rate of 4%; calculate the standard deviation
of the returns on the resulting portfolio:
A.8%
B.10%
In C.20%
D.none of the above
Question 9 of 25
4.0/ 4.0 Points
The cost of a resource that may be relevant to an investment
decision even when no cash changes hand is called a (an):
A.Sunk cost
B.Opportunity cost
C.Working capital
D.None of the above
Question 10 of 25
4.0/ 4.0 Points
If the NPV of project A is + $30 and that of project B is +
$60, then the NPV of the combined project is:
A.+$30
B.-$60
C.-$30
D.None of the above.
Question 11 of 25
4.0/ 4.0 Points
A firm’s capital investment proposals should reflect:
I) Capital budgeting process
II) Strategic planning process
III) Middle managers’ ideas and views
A.I only
B.I and II only
C.I, II, and III
D.III only
Question 12 of 25
4.0/ 4.0 Points
The NPV value obtained by discounting nominal cash flows
using the nominal discount rate is the: I) same as the NPV value obtained by
discounting real cash flows using the real discount rate II) same as the NPV
value obtained by discounting real cash flows using the nominal discount rate
III) same as the NPV value obtained by discounting nominal cash flows using the
real discount rate
A.I only
B.II only
C.III only
D.II and III only
Question 13 of 25
4.0/ 4.0 Points
Florida Company (FC) and Minnesota Company (MC) are both
service companies. Their historical return for the past three years are: FC: –
5%,15%, 20%; MC: 8%, 8%, 20%. If FC and MC are combined in a portfolio with 50%
of the funds invested in each, calculate the expected return on the portfolio.
A.12%
B.10%
C.11%
D.None of the above.
Question 14 of 25
4.0/ 4.0 Points
The value of a common stock today depends on:
A.Number of shares
outstanding and the number of shareholders
B.The expected future
dividends and the discount rate
C.The Wall Street
analysts
D.Present value of
the future earnings per share
Question 15 of 25
4.0/ 4.0 Points
The market value of Cable Company’s equity is $60 million,
and the market value of its risk-free debt is $40 million. If the required rate
of return on the equity is 15% and that on the debt is 5%, calculate the
company’s cost of capital. (Assume no taxes.)
A.15%
B.10%
C.11%
D.None of the above
Question 16 of 25
4.0/ 4.0 Points
A bond with duration of 10 years has yield to maturity of
10%. This bond’s volatility is:
A.9.09%
B.6.8%
C.14.6%
D.6.0%
Question 17 of 25
4.0/ 4.0 Points
If the correlation coefficient between stock C and stock D
is +1.0% and the standard deviation of return for stock C is 15% and that for
stock D is 30%, calculate the covariance between stock C and stock D.
A.+45
B.-450
C.+450
D.None of the above
Question 18 of 25
4.0/ 4.0 Points
Present Value is defined as:
A.Future cash flows
discounted to the present at an appropriate discount rate
B.Inverse of future
cash flows
C.Present cash flow
compounded into the future
D.None of the above
Question 19 of 25
4.0/ 4.0 Points
Present Value of $100,000 that is, expected, to be received
at the end of one year at a discount rate of 25% per year is:
A.$80,000
B.$125,000
C.$100,000
D.None of the above
Question 20 of 25
4.0/ 4.0 Points
A 5-year treasury bond with a coupon rate of 8% has a face
value of $1000. What is the semi-annual interest payment? Annual interest
payment = 1000(0.08) = $80; Semi-annual payment = 80/2 = $40
A.$80
B.$40
C.$100
D.None of the above
Question 21 of 25
4.0/ 4.0 Points
The correlation measures the:
A.Rate of movements
of the return of individual stocks
B.Direction of
movement of the return of individual stocks
C.Direction of
movement between the returns of two stocks
D.Stock market
volatility
Question 22 of 25
4.0/ 4.0 Points
The security market line (SML) is the graph of:
A.Expected rate on
investment (Y-axis) vs. variance of return
B.Expected return on
investment vs. standard deviation of return
C.Expected rate of
return on investment vs. beta
D.A and B
Question 23 of 25
4.0/ 4.0 Points
The cost of capital for a project depends on:
A.The company’s cost
of capital
B.The use to which
the capital is put, i.e. the project
C.The industry cost
of capital
D.All of the above
Question 24 of 25
4.0/ 4.0 Points
Briefly explain the difference between company and project
cost of capital.
Question 25 of 25
4.0/ 4.0 Points
An annuity is defined as
A.Equal cash flows at
equal intervals of time for a specified period of time
B.Equal cash flows at
equal intervals of time forever
C.Unequal cash flows
at equal intervals of time forever
D.None of the above