Reference no: EM13961797

Question 1 If the discount rate is stated in nominal terms, then in order to calculate the NPV in a consistent manner requires that project: I) cash flows be estimated in nominal terms II) cash flows be estimated in real terms III) accounting income be used

A.I only

B.II only

C.III only

D.None of the above

Question 2 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 3 Generally, postaudits are conducted for large projects:

A.shortly after the completion of the project

B.after several years after the completion of the project

C.shortly after the project has begun to operate

D.well before the start of the project

Question 4 Spill Oil Company's stocks had -8%, 11% and 24% rates of return during the last three years respectively; calculate the average rate of return for the stock.

A.8% per year

B.9% per year

C.11% per year

D.None of the above

5.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 6 Briefly explain the difference between company and project cost of capital.

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The company cost of capital is the company's required return. The cost of capital of a company is commonly calculated by the weighted average of the various sources of financing for the company.

The project cost of capital is the benchmark that a project has to meet. The project cost of capital is used to evaluate projects. The project cost of capital is most commonly calculated using the Capital Asset Pricing Model. The project cost of capital is different for different projects as project risks differs from project to project.

Question 7 The concept of compound interest is most appropriately described as:

A.Interest earned on an investment

B.The total amount of interest earned over the life of an investment

C.Interest earned on interest

D.None of the above

Question 8 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%

C.20%

D.none of the above

Question 9 If the Wall Street Journal Quotation for a company has the following values close: 55.14; Net chg: = + 1.04; then the closing price for the stock for the previous trading day was?

A.$56.18

B.$54.10

C.$55.66

D.None of the above.

Question 10 The beta of market portfolio is:

A.+ 1.0

B.+0.5

C.0

D.-1.0

Question 11 The following are measures used by firms when making capital budgeting decisions except:

A.Payback period

B.Internal rate of return

C.P/E ratio

D.Net present value

Question 12 The type of bonds where the identities of bonds' owners are recorded and the coupon interest payments are sent automatically are called:

A.Bearer bonds

B.Government bonds

C.Registered bonds

D.None of the above

Question 13 What is the relationship between interest rates and bond prices?

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There is an inverse relationship between interest rates and the bond prices. Thus, if the market interest rate goes up then the bond price will fall. Again if the interest rate falls down, then the bond price will rise.

This is due to the factor that the bond coupon rate remains the same. If the market interest rate goes up, the bond becomes less attractive to investors and hence the bond price falls. Similarly if the market interest rate falls down, then the bond becomes more attractive to the investors, hence the bond price rises.

Question 14 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 15 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 16 The growth rate in dividends is a function of two ratios. They are:

A.ROA and ROE.

B.Dividend yield and growth rate in dividends.

C.ROE and the Retention Ratio.

D.Book value per share and EPS.

Question 17 Briefly explain the term "risk-free rate of interest"

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The risk-free rate of return is the rate of return of an investment with nil risk. The short term government bonds or treasury bills interest rate is commonly taken as the risk-free rate of interest.

Thus the risk-free rate of return can be defined as the rate of return an investor expects to earn on investing in risk free investments.

Question 18 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 19 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 20 According to the net present value rule, an investment in a project should be made if the:

A.Net present value is greater than the cost of investment

B.Net present value is greater than the present value of cash flows

C.Net present value is positive

D.Net present value is negative

Question 21 Which of the following investment rules does not use the time value of the money concept?

A.Net present value

B.Internal rate of return

C.The payback period

D.All of the above use the time value concept

Question 22 Market risk is also called: I) systematic risk, II) undiversifiable risk, III) firm specific risk.

A.I only

B.II only

C.III only

D.I and II only

Question 23 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 24 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 25 The unique risk is also called the:

A.Unsystematic risk

B.Diversifiable risk

C.Firm specific risk

D.All of the above