Function of financial markets in competitive economy

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1. As a general rule, the value of any financial asset, such as a stock or bond, or physical investment project is determined by which of the following processes?

A. Measuring the present value of the net cash flows generated by the asset using a risk adjusted required rate of return as a discount factor.

B. Measuring the present value of the profits of the investment using a risk adjusted required return as a discount factor.

C. Adding the value of profits over the life of the investment and deducting the cost of that investment.

D. Any of the above methods are acceptable.

2. What is the primary difference between accounting profits and economic profits?

A. Accounting profits include all revenues and expenses, while economic profits omit certain revenues and expenses from the calculation.

B. Accounting profits are measured only on an annual basis, while economic profits can be measured over longer periods of time.

C. Accounting profits do not include measures of opportunity cost, while economic profits do include measures of opportunity cost in the calculation.

D. All of the above are differences between accounting and economic profits.

3. A firm is identified as earning a "normal" profit level. Which of the following is true?

A. The firm's economic profit is greater than zero.

B. The firm's economic profit is equal to zero.

C. The firm's economic profit is less than zero.

D. It is impossible to tell the economic profit level from the information provided.

4. Which of the following statements are true?

A. Positive economic profits will lead to entry of investment capital into an industry.

B. Economic profits can be negative even if accounting profits are positive.

C. Both a and b are true.

D. Neither a nor b are true.

5. Which of the following statements best describe the function of financial markets in a competitive economy?

A. Financial markets provide a way to reinsert consumer savings into the circular flow of money through the economy.

B. Financial markets provide a means of funding investments that earn returns that are equal to or greater than the returns required by investors.

C. Financial markets provide a mechanism for determining the optimal value of different investment opportunities.

D. All of the above are true.

Reference no: EM131567490

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