Reference no: EM13504213

“Millionaire” - Multiple Choice Questions (with Solutions)

1. Which of the following is closest to the average market risk premium (rm – rf) observed in the US?

a. 1% b. 3% c. 6% d. 10%

2. Shareholders of a corporation may be, among others: I) Individuals; II) Pension Funds; III) Insurance Companies

a. I only

b. I and II only c. II only

d. I, II and III

3. A firm's investment decision is also called the: a. Financing decision

b. Liquidity decision

c. Capital budgeting decision d. None of the above

4. Which of the following is the LEAST useful technique to deal with future contingencies and uncertainties?

a. Sensitivity-Scenario Analyses b. Monte Carlo Simulations

c. Net Present Value Approach d. Decision Trees

5. Short-Term financing decisions include: a. Short-term assets and liabilities

b. Cash-flows forecasts for next few months

c. Short-term financing that interacts with long-term financing and investment decisions d. All of the above

6. Which of the following technique is used for estimating credit risk of firm? a. CAPM

b. IRR

c. Z-score

d. None of the above

7. Which of the following types of investors have major holdings of corporate debts in the U.S.? a. Insurance companies

b. Individual investors c. Banks

d. Hedge funds

8. Which of the following is an input to Dividend Growth Model? a. Future dividends

b. Growth rate of dividends c. Market capitalization rate d. All of the above

9. The following are important functions of financial markets: I) Source of financing; II) Provide liquidity; III) Reduce risk; IV) Source of information

a. I only

b. I and II only

c. I, II, III, and IV d. IV only

10. In the principal-agent framework: a. Shareholders are the principals

b. Managers are the principals c. Managers are the agents

d. A and C

11. The financial goal of a corporation is to: a. Maximize profits

b. Maximize sales

c. Maximize the value of the firm for the shareholders d. Maximize managers' benefits

12. An initial investment of $400,000 will produce an end of year cash flow of $480,000. What is the NPV of the project at a discount rate of 20%?

a. $176,000 b. $80,000 c. $0 (zero)

d. None of the above

NPV= -400,000 + (480,000/1.2) = 0

13. Net working capital (NWC) is calculated as: a. Total assets - total liabilities

b. Current assets + current liabilities c. Current assets - current liabilities d. None of the above

14. The IRR is defined as:

a. The discount rate that makes the NPV equal to zero

b. The difference between the cost of capital and the present value of the cash flows c. The discount rate used in the NPV method

d. The discount rate used in the discounted payback period method

15. When firm has both debt and equity, the cost of capital should be:

a. CAPM

b. YTM

c. WACC

d. None of the above