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%

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? 

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