Question 1

You are scheduled to receive $10,000 in one year. An increase in the interest rate will have what effect on the present value of this cash flow?

Accepted Answer

A)  It will cause the present value to rise. 
B)  It will have no effect on the present value. 
C)  It will cause the present value to fall. 
D)  The effect cannot be determined with the information provided. 
A)  It will cause the present value to rise. 
B)  It will have no effect on the present value. 
C)  It will cause the present value to fall. 
D)  The effect cannot be determined with the information provided. C

Question 2

A manufacturer of breakfast cereals has the opportunity to purchase barley at $3.00 a kilo for 10,000 kilos, if it also buys 5000 kilos of wheat at $16.00 per kilo. However, the manufacturer does not use any barley in its products, and currently needs 20,000 kilos of wheat. If the current market price of barley is $3.80 per kilo, and wheat is $15.80 per kilo, should this opportunity be taken, and why?

Accepted Answer

A)  Because the company has no need of barley, the opportunity should not be taken. 
B)  Because the value of the opportunity is positive, the opportunity should be taken. 
C)  Because the value of the opportunity is negative, the opportunity should not be taken. 
D)  Because the opportunity does not meet the company's need for wheat, the opportunity should not be taken. 
A)  Because the company has no need of barley, the opportunity should not be taken. 
B)  Because the value of the opportunity is positive, the opportunity should be taken. 
C)  Because the value of the opportunity is negative, the opportunity should not be taken. 
D)  Because the opportunity does not meet the company's need for wheat, the opportunity should not be taken. B

Question 3

Heavy Duty Inc., a manufacturer of power tools, decides to offer a rebate of $100 on its 16-inch mid-range chain saw, which currently has a retail price of $470. Heavy Duty's marketers estimate that, as a result of the rebate, sales of this model will increase from 50,000 to 80,000 units next year. The profit margin for Heavy Duty before the rebate is $150. Based on the given information, is the decision to give the rebate a wise one?

Accepted Answer

A)  Yes, since the benefits are $0.2 million more than the costs. 
B)  No, since costs are $5.0 million more than benefits. 
C)  No, since costs are $3.5 million more than benefits. 
D)  Yes, since the benefits are $1.5 million more than the costs. 
A)  Yes, since the benefits are $0.2 million more than the costs. 
B)  No, since costs are $5.0 million more than benefits. 
C)  No, since costs are $3.5 million more than benefits. 
D)  Yes, since the benefits are $1.5 million more than the costs. C

Question 4

What is a competitive market?

Accepted Answer

A)  a market in which goods can be bought at the ask price and sold at bid price 
B)  a market in which a good can be bought and sold at the same price 
C)  a market in which a good is bought for a lower price than that for which it can be sold 
D)  a market in which a good is sold at a lower price than that for which it can be bought 
A)  a market in which goods can be bought at the ask price and sold at bid price 
B)  a market in which a good can be bought and sold at the same price 
C)  a market in which a good is bought for a lower price than that for which it can be sold 
D)  a market in which a good is sold at a lower price than that for which it can be bought

Question 5

How can we perform cost-benefit analyses in cases that are occurring in different currencies?

Accepted Answer

We need to convert costs and b

Question 6

Which of the following statements regarding the Law of One Price is INCORRECT?

Accepted Answer

A)  At any point in time, the price of two equivalent goods trading in different competitive markets will be the same. 
B)  An important property of the Law of One Price is that it holds even in markets where arbitrage is not possible. 
C)  If equivalent goods or securities trade simultaneously in different competitive markets, then they will trade for the same price in both markets. 
D)  One useful consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value (NPV), we can use any competitive price to determine a cash value, without checking the price in all possible markets. 
A)  At any point in time, the price of two equivalent goods trading in different competitive markets will be the same. 
B)  An important property of the Law of One Price is that it holds even in markets where arbitrage is not possible. 
C)  If equivalent goods or securities trade simultaneously in different competitive markets, then they will trade for the same price in both markets. 
D)  One useful consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value (NPV), we can use any competitive price to determine a cash value, without checking the price in all possible markets.

Question 7

An elderly relative offers to sell you their used 1959 Jaguar Mark 9 saloon for $50,000. You note that very similar cars are selling on the open market for $90,000. You don't care for classic cars and would rather buy a new Subaru Outback for $35,000. What is the net value of buying the Jaguar?

Accepted Answer

A)  $50,000, since the Jaguar could be bought for this price. 
B)  $35,000, since this is the value of the car that you really want to buy. 
C)  $90,000, since the Jaguar could be sold for this price. 
D)  $40,000, since this is the difference between purchase and resale price of the Jaguar. 
A)  $50,000, since the Jaguar could be bought for this price. 
B)  $35,000, since this is the value of the car that you really want to buy. 
C)  $90,000, since the Jaguar could be sold for this price. 
D)  $40,000, since this is the difference between purchase and resale price of the Jaguar.

Question 8

Consider the following timeline:   If the current market rate of interest is 9%, then the present value (PV) of this timeline as of year 0 is closest to:

Accepted Answer

A)  $400 
B)  $600 
C)  $492 
D)  $637 
A)  $400 
B)  $600 
C)  $492 
D)  $637

Question 9

The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation?

Accepted Answer

A)  The State Bank would experience a fall in demand for deposits. 
B)  The Colonial Bank would experience a surge in demand for loans. 
C)  The State Bank would experience a surge in demand for loans. 
D)  The Colonial Bank would experience a surge in demand for deposits. 
A)  The State Bank would experience a fall in demand for deposits. 
B)  The Colonial Bank would experience a surge in demand for loans. 
C)  The State Bank would experience a surge in demand for loans. 
D)  The Colonial Bank would experience a surge in demand for deposits.

Question 10

The one-year discount factor is the discount at which we can purchase money in the future?

Accepted Answer

A) True 
 B)False

Question 11

An investor has the opportunity to buy a $10,000 government bond which is guaranteed to yield 6.5% interest in one year's time. The investor decides to make the investment as there is a net difference between the cost and benefit. Which of the following is NOT a reason that the investor's decision may be flawed?

Accepted Answer

A)  It does not consider the current market interest rate. 
B)  It does not consider the value of the $10,000 in one year's time if invested elsewhere. 
C)  It does not consider whether the $10,000 will be needed elsewhere. 
D)  It ignores the fact that the costs are incurred today, but the benefits occur in one year's time. 
A)  It does not consider the current market interest rate. 
B)  It does not consider the value of the $10,000 in one year's time if invested elsewhere. 
C)  It does not consider whether the $10,000 will be needed elsewhere. 
D)  It ignores the fact that the costs are incurred today, but the benefits occur in one year's time.

Question 12

Whenever a good trades in a competitive market, th?

Accepted Answer

A)  cost 
B)  demand 
C)  supply 
D)  price 
A)  cost 
B)  demand 
C)  supply 
D)  price

Question 13

If an analyst adds cash flows occurring at different points in time, what is the implied assumption in the process?

Accepted Answer

Cash flows occurring at different points

Question 14

To calculate a cash flow's present value (PV), you must compound it?

Accepted Answer

A) True 
 B)False

Question 15

How can we convert the value of money from one point in time to another?

Accepted Answer

A)  using the current interest rate 
B)  using the current exchange rate 
C)  using a cost-benefit analysis 
D)  using the Valuation Principle 
A)  using the current interest rate 
B)  using the current exchange rate 
C)  using a cost-benefit analysis 
D)  using the Valuation Principle

Question 16

On the day Harry was born, his parents put $1000 into an investment account that promises to pay a fixed interest rate of 4 percent per year. How much money will Harry have in this account when he turns 18?

Accepted Answer

A)  $4,806 
B)  $1,720 
C)  $2,026 
D)  $2,804 
A)  $4,806 
B)  $1,720 
C)  $2,026 
D)  $2,804

Question 17

If the risk-free rate of interest (rf) is 6%, then you should be indifferent between receiving $250 today or

Accepted Answer

A)  $250.00 in one year. 
B)  $265.00 in one year. 
C)  $235.85 in one year. 
D)  none of the above. 
A)  $250.00 in one year. 
B)  $265.00 in one year. 
C)  $235.85 in one year. 
D)  none of the above.

Question 18

What is the future value (FV) of $60,000 in five years, assuming the interest rate is 5% per year?

Accepted Answer

A)  $76,576.89 
B)  $72,674.86 
C)  $75,000.00 
D)  $62,500.00 
A)  $76,576.89 
B)  $72,674.86 
C)  $75,000.00 
D)  $62,500.00

Question 19

"If equivalent investment opportunities trade simultaneously in different competitive markets, thenthey must trade for the same price in both markets." What do we call the above statement?

Accepted Answer

A)  the Net Present Value rule 
B)  the Valuation Principle 
C)  the Law of One Price 
D)  the time value of money 
A)  the Net Present Value rule 
B)  the Valuation Principle 
C)  the Law of One Price 
D)  the time value of money

Question 20

Costs and benefits must be put in common terms if they are to be compared?

Accepted Answer

A) True 
 B)False

You are scheduled to receive $10,000 in one year. An increase in the interest rate will have what effect on the present value of this cash flow?

What is a competitive market?

How can we perform cost-benefit analyses in cases that are occurring in different currencies?

Which of the following statements regarding the Law of One Price is INCORRECT?

An elderly relative offers to sell you their used 1959 Jaguar Mark 9 saloon for $50,000. You note that very similar cars are selling on the open market for $90,000. You don't care for classic cars and would rather buy a new Subaru Outback for $35,000. What is the net value of buying the Jaguar?

Consider the following timeline: If the current market rate of interest is 9%, then the present value (PV) of this timeline as of year 0 is closest to:

The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation?

The one-year discount factor is the discount at which we can purchase money in the future?

Whenever a good trades in a competitive market, th?

If an analyst adds cash flows occurring at different points in time, what is the implied assumption in the process?

To calculate a cash flow's present value (PV), you must compound it?

How can we convert the value of money from one point in time to another?

On the day Harry was born, his parents put $1000 into an investment account that promises to pay a fixed interest rate of 4 percent per year. How much money will Harry have in this account when he turns 18?

If the risk-free rate of interest (rf) is 6%, then you should be indifferent between receiving $250 today or

What is the future value (FV) of $60,000 in five years, assuming the interest rate is 5% per year?

"If equivalent investment opportunities trade simultaneously in different competitive markets, thenthey must trade for the same price in both markets." What do we call the above statement?

Costs and benefits must be put in common terms if they are to be compared?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bond Valuation

Share Valuation: the Dividend-Discount Model

Investment Decision Rules

Fundamentals of Capital Budgeting

Share Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Capital

Debt Financing

Capital Structure

Payout Policy

Filters

Exam 3: Time Value of Money: an Introduction

You are scheduled to receive $10,000 in one year. An increase in the interest rate will have what effect on the present value of this cash flow?

What is a competitive market?

How can we perform cost-benefit analyses in cases that are occurring in different currencies?

Which of the following statements regarding the Law of One Price is INCORRECT?

An elderly relative offers to sell you their used 1959 Jaguar Mark 9 saloon for $50,000. You note that very similar cars are selling on the open market for $90,000. You don't care for classic cars and would rather buy a new Subaru Outback for $35,000. What is the net value of buying the Jaguar?

Consider the following timeline: If the current market rate of interest is 9%, then the present value (PV) of this timeline as of year 0 is closest to:

The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation?

The one-year discount factor is the discount at which we can purchase money in the future?

Whenever a good trades in a competitive market, th?

If an analyst adds cash flows occurring at different points in time, what is the implied assumption in the process?

To calculate a cash flow's present value (PV), you must compound it?

How can we convert the value of money from one point in time to another?

On the day Harry was born, his parents put $1000 into an investment account that promises to pay a fixed interest rate of 4 percent per year. How much money will Harry have in this account when he turns 18?

If the risk-free rate of interest (rf) is 6%, then you should be indifferent between receiving $250 today or

What is the future value (FV) of $60,000 in five years, assuming the interest rate is 5% per year?

"If equivalent investment opportunities trade simultaneously in different competitive markets, thenthey must trade for the same price in both markets." What do we call the above statement?

Costs and benefits must be put in common terms if they are to be compared?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bond Valuation

Share Valuation: the Dividend-Discount Model

Investment Decision Rules

Fundamentals of Capital Budgeting

Share Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Capital

Debt Financing

Capital Structure

Payout Policy

Filters