Question 1

Which of the following is not true?

Accepted Answer

A)  Financial markets can be used to adjust consumption patterns over time. 
B)  Corporate investment decisions have nothing to do with financial markets. 
C)  Financial markets deal with cash flows over time. 
D)  Investment decisions rely on the economic principles of financial markets. 
A)  Financial markets can be used to adjust consumption patterns over time. 
B)  Corporate investment decisions have nothing to do with financial markets. 
C)  Financial markets deal with cash flows over time. 
D)  Investment decisions rely on the economic principles of financial markets.

Question 2

An individual has an income of $4,000 in period 0 and $0 in period 1. The individual has the potential investment opportunities given below:
   If the market interest rate is 11%, what is the optimal investment? What is maximum consumption in period 1 if the individual takes on the optimal set of investment projects and consumes all other period 0 income? 
D.
Period 1 consumption is $2,400 + $910 = $3,310

Accepted Answer

Invest $2,000 in pro

Question 3

An individual has an income of $4,000 in period 0 and $0 in period 1. The individual has the potential investment opportunities given below:
   An individual has income of $10,000 in period 0 and $25,000 in period 1. An investment opportunity that costs $10,000 in period 0 is worth $10,500 in period 1. The market interest rate is 8%. What is the maximum possible consumption in period 1 if the individual consumes $20,000 in period 0 and the individual follows the NPV rule?

Accepted Answer

The individual will turn down the invest

Question 4

An investment should be made in period 0 if:

Accepted Answer

A)  desired consumption in period 0 is less than income. 
B)  desired consumption in period 1 is greater than income. 
C)  return on the investment is greater than the interest rate. 
D)  return on the investment is less than the interest rate. 
A)  desired consumption in period 0 is less than income. 
B)  desired consumption in period 1 is greater than income. 
C)  return on the investment is greater than the interest rate. 
D)  return on the investment is less than the interest rate.

Question 5

Shareholders of corporations generally do not vote on every investment decision but depend on managers to maximize value by:

Accepted Answer

A)  choosing the highest net income projects. 
B)  investing at the market rate of return. 
C)  buying shares back from investors. 
D)  following the NPV rule to choose investments. 
A)  choosing the highest net income projects. 
B)  investing at the market rate of return. 
C)  buying shares back from investors. 
D)  following the NPV rule to choose investments.

Question 6

An individual has an income of $4,000 in period 0 and $0 in period 1. The individual has the potential investment opportunities given below:
   At what market rates of interest would make the individual indifferent between (1) all consumption in Period 0 and none in Period 1 and (2) no consumption in Period 0 and all consumption in Period 1?

Accepted Answer

Determine rates of return; A-8%, B-20%,

Question 7

Corporate managers can maximize shareholder wealth by choosing positive NPV projects because:

Accepted Answer

A)  all investors have the same preferences. 
B)  the unhappy shareholders can sell off shares. 
C)  the separation theorem in financial markets states that all investors will be satisfied with the same investment decision regardless of personal preferences. 
D)  managers are wiser than shareholders regarding investments. 
A)  all investors have the same preferences. 
B)  the unhappy shareholders can sell off shares. 
C)  the separation theorem in financial markets states that all investors will be satisfied with the same investment decision regardless of personal preferences. 
D)  managers are wiser than shareholders regarding investments.

Question 8

A corporation has the following opportunity to invest in a project with a return of $42,000 in one period. The current investment is $46,900. The financial market rate is 14%.
Graph and explain the investment choice the corporation should make. (Hint: Determine the NPV.)

Accepted Answer

NPV = -42,000 + (46,

Question 9

The consumption opportunity set moves further out when an investment is available because:

Accepted Answer

A)  the total number of alternatives are now greater. 
B)  the investment is better than what is available in the market. 
C)  the project rate of return is less than the market rate. 
D)  the market rate is irrelevant to the investment choice. 
A)  the total number of alternatives are now greater. 
B)  the investment is better than what is available in the market. 
C)  the project rate of return is less than the market rate. 
D)  the market rate is irrelevant to the investment choice.

Question 10

Components of a loan which is fully paid back are:

Accepted Answer

A)  the interest and financial market payments. 
B)  the principle repayment and the down payment. 
C)  the interest payment and principal repayment. 
D)  the down payment and interest payment. 
A)  the interest and financial market payments. 
B)  the principle repayment and the down payment. 
C)  the interest payment and principal repayment. 
D)  the down payment and interest payment.

Question 11

The separation theorem says that:

Accepted Answer

A)  expected return of a portfolio is separate from its variance. Investment decisions can be made separately from consumption decisions. 
B)  lending decisions can be made jointly with borrowing decisions. 
C)  systematic risk and unsystematic risk should be considered separately. 
D)  variance of a portfolio is separate from its covariance. 
A)  expected return of a portfolio is separate from its variance. Investment decisions can be made separately from consumption decisions. 
B)  lending decisions can be made jointly with borrowing decisions. 
C)  systematic risk and unsystematic risk should be considered separately. 
D)  variance of a portfolio is separate from its covariance.

Question 12

Which of the following statements is true?

Accepted Answer

A)  Stockholders prefer corporations to make investments when the net present value is positive. 
B)  Stockholders prefer corporations to make investments only when the probability of loss is very low. 
C)  Most corporate charters require a stockholder vote on decisions concerning large investment projects. 
D)  Stockholders prefer corporations to make all investments with positive net incomes. 
A)  Stockholders prefer corporations to make investments when the net present value is positive. 
B)  Stockholders prefer corporations to make investments only when the probability of loss is very low. 
C)  Most corporate charters require a stockholder vote on decisions concerning large investment projects. 
D)  Stockholders prefer corporations to make all investments with positive net incomes.

Question 13

The present value of future cash flows minus initial cost is called:

Accepted Answer

A)  the future value of the project. 
B)  the net present value of the project. 
C)  the equivalent sum of the investment. 
D)  the initial investment risk equivalent value. 
A)  the future value of the project. 
B)  the net present value of the project. 
C)  the equivalent sum of the investment. 
D)  the initial investment risk equivalent value.

Question 14

Financial markets develop to accommodate _________ between individuals.

Accepted Answer

A)  trade and barter 
B)  barter and lending 
C)  borrowing and lending 
D)  lending and trade 
A)  trade and barter 
B)  barter and lending 
C)  borrowing and lending 
D)  lending and trade

Question 15

An individual has income of $35,000 in period 0 and $40,000 in period 1. An investment opportunity that costs $10,000 in period 0 is worth $11,000 in period 1. What is the maximum possible consumption in period 0 if the individual consumes $50,000 in period 1 when the market rate of interest is 8%?

Accepted Answer

A)  $26,000 
B)  $26,667 
C)  $44,000 
D)  $44,720 
A)  $26,000 
B)  $26,667 
C)  $44,000 
D)  $44,720

Question 16

If the corporation had cash on hand of $25,000 before raising any capital for the investment and the financial market rate is 9%. Graph and explain the investment choice the corporation should make. (Hint: Determine the NPV.)

Accepted Answer

NPV = -42,000 + (46,

Exam 4: Financial Markets and Net Present Value: First Principles of Finance

Which of the following is not true?

An investment should be made in period 0 if:

Shareholders of corporations generally do not vote on every investment decision but depend on managers to maximize value by:

Corporate managers can maximize shareholder wealth by choosing positive NPV projects because:

A corporation has the following opportunity to invest in a project with a return of $42,000 in one period. The current investment is $46,900. The financial market rate is 14%. Graph and explain the investment choice the corporation should make. (Hint: Determine the NPV.)

The consumption opportunity set moves further out when an investment is available because:

Components of a loan which is fully paid back are:

The separation theorem says that:

Which of the following statements is true?

The present value of future cash flows minus initial cost is called:

Financial markets develop to accommodate _________ between individuals.

An individual has income of $35,000 in period 0 and $40,000 in period 1. An investment opportunity that costs $10,000 in period 0 is worth $11,000 in period 1. What is the maximum possible consumption in period 0 if the individual consumes $50,000 in period 1 when the market rate of interest is 8%?

If the corporation had cash on hand of $25,000 before raising any capital for the investment and the financial market rate is 9%. Graph and explain the investment choice the corporation should make. (Hint: Determine the NPV.)

Introduction to Corporate Finance

Accounting Statements and Cash Flow

Financial Planning and Growth

The Time Value of Money

How to Value Bonds and Stocks

Net Present Value and Other Investment Rules

Net Present Value and Capital Budgeting

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Risk and Return: the Capital Asset Pricing Model

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, Return, and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Issuing Equity Securities to the Public

Long-Term Debt

Leasing

Options and Corporate Finance: Basic Concepts

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

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