Question 1

What is the profit- maximising rule for the employment of capital?

Accepted Answer

Capital has a marginal cost and a marginal revenue product. The marginal revenue product can be assumed to be falling. More capital should be used until the marginal revenue product falls to the marginal cost of capital. After that point extra capital would be costing more than it added to revenue.

Question 2

A primary market in capital is where shareholders sell shares to others.

Accepted Answer

A) True 
 B)False  FALSE

Question 3

The supply of capital curve for an individual firm is

Accepted Answer

A)  more elastic than the market supply. 
B)  derived from the marginal revenue product of capital. 
C)  vertical. 
D)  less elastic than the market supply. 
A)  more elastic than the market supply. 
B)  derived from the marginal revenue product of capital. 
C)  vertical. 
D)  less elastic than the market supply. A

Question 4

What are the main roles of the financial sector?

Accepted Answer

The financial sector:
• provides expert

Question 5

The marginal efficiency of capital can also be defined as the

Accepted Answer

A)  compound interest rate. 
B)  rate of discount. 
C)  internal rate of return. 
D)  NPV of an investment. 
A)  compound interest rate. 
B)  rate of discount. 
C)  internal rate of return. 
D)  NPV of an investment.

Question 6

Why does the cost of equity rise as a firm increases it debt to equity ratio?

Accepted Answer

The reason is that interest on debt (i.e

Question 7

Bank lending for investment purposes may decline during a recession because

Accepted Answer

A)  the demand for funds declines. 
B)  there is a surplus of funds. 
C)  banks become more cautious. 
D)  A and C 
A)  the demand for funds declines. 
B)  there is a surplus of funds. 
C)  banks become more cautious. 
D)  A and C

Question 8

If the stock market works in a way that prevents share prices moving in cycles, this is called

Accepted Answer

A)  semi- strong efficiency. 
B)  weak efficiency. 
C)  short- termism. 
D)  strong efficiency. 
A)  semi- strong efficiency. 
B)  weak efficiency. 
C)  short- termism. 
D)  strong efficiency.

Question 9

A secondary capital market is where shareholders sell their existing shares to others.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is not a role played by the financial sector?

Accepted Answer

A)  Exchange rate management/manipulation 
B)  Risk transformation 
C)  Intermediary between borrowers and lenders 
D)  Offering expertise in channelling funds 
A)  Exchange rate management/manipulation 
B)  Risk transformation 
C)  Intermediary between borrowers and lenders 
D)  Offering expertise in channelling funds

Question 11

In the UK long- term finance for industry has, for many years, come mainly from

Accepted Answer

A)  merchant banks. 
B)  the issue of shares and bonds. 
C)  venture capitalists. 
D)  commercial banks. 
A)  merchant banks. 
B)  the issue of shares and bonds. 
C)  venture capitalists. 
D)  commercial banks.

Question 12

Assume that a tool hire company already has a stock of tools. Which of the following are opportunity costs of hiring out the tools?
(i) Maintenance costs of the equipment
(ii) The cost of replacing the equipment
(iii) The depreciation of the equipment due to ageing
(iv) The depreciation of the equipment due to wear and tear
(v) Handling costs associated with hiring out the equipment

Accepted Answer

A)  (ii), (iii) and (v) 
B)  (i), (ii) and (iii) 
C)  (iii) and (v) 
D)  (i), (iv) and (v) 
E)  (i), (ii), (iii) and (v) 
A)  (ii), (iii) and (v) 
B)  (i), (ii) and (iii) 
C)  (iii) and (v) 
D)  (i), (iv) and (v) 
E)  (i), (ii), (iii) and (v)

Question 13

The extent to which a company relies on debt as opposed to equity finance is called

Accepted Answer

A)  the gearing ratio. 
B)  the debt/equity ratio. 
C)  leverage. 
D)  the risk premium. 
A)  the gearing ratio. 
B)  the debt/equity ratio. 
C)  leverage. 
D)  the risk premium.

Question 14

If the stock market works in a way which results in share prices reflecting private and public information about a company, this is called strong efficiency.

Accepted Answer

A) True 
 B)False

Question 15

What does efficiency mean in the context of the stock market?

Accepted Answer

Efficiency of the stock market is the ex

Question 16

What are the main sources of short- , medium- and long- term business finance?

Accepted Answer

Short- term finance is often a short- te

Question 17

What are the risks of investment?

Accepted Answer

An investment is made with the goal of e

Question 18

In the UK, long- term finance for industry has, for many years, come mainly from the issue of shares and bonds.

Accepted Answer

A) True 
 B)False

Question 19

Risk transformation involves increasing the risk of an investor's portfolio.

Accepted Answer

A) True 
 B)False

Question 20

Explain the present value approach to investment appraisal?

Accepted Answer

In the simplest case the cost of capital

Exam 19: Investment and the Employment of Capital

What is the profit- maximising rule for the employment of capital?

A primary market in capital is where shareholders sell shares to others.

The supply of capital curve for an individual firm is

What are the main roles of the financial sector?

The marginal efficiency of capital can also be defined as the

Why does the cost of equity rise as a firm increases it debt to equity ratio?

Bank lending for investment purposes may decline during a recession because

If the stock market works in a way that prevents share prices moving in cycles, this is called

A secondary capital market is where shareholders sell their existing shares to others.

Which of the following is not a role played by the financial sector?

In the UK long- term finance for industry has, for many years, come mainly from

The extent to which a company relies on debt as opposed to equity finance is called

If the stock market works in a way which results in share prices reflecting private and public information about a company, this is called strong efficiency.

What does efficiency mean in the context of the stock market?

What are the main sources of short- , medium- and long- term business finance?

What are the risks of investment?

In the UK, long- term finance for industry has, for many years, come mainly from the issue of shares and bonds.

Risk transformation involves increasing the risk of an investor's portfolio.

Explain the present value approach to investment appraisal?

The Business Environment and Business Economics

Economics and the World of Business

Business Organisations

The Working of Competitive Markets

Business in a Market Environment

Demand and the Consumer

Demand and the Firm

Products, Marketing and Advertising

Costs of Production

Revenue and Profit

Profit Maximisation Under Perfect Competition and Monopoly

Profit Maximisation Under Imperfect Competition

An Introduction to Business Strategy

Alternative Theories of the Firm

Growth Strategy

The Small-Firm Sector

Pricing Strategy

Labour Markets, Wages and Industrial Relations

Reasons for Government Intervention in the Market

Government and the Firm

Government and the Market

Globalisation and Multinational Business

International Trade

Trading Blocs

The Macroeconomic Environment of Business

The Balance of Payments and Exchange Rates

Banking, Money and Interest Rates

Business Activity, Employment and Inflation

Demand-Side Policy

Supply-Side Policy

International Economic Policy

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