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

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%?

An individual with no investment opportunities has income of $15,000 in period 0 and income of $10,000 in period 1. If the interest rate is 7%, which of the following points is on the individual's consumption possibility line?

The separation theorem in financial markets is fundamental to allowing managers to maximize all shareholders wealth. Explain the separation theorem and how the financial markets provide for all different types of investors.

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

If the amount of money to be lent is exactly equal to the amount desired to be borrowed then the market is cleared at:

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

Diagrams illustrating the consumption choices for a corporation show the two period trade-off as originating in the northwest quadrant, or (-X, Y), because:

A financial instrument, by its possession, that entitles the holder to receive the payments are called:

A corporation has the following opportunity to invest in a project with a return of $42,000 in one period. The current investment is $46,9000. The financial market rate is 14%. -Graph and explain the investment choice the corporation should make. (Hint: Determine the NPV.)

The financial market rate is 5%. Graph and explain the investment choice the corporation should make. (Hint: Determine the NPV.) NPV = -42,000 + (46,900/1.05) = -

A corporation has the following opportunity to invest in a project with a return of $42,000 in one period. The current investment is $46,9000. The financial market rate is 14%. -If the corporation had cash on hand of $25,000 before raising any capital for the investment and the financial market rate is 9%. How much will the current shareholders earn.?

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?

An individual has income of $20,000 in period 0 and $42,000 in period 1. An investment opportunity that costs $15,000 in period 0 is worth $18,000 in period 1. The market interest rate is 6%. What is the maximum possible consumption in period 1 if the individual consumes $16,000 in period 0 and follows the NPV rule?

The first or basic principle of finance dictates that an individual will invest in a project if:

An individual has $60,000 income in period 0 and $30,000 income in period 1. If the individual desires to consume $19,000 in period 1 and the market interest rate is 8%, what is the maximum amount of consumption in period 0?

According to the net present value rule, an investment should be made if:

Financial markets develop to accommodate _________ between individuals.

The ray that connects the maximum one can consume in Year 0 with the maximum one can consume in Year 1 represents:

The following statement, that the value of an investment to an individual is not dependent on consumption preferences, is called the:

A corporation has the following opportunity to invest in a project with a return of $42,000 in one period. The current investment is $46,9000. The financial market rate is 14%. -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.)