Deck 14: Capital and Financial Markets

Question 1

In New York City,you need a license to drive a taxicab.Each license is valid for three years,and then it expires.The holder of a license can expect to earn $10,000 in profit each year.If the interest rate is 5 percent (0.05)per year,what is the value of a newly issued taxicab license? (Assume that each year's profit is received at the end of the year. )

A)$1,990.74
B)$10,000.00
C)$14,074.07
D)$27,232.48
E)$30,000.00

Answer 1

$27,232.48

Question 2

A new computer will generate $1,000 in net revenue for a firm during its first year,$500 during its second year,$250 during its third year,and nothing thereafter.If the interest rate is 10 percent (0.10)per year,what is the present value of the computer to the firm? (The first payment will be received at the end of this year. )

A)$1,590.91
B)$1,510.14
C)$1,750.00
D)$1,446.28
E)$1,661.16

Answer 2

$1,661.16

Question 3

You have a choice among three options.Option 1: receive $900 immediately.Option 2: receive $1,200 one year from now.Option 3: Receive $2,000 five years from now.The interest rate is 15 percent (0.15)per year.Rank these three options from highest present value to lowest present value.

A)Option 1,Option 2,Option 3
B)Option 3,Option 2,Option 1
C)Option 2,Option 3,Option 1
D)Option 3,Option 1,Option 2
E)Option 1,Option 3,Option 2

Answer 3

Option 2,Option 3,Option 1

Question 4

The marginal revenue product of capital is

A)the increase in output that results from employing one more unit of capital
B)the increase in profit that results from employing one more unit of capital
C)the increase in revenue that results from employing one more unit of labor
D)the increase in revenue that results from employing one more unit of capital
E)the increase in profits that results from employing one less unit of labor

Question 5

Suppose $X is the present value of $Y to be received next year.If you have $X and let it earn interest at r percent annually,how much money do you expect to have after one year?

A)$Y
B)$Y/(1 + r)
C)$Y(1 + r)
D)$X/(1 + r)
E)$X/r

Question 6

The amount of money that someone would pay today for the right to receive a future payment is called

A)the present value of the future payment
B)the determinate value of the future payment
C)the interest rate
D)the principal
E)the time discount

Question 7

You have a bond that you can redeem for $10,000 one year from now.The interest rate is 10 percent (0.10)per year.How much is the bond worth today?

A)$9,090.91
B)$10,000.00
C)$8,264.46
D)$9,523.81
E)$9,000.00

Question 8

A new pinball machine will generate $3,000 in additional revenue each year for a game arcade.It has a useful life of three years.Assume that each year's income is received at the end of the year.If the interest rate is 10 percent (0.10)per year,,what is the present value of a new pinball machine to the arcade?

A)$6,761.83
B)$8,181.82
C)$9,000.00
D)$7,460.56
E)$8,206.61

Question 9

A new business computer will generate net income of $1,000 this year,$800 next year,$400 the year after that,and nothing thereafter.Assume that each year's income is received at the end of the year.What is the maximum amount a firm would be willing to pay for the computer?

A)more than $2,200
B)$2,200
C)$1,000
D)between $1,000 and $2,200
E)less than $1,000

Question 10

Any long-lasting tool that people use to produce goods and services is called

A)a product
B)machinery
C)capital
D)equipment
E)labor assistance

Question 11

A firm's choice about how much physical capital to employ differs from its choice of how much labor to employ because

A)the firm has to pay for its capital
B)the productivity of labor depends on the firm's production function
C)firm must compare the marginal costs and benefits of acquiring more capital
D)firms do not own the labor they employ,but they frequently purchase capital outright
E)labor is productive but capital is not

Question 12

A formalwear shop will earn a net income of $1,500 per year on a tuxedo.A tuxedo is good for two years,after which it will be worn out and worthless.If the interest rate is 10 percent (0.10)per year,what is the present value of a new tuxedo to the shop? (Assume that each year's income is received at the end of the year. )

A)$148.76
B)$2,955.30
C)$2,955.59
D)$2.603.31
E)$3,000.00

Question 13

If the interest rate is 5 percent (0.05)per year,what is the present value of $3,000 to be received two years from now?

A)$2,850.00
B)$3,000.00
C)$2,707.50
D)$2,721.09
E)$2,857.14

Question 14

Which of the following changes would increase the present value of a future payment?

A)a decrease in the size of the payment
B)a decrease in the certainty of the payment actually being received
C)an increase in the amount of time that elapses before receiving the payment
D)a decrease in the interest rate
E)none of the above

Question 15

The additional revenue a firm obtains from employing one more unit of capital is called the

A)marginal revenue product of capital
B)total product of capital
C)marginal product of capital
D)production function
E)marginal product of labor

Question 16

The table below shows the total number of loaves of bread a bakery can bake per year with different numbers of ovens.The market for bread is perfectly competitive,with a market price of $2 per loaf.What is the marginal revenue product of the third oven?

A)$1,200
B)2,400 loaves of bread
C)$4,800
D)600 loaves of bread
E)$1,600

Question 17

If the interest rate at which you can lend funds is r percent per year,then the present value of Y dollars to be received next year is

A)(1 + r)Y
B)Y / r
C)Y
D)Y - r
E)Y / (1 + r)

Question 18

A snowplow will generate a net income of $2,000 per year for its owner.After 8 years,the plow will break down and have zero value.The maximum amount of money anyone would pay for the plow is

A)less than $2,000
B)$2,000
C)between $2,000 and $16,000
D)$16,000
E)more than $16,000

Question 19

You have a bond that you can redeem for $10,000 one year from now.The interest rate is 3 percent (0.03)per year.How much is the bond worth today?

A)$9,090.91
B)$10,000.00
C)$8,264.46
D)$9,708.74
E)$9,000.00

Question 20

A car rental company will earn a net income of $6,000 per year on a new car for the first three years of its life.After three years,the car will be worthless.If the interest rate is 10 percent (0.10)per ear,what is the present value of the car to the car rental company? (Assume that each year's income is received at the end of the year. )

A)$16,413.22
B)$14,921.11
C)$18,000.00
D)$16,363.62
E)$13,523.67

Question 21

A new file cabinet will generate $300 in net revenue each year for a Data Storage Co.The file cabinet has a useful life of two years.At the end of the second year,the cabinet will be sold as scrap metal for $200.If the interest rate is 10 percent (0.10)per year,what is the present value of the file cabinet to Data Storage Co.? (Assume that each year's revenue is received at the end of the year. )

A)$500
B)$600
C)$800
D)$1,000
E)none of the above

Question 22

If each additional unit of capital increases a firm's yearly output by a smaller amount than the previous unit of capital,and other inputs are held constant,then the firm is experiencing

A)diminishing returns to scale
B)negative marginal productivity of capital
C)diminishing marginal productivity of capital
D)capital depreciation
E)diminishing marginal productivity of labor

Question 23

The table below describes a lawn mowing company's revenues from different numbers of lawn mowers.If the price of a lawn mower is $2,000,how many mowers should the company buy?

A)0
B)2
C)3
D)4
E)5

Question 24

The table below shows the present value of beds for a city hospital,at different interest rates.For either interest rate,notice that the present value of each additional bed is less than the present value of the previous bed.What most likely accounts for this fact?

A)diminishing returns to scale
B)diminishing marginal productivity of capital
C)an increased interest rate
D)increased time waiting for the revenue to be received
E)depreciation and lack of maintenance

Question 25

The table below shows the total number of tickets a movie theater can sell per year with different numbers of screens.The market for movie tickets is perfectly competitive,with a market price of $8 per ticket.What is the marginal revenue product of the second screen?

A)50,000 tickets
B)$240,000
C)$400,000
D)125,000 tickets
E)$1,000,000

Question 26

The table below shows the present value of additional revenue from cash registers at a fast food restaurant.If the price of a cash register is $700,what will be the restaurant's total investment expenditure on cash registers?

A)$3,500.00
B)$4,545.93
C)$1,400.00
D)$3,409.45
E)$2,100.00

Question 27

The table below shows the total present value of additional revenue from DVD players at Video Wizard,a business that rents audiovisual equipment.If the price of a DVD player is $450,what will be Video Wizard's total investment expenditure on cash registers?

A)$900.00
B)$1,800.00
C)$578.25
D)$3,469.48
E)$2,250.00

Question 28

A shipping company can buy either a new truck or a used truck.Each truck will generate $4,000 in net revenue per year.But the new truck has a useful life of three years,whereas the used truck has a useful life of only two years.If the interest rate is 5 percent (0.05)per year,what is the difference in value between the two trucks? (Assume that each year's revenue is received at the end of the year. )

A)$0
B)$4,000.00
C)$3,455.35
D)$1,185.19
E)$8,000.00

Question 29

A higher interest rate will lead a firm to purchase less capital because the higher interest rate

A)lowers the marginal product of capital goods
B)causes technological change to cease
C)lowers the present value of capital goods
D)causes economies of scale to be exhausted
E)causes the capital market become monopolized

Question 30

A new moving van will increase a moving company's yearly revenue by $15,000.Its useful life is three years.If the interest rate is 10 percent (0.1)per year,which of the following is the highest price the firm would be willing to pay for the van? Assume that each year's revenue is received at the end of the year.(Answers are rounded to the nearest $100. )

A)$15,000
B)$20,000
C)$37,300
D)$44,100
E)$45,000

Question 31

The relationship between the marginal product of capital (MPK),the product price (P),and marginal revenue product of capital (MRP_K)in a perfectly competitive market is

A)MP_K = P × MRP_K
B)MP_K = P + MRP_K
C)MRP_K = P/MP_K
D)MRP_K = P × MP_K
E)MRP_K = P + MP_K

Question 32

Which of the following is not a financial asset?

A)a corporate bond
B)a piece of real estate
C)an IOU
D)a share of Coca-Cola stock
E)a Treasury bond

Question 33

The table below describes a lawn mowing company's revenues from different numbers of lawn mowers.If the price of a lawn mower is $1,200,how many mowers should the company buy?

A)0
B)2
C)3
D)4
E)5

Question 34

The table below shows the present value of beds for a city hospital,at different interest rates.The price of each bed is $800.If the interest rate decreases from 15 percent (0.15)to 5 percent (0.05)per year,how will the hospital's capital expenditure change?

A)decrease by $138.19
B)increase by $276.39
C)increase by $800
D)increase by $631.04
E)decrease by $1,600

Question 35

The table below shows the total number of loaves of bread a bakery can bake per year with different numbers of ovens.The market for bread is perfectly competitive,with a market price of $2 per loaf.For which oven is the value of marginal product equal to $1400?

A)oven 1
B)oven 2
C)oven 3
D)oven 4
E)none of the ovens has value of marginal product equal to $1400

Question 36

The table below describes an amusement park's revenues from different numbers of batting cages.If the price of constructing a new batting cage is $6,000,how many cages should the park construct?

A)0
B)2
C)3
D)4
E)5

Question 37

According to the principle of asset valuation,the value of any asset is equal to

A)the sum of all the future benefits it generates
B)the revenue it generates during its first year
C)the sum of the present values of all the future net benefits it generates
D)the ratio of its final year's benefits to its price
E)the sum of all future benefits it generates minus its price

Question 38

The principle of asset valuation applies to

A)physical capital
B)natural resources
C)human capital
D)stocks and bonds
E)all of the above

Question 39

A decrease in the interest rate is represented by

A)a leftward shift of a firm's investment curve
B)a rightward shift of a firm's investment curve
C)a movement along a firm's investment curve,upward and to the left
D)a movement along a firm's investment curve,downward and to the right
E)a movement along a firm's investment curve,upward and to the right

Question 40

Other things equal,an increase in the interest rate will

A)decrease firms' investment expenditures
B)increase the standard of living in the economy
C)increase of the present value of capital good
D)increase firms' investment expenditures
E)encourage production of durable goods

Question 41

If a bond is sold in the secondary market,

A)the issuing firm is buying back its own bond
B)the issuing firm does not obtain any part of the price
C)the seller remits a portion of the price to the issuing firm
D)the yield must be insufficient to justify sale on the primary market
E)the seller is the issuing firm

Question 42

Which of the following states the relationship between a bond's price and its yield?

A)As the price falls,the yield falls.
B)Price and yield are usually independent of each other.
C)As the price rises,the yield rises.
D)As the price rises,the yield falls.
E)As the yield rises,so does the price.

Question 43

A bond with a face value of $10,000 (and no coupon payments)is always worth

A)$10,000
B)less than $10,000 before the maturity date
C)more than $10,000 if the interest rate is high enough
D)$10,000 on the date of purchase
E)$9,090.91 two years before the maturity date

Question 44

What would you pay for a newly issued 10-year bond with face value of $10,000 and no coupon payments? Assume the interest rate is 5 percent (0.05)per year.

A)$0
B)$6,139.13
C)$10,000
D)$95,632.41
E)$100,000.00

Question 45

Which of the following will lower the present value of a bond?

A)a fall in the interest rate
B)an increase in the principal
C)a shorter time to maturity
D)an increased risk of default
E)none of the above

Question 46

Your aunt gives you a PepsiCo bond with face value of $5,000.It will mature in two years.Currently,the interest rate is 10 percent (0.10)per year.How will the value of the bond change if the interest rate falls to 5 percent tomorrow morning?

A)It will rise by $413.22.
B)It will rise by $402.90.
C)It will rise by $432.90.
D)It will fall by $432.90.
E)It will fall by $402.92.

Question 47

You are thinking of purchasing a 5-year bond,with a face value of $8,000,on the secondary bond market.The bond was issued three years ago,so it will mature two years from today.If the interest rate is 10 percent (0.10)per year,what is the value of the bond?

A)$6,611.57
B)$8,000.00
C)$4,967.37
D)$6,010.52
E)$7,272.73

Question 48

A financial asset is

A)a unit of physical capital with a positive market value
B)any asset that generates a stream of income
C)a share in the ownership of a productive enterprise
D)a form of money
E)a promise to pay future income in some form

Question 49

A newly issued bond with a face value of $12,000 and no coupon payments is priced at $9,000.The bond will mature in one year.What is the yield on this bond?

A)33.3 percent
B)25 percent
C)$3,000
D)$1,909.09
E)It depends on the interest rate

Question 50

A newly issued bond with a face value of $8,000 and no coupon payments is priced at $7,000.The bond will mature in one year.What is the yield on this bond?

A)$1,000
B)12.5 percent
C)14.3 percent
D)$272.73
E)It depends on the interest rate

Question 51

The key difference between the primary and secondary bond markets is that __________ bonds are traded on the primary market,while __________ bonds are traded on the secondary market.

A)newly issued;previously issued
B)government;corporate
C)more valuable;less valuable
D)low risk;high risk
E)high yield;low yield

Question 52

You are thinking of buying a 10-year bond on the secondary bond market.The face value of the bond is $10,000,the interest rate is 5 percent (0.05)per year,and the bond was issued exactly eight years ago.What is the value of the bond today?

A)$5,295.43
B)$9,070.30
C)$10,000.00
D)$20,000.00
E)$100,000.00

Question 53

Consider three bonds,from Corporation X,Corporation Y,and Corporation Z.The X and Y bonds mature in 1 year,while the Z bond matures in 2 years.The Y and Z bonds have face values of $5,000,while the X bond has a face value of $4,000.If the interest rate is 10 percent (0.10)per year,rank the three bonds from highest present value to lowest present value.

A)X,Y,Z
B)Z,Y,X
C)Y,Z,X
D)Z,X,Y
E)Y,X,Z

Question 54

You have two bonds,both with a face value of $7,000.One of them matures one year from today,while the other matures one year after that.If the interest rate is 8 percent (0.08)per year,what is the difference in value between the two bonds?

A)$480.11
B)$578.52
C)$317.46
D)zero
E)$925.92

Question 55

You are thinking of buying a newly issued,5-year bond that has a face value of $10,000 and offers no annual coupon payments.What is the most you should pay for this bond,if the interest rate is 5 percent (0.05)per year?

A)$5,000.00
B)$6,139.13
C)$7,835.26
D)$10,000.00
E)$43,294.77

Question 56

The interest rate on U.S.government securities is often called the

A)prime rate
B)public discount
C)riskless rate
D)superior rate
E)universal discount

Question 57

What is the value of a newly issued 3-year bond with a face value of $5,000 and no coupon payments? Assume the interest rate is 8 percent (0.08)per year.

A)$4,629.63
B)$5,000.00
C)$3,969.16
D)$3,756.57
E)$4,545.45

Question 58

What is the value of a newly issued 10-year bond with face value of $10,000 and no coupon payments? Assume the interest rate is 7 percent (0.07)per year.

A)$0
B)$5,083.49
C)$10,000
D)$95,632.41
E)$100,000.00

Question 59

Which of the following will increase the yield on a bond?

A)a reduction principal
B)an increased risk of default
C)an increase in the bond's price
D)a reduced risk of default
E)none of the above

Question 60

Microsoft issues a 2-year bond with a face value of $5,000.In addition to the principal paid at maturity,the bond has 2 annual coupon payments of $500 each,to be received at the end of the first and second year respectively.If the interest rate is 10 percent (0.10)per year,what is the value of the newly issued bond?

A)$5,000.00
B)$6,000.00
C)$5,886.68
D)$4,901.48
E)$41.32

Question 61

Which of the following would increase the value of a firm's stock?

A)a decrease in the firm's present profit
B)a decrease in the anticipated growth rate of future profits
C)an increase in the perceived riskiness of future profits
D)a fall in the interest rate
E)an anticipated increase in the interest rate

Question 62

The total value of dividends paid out to shareholders by a firm is equal to

A)its total after-tax profits
B)its total after-tax profits minus its retained earnings
C)its total after-tax profits minus its bond payments
D)its total after-tax profits plus its retained earnings
E)the present value of the firm

Question 63

Agrophonic.com has issued 80 million shares of stock.You own 5 million of them.You also own Agrophonic.com bonds with a present value of $1 million.What percentage of Agrophonic.com do you own?

A)zero
B)7.1%
C)6.3%
D)5.9%
E)4.7%

Question 64

When the demand for alternative investments increases,the market for a particular bond adjusts by

A)having the supply of that bond increase.
B)having the supply of that bond decrease.
C)having the demand for that bond increase.
D)having the demand for that bond decrease.

Question 65

The price/earnings (PE)ratio of a stock is found by

A)dividing the most recent year's dividend by the current stock price
B)dividing the current stock price by the after-tax profit per share
C)dividing the most recent year's dividend by retained earnings
D)dividing the current stock price by the Dow Jones Industrial Average
E)dividing the current stock price by the present value of the firm

Question 66

Which of the following types of bond typically has the highest yields? (The letters are Moody's ratings. )

A)a federal government bond
B)a corporate bond rated Aaa
C)a corporate bond rated Aa
D)a corporate bond rated A
E)a corporate bond rated Baa

Question 67

Crazy Cryptography is a software corporation that has 1,000 shares of stock in existence.The corporation has just surprised the market by announcing a new software package that will increase the company's after-tax profit by $500,000 each year,forever.If the interest rate is 8 percent (0.08)per year,by how much will the value of a single share of stock increase?

A)$500.00
B)$6,250.00
C)$5,000.00
D)$10,000.000
E)$8,333.33

Question 68

Xanadu Corp.has issued 90 million shares of stock,and it has no plans to issue any more in the near future.If the demand for Xanadu stock increases,

A)the price and quantity of Xanadu stock will both increase
B)the price and quantity of Xanadu stock will both decrease
C)the price will remain constant,and the quantity of Xanadu stock will increase
D)the quantity of Xanadu stock will remain constant,and the price will increase
E)the price will increase,and the quantity of Xanadu stock will decrease

Question 69

If you own 10% of the shares of a corporation's stock,and the corporation is expected to earn $9 million a year in after-tax profits forever,and the interest rate is 0.05,what is the value of your shares?

A)$18 million
B)$900,000
C)$9 million
D)$6 million
E)$180 million

Question 70

The payments made to shareholders from a firm's profits are called

A)owner subsidies
B)principal
C)coupon payments
D)retained earnings
E)dividends

Question 71

When the demand for alternative investments decreases,the market for a particular bond adjusts by

A)having the supply of that bond increase.
B)having the supply of that bond decrease.
C)having the demand for that bond increase.
D)having the demand for that bond decrease.

Question 72

The demand curve for shares of a stock is typically

A)downward sloping,because people calculate present value according to different expectations and attitudes toward risk
B)vertical,because only a fixed number of shares of stock are available
C)horizontal,because everyone values the stock according to its present value
D)upward sloping,because a higher stock price signals to potential shareholders that the firm is more valuable
E)horizontal,because no one is willing to pay more than the market price

Question 73

On a secondary stock market,such as the New York Stock Exchange,

A)firms sell new issues of stock
B)firms make initial public offerings
C)previously issued bonds are sold and resold
D)previously issued shares of corporations are sold and resold
E)firms sell newly issued bonds

Question 74

When the market estimate of a company's riskiness increases the market adjusts by

A)having the supply of that bond increase.
B)having the supply of that bond decrease.
C)having the demand for that bond increase.
D)having the demand for that bond decrease.

Question 75

Stretchy Socks,Inc. ,is expected to earn $2,000,000 in after-tax profits each year forever.The interest rate is 0.1.What is the total value of all shares of stock in Stretchy Socks?

A)$1,818,182
B)$2,000,000
C)$16,528,926
D)$18,181,818
E)$20,000,000

Question 76

Which of the following is a correct statement about bond prices,other things equal?

A)a lower face value leads to a higher bond price
B)a higher risk of default leads to a higher bond price
C)a higher risk of default leads to a lower yield
D)fewer coupon payments lead to a higher bond price
E)a higher price leads to a lower yield

Question 77

Elena Johnson owns 100 shares of Funky Foods,which has 100,000 shares of stock outstanding.Funky Foods is expected to earn $1 million in after-tax profits every year forever.The interest rate is 5 percent (0.05)per year.According to the principle of asset valuation,what is the value of Elena's shares?

A)$200,000
B)$10,000
C)$20,000
D)$100,000
E)$2,000

Question 78

A corporation that specializes in owning shares of stock in other corporations is called a

A)secondary market
B)mutual fund
C)stock broker
D)second hander
E)day trader

Question 79

The key difference between a share of stock and a bond is that

A)a share of stock is a riskless asset
B)the holder of a bond receives only one future payment
C)the holder of a share stock has a share in the ownership of a firm
D)bonds are issued only by the government,while stock is issued only by corporations
E)there are secondary markets for stocks,but not for bonds

Question 80

When the market estimate of a company's riskiness decreases the market adjusts by

A)having the supply of that bond increase.
B)having the supply of that bond decrease.
C)having the demand for that bond increase.
D)having the demand for that bond decrease.