Question 1

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.

Question 2

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.

Question 3

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 answer of An individual has income of $10,000 in...

Question 4

You have an investment opportunity available to you that requires $400,000. You have no funds available but you will have income of $120,000 this year. The investment will have a payoff $433,000 at the end of the year. If the market rate is 8.25% what is the net present value?

Accepted Answer

A)  $33,000. 
B)  $433,000 
C)  $0.00 
D)  $23,100 
E)  $30,485.

Question 5

You have an investment opportunity available to you that requires $400,000. You have no funds available but you will have income of $120,000 this year. The investment will have a net payoff $33,000 at the end of the year. If the market rate is 7.5% will you make the investment?

Accepted Answer

A)  No, because I need $280,000 more than I will have 
B)  Yes, because I will $3,000 above my required return. 
C)  No, because I only get $33,000 back on my $400,000. 
D)  Yes, because the market rate is less than the borrowing rate.

Question 6

Suppose that the market interest rate falls to 5%. What is the maximum possible consumption in period 1 if the individual takes on the optimal set of investment projects?

Accepted Answer

The answer of Suppose that the market interest rate falls...

Question 7

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?

Accepted Answer

The answer of If the market interest rate is 11%,...

Question 8

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.

Question 9

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

Question 10

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.

Question 11

An individual has income of $15,000 in period 0 and $20,000 in period 1. An investment opportunity that costs $10,000 in period 0 is worth $11,500 in period 1. The market interest rate is 8%. What is the maximum possible consumption in period 0 if the individual consumes $26,000 in period 1?

Accepted Answer

The answer of An individual has income of $15,000 in...

Question 12

Which of the following statements is(are) 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.

Question 13

A lender with no investment opportunities has equal income in period 0 and in period 1. Which of the following correctly describes the consequence of an increase in the interest rate?

Accepted Answer

A)  Consumption in period 0 stays the same while consumption in period 1 decreases. 
B)  Consumption in period 0 stays the same while consumption in period 1 increases. 
C)  Consumption in period 0 increases while consumption in period 1 decreases. 
D)  Consumption in period 0 increases while consumption in period 1 increases.

Question 14

One of the functions of financial intermediaries is to make sure the market clears. This me

Accepted Answer

A)  setting the appropriate interest rates 
B)  recording the parties to the transactions 
C)  making sure the total amount to be lent equals the total amount to be borrowed 
D)  minimizing the spread between rates

Question 15

When lenders and borrowers are satisfied the financial markets will clear at

Accepted Answer

A)  the treasury bill rate of interest. 
B)  the equilibrium rate of interest. 
C)  the federal funds rate of interest. 
D)  several different rates of interest under certainty.

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