Question 1

A firm has three different investment options. Option A will give the firm $10 million at the end of one year, $10 million at the end of two years, and $10 million at the end of three years. Option B will give the firm $15 million at the end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option C will give the firm $30 million at the end of one year, and nothing thereafter. Which of these options has the highest present value?

Accepted Answer

A)   Option A
B)   Option B
C)   Option C
D)   The answer depends on the rate of interest, which is not specified here.E) B) and D)
F) B) and C)

Question 2

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Accepted Answer

A) True 
 B)False

Question 3

Other things the same, an increase in the interest rate makes the quantity of loanable funds demanded

Accepted Answer

A)   rise, and investment spending rise.
B)   rise, and investment spending fall.
C)   fall, and investment spending rise.
D)   fall, and investment spending fall.E) All of the above
F) A) and D)

Question 4

Fundamental analysis shows that stock in "Night and Day" fitness centers has a price below its present value.

Accepted Answer

A)   This stock is undervalued; you should consider adding it to your portfolio.
B)   This stock is undervalued; you shouldn't consider adding it to your portfolio.
C)   This stock is overvalued; you should consider adding it to your portfolio.
D)   This stock is overvalued; you shouldn't consider adding it to your portfolio.E) A) and D)
F) A) and C)

Question 5

Allen Steel Company is considering whether to build a new mill. If the interest rate rises,

Accepted Answer

A)   the present value of the returns from the mill will fall, so Allen will be less likely to build the mill.
B)   the present value of the returns from the mill will fall, so Allen will be more likely to build the mill.
C)   the present value of the returns from the mill will rise, so Allen will be less likely to build the mill.
D)   the present value of the returns from the mill will rise, so Allen will be more likely to build the mill.E) C) and D)
F) A) and B)

Question 6

Figure 27-5. The figure shows a utility function for Dexter. 
-Refer to Figure 27-5. From the appearance of the utility function, we know that

Accepted Answer

A)   Dexter is risk averse.
B)   Dexter gains less satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars.
C)   the property of diminishing marginal utility does not apply to Dexter.
D)   All of the above are correct.E) B) and D)
F) None of the above

Question 7

The You Look Marvelous! cosmetic company is considering building a new shampoo factory. Its accountants and board of directors meet and decide that it is not a good idea to build the factory. If interest rates fall after the meeting

Accepted Answer

A)   the present value of the factory rises. It's more likely the company will build the factory.
B)   the present value of the factory rises. It's less likely the company will build the factory.
C)   the present value of the factory falls. It's more likely the company will build the factory.
D)   the present value of the factory falls. It's less likely the company will build the factory.E) C) and D)
F) A) and D)

Question 8

The market for insurance is an example of diversification.

Accepted Answer

A) True 
 B)False

Question 9

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Accepted Answer

A)   rises, so investment spending rises.
B)   falls, so investment spending rises.
C)   rises, so investment spending falls.
D)   falls, so investment spending falls.E) A) and B)
F) B) and C)

Question 10

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Accepted Answer

Bill's behavior illu...

Question 11

At which interest rate is the present value of $196.85 three years from today equal to $175 today?

Accepted Answer

A)   2 percent
B)   4 percent
C)   6 percent
D)   8 percentE) A) and C)
F) B) and C)

Question 12

According to the efficient markets hypothesis, stocks follow a random walk so that stocks that increase in price one year are more likely to increase than decrease in the next year.

Accepted Answer

A) True 
 B)False

Question 13

Phillip is a mortgage broker, who is paid by commission. When interest rates decline, he does a lot of business and earns a lot of money, as more people buy houses or refinance their mortgages. But when interest rates rise, business falls substantially. To diversify, Phillip should choose investments that

Accepted Answer

A)   provide a higher return than the market average.
B)   provide a lower return than the market average.
C)   pay higher returns when interest rates rise and lower returns when interest rates fall.
D)   pay lower returns when interest rates rise and higher returns when interest rates fall.E) B) and C)
F) All of the above

Question 14

Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.

Accepted Answer

A)   This stock is overvalued; you should consider adding it to your portfolio.
B)   This stock is overvalued; you shouldn't consider adding it to your portfolio.
C)   This stock is undervalued; you should consider adding it to your portfolio.
D)   This stock is undervalued; you shouldn't consider adding it to your portfolio.E) A) and C)
F) None of the above

Question 15

Which, if any, of the present values below are computed correctly?

Accepted Answer

A)   A payment of $100 to be received one year from today, with a 2 percent interest rate, has a present value of $98.81.
B)   A payment of $200 to be received two years from today, with a 3 percent interest rate, has a present value of $188.52.
C)   A payment of $300 to be received three years from today, with a 4 percent interest rate, has a present value of $234.34.
D)   None of the above are correct to the nearest cent.E) None of the above
F) B) and D)

Question 16

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $500 for ten years, you will have about $983.58. If your accountant is correct, what is the current rate of interest?

Accepted Answer

A)   5 percent
B)   6 percent
C)   7 percent
D)   8 percentE) B) and C)
F) A) and D)

Question 17

If the interest rate is 4.5 percent, what is the present value of a payment of $500 to be made one year from today?

Accepted Answer

A)   $457.14
B)   $468.02
C)   $478.47
D)   None of the above are correct to the nearest cent.E) B) and C)
F) A) and D)

Question 18

The efficient markets hypothesis implies that

Accepted Answer

A)   building a portfolio based on a published list of the "most respected" companies is likely to produce a better­ than-average return.
B)   if a stock rose in price last year, it is likely to rise in price this year.
C)   managed mutual funds should generally outperform indexed mutual funds.
D)   None of the above are correct.E) C) and D)
F) A) and B)

Question 19

During a financial crisis the possibility of bank failures rose. An increase in the likelihood of a bank failing shifts demand for its stock

Accepted Answer

A)   right, so the price rises.
B)   right, so the price falls.
C)   left, so the price rises.
D)   left, so the price falls.E) B) and D)
F) A) and C)

Question 20

At which interest rate is the present value of $95.40 one year from today equal to $90 today?

Accepted Answer

A)   4 percent
B)   5 percent
C)   6 percent
D)   7 percentE) A) and B)
F) A) and C)

Exam 9: The Basic Tools of Finance

Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.

Correct Answer
verified

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $500 for ten years, you will have about $983.58. If your accountant is correct, what is the current rate of interest?

Correct Answer
verified

At which interest rate is the present value of $196.85 three years from today equal to $175 today?

Correct Answer
verified

At which interest rate is the present value of $95.40 one year from today equal to $90 today?

Correct Answer
verified

Which, if any, of the present values below are computed correctly?

Correct Answer
verified

Fundamental analysis shows that stock in "Night and Day" fitness centers has a price below its present value.

Correct Answer
verified

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Correct Answer
verified
Bill's behavior illu...
View Answer

Other things the same, an increase in the interest rate makes the quantity of loanable funds demanded

Correct Answer
verified

During a financial crisis the possibility of bank failures rose. An increase in the likelihood of a bank failing shifts demand for its stock

Correct Answer
verified

Allen Steel Company is considering whether to build a new mill. If the interest rate rises,

Correct Answer
verified

Correct Answer
verified

The efficient markets hypothesis implies that

Correct Answer
verified

If the interest rate is 4.5 percent, what is the present value of a payment of $500 to be made one year from today?

Correct Answer
verified

The You Look Marvelous! cosmetic company is considering building a new shampoo factory. Its accountants and board of directors meet and decide that it is not a good idea to build the factory. If interest rates fall after the meeting

Correct Answer
verified

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Correct Answer
verified

Correct Answer
verified

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Correct Answer
verified

According to the efficient markets hypothesis, stocks follow a random walk so that stocks that increase in price one year are more likely to increase than decrease in the next year.

Correct Answer
verified

The market for insurance is an example of diversification.

Correct Answer
verified

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. From the appearance of the utility function, we know that

Correct Answer
verified

Exam 9: The Basic Tools of Finance

Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.

Correct AnswerverifiedShow Answer

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $500 for ten years, you will have about $983.58. If your accountant is correct, what is the current rate of interest?

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $196.85 three years from today equal to $175 today?

Correct AnswerverifiedShow Answer

At which interest rate is the present value of $95.40 one year from today equal to $90 today?

Correct AnswerverifiedShow Answer

Which, if any, of the present values below are computed correctly?

Correct AnswerverifiedShow Answer

Fundamental analysis shows that stock in "Night and Day" fitness centers has a price below its present value.

Correct AnswerverifiedShow Answer

Bill gets medical insurance and then exercises less. Lilly has health concerns and so applies for medical insurance. Identify each of these as moral hazard or adverse selection.

Correct AnswerverifiedBill's behavior illu...View AnswerShow Answer

Other things the same, an increase in the interest rate makes the quantity of loanable funds demanded

Correct AnswerverifiedShow Answer

During a financial crisis the possibility of bank failures rose. An increase in the likelihood of a bank failing shifts demand for its stock

Correct AnswerverifiedShow Answer

Allen Steel Company is considering whether to build a new mill. If the interest rate rises,

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The efficient markets hypothesis implies that

Correct AnswerverifiedShow Answer

If the interest rate is 4.5 percent, what is the present value of a payment of $500 to be made one year from today?

Correct AnswerverifiedShow Answer

The You Look Marvelous! cosmetic company is considering building a new shampoo factory. Its accountants and board of directors meet and decide that it is not a good idea to build the factory. If interest rates fall after the meeting

Correct AnswerverifiedShow Answer

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

Correct AnswerverifiedShow Answer

According to the efficient markets hypothesis, stocks follow a random walk so that stocks that increase in price one year are more likely to increase than decrease in the next year.

Correct AnswerverifiedShow Answer

The market for insurance is an example of diversification.

Correct AnswerverifiedShow Answer

Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. From the appearance of the utility function, we know that

Correct AnswerverifiedShow Answer

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Bill's behavior illu...
View Answer

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