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75 Cards in this Set
- Front
- Back
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1.
The preference of consuming goods today instead of wait to consume those goods in the future is the basis for time value of money. A. True B. False |
T
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2.
The future value of a lump sum of money using a simple interest calculation and a compounded interest calculation will provide the same result in one period's time. A. True B. False |
t
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3.
As the discount rate increases, the present value of a one-time future cash flow increases. A. True B. False |
f
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4.
Using the“Rule of 72” is always an accurate way to measure the length of time to double a sum of money. A. True B. False |
f
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5.
Continuous compounding measures the effect that increasing the number of periods has on a future value. A. True B. False |
f
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6.
The present value of a one-time future cash flow: A. increases as the number of discount period increases B. is normally greater than the future cash flow C. depends on the number of period until the timing of the cash flow D. increases as the discount rate increases |
c
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7.
Generally, the future value of an investment will increase if: A. the investment involves more risk B. the investment is compounded at a higher interest rate C. the investment is compounded for fewer years D. the investment is discounted at a higher interest rate |
b
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8.
The present value of a single cash flow: A. increases as the discount rate decreases B. decreases as the discount rate decreases C. increases as the number of discount periods increases D. increases as the discount rate increases |
a
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9.
Which of the following is true? A. The future value of a cash flow will be greater if an investment earns 5% instead of 10% B. The future value of a cash flow will be unchanged by the rate of return that the investment earns C. The future value of a cash flow will be greater if an investment earns 12% instead of 6% D. The future value of a cash flow will be unchanged by the length of time that the funds are invested |
b
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10.
At 8%, compounded annually, how long will it take for $7,500 to double? A. 4 years B. 8 years C. 9 years D. 12 years |
c
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11.
At what rate must $400 be compounded annually for it to grow to $1432.80 in 10 years? A. 5 percent B. 6 percent C. 7 percent D. 8 percent |
b
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12.
Assume that two investments have the same number of years of generating cash flows; a high discount rate tends to favor: A. the investment with large cash flows early B. the investment with large cash flows late C. the investment with even cash flows D. neither investment is favored since they are over the same time period |
a
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13.
Dr. Kilic currently has $300,000 in a stock fund. The fund pays a 10% annual return. If he never makes another deposit into the account, how long will it take for the account to grow to $1 million? A. 23.33 years B. 12.63 years C. 33.33 years D. 16.66 years |
b
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14.
You just received a job offer from EG. You're excited because your dad started his career out of college with EG. If the salary offered to you is $30,000 annually, what would have been the salary offered to your dad 25 years ago if the annual inflation rate was 3.8%? A. $11,808.30 B. $1,140.00 C. $7,894.74 D. $76,217.57 |
a
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15.
Your parents have promised to give you $25,000 on your wedding day if you wait 10 years to get married. Your sister is getting married this year. What amount should she receive today to match your gift? The interest rate is 12%. A. $8,049 B. $10,000 C. $22,321 D. $25,000 |
a
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1.
A proper method to evaluate amongst different cash flow scenarios would be to compare the present values of each alternative. A. True B. False |
a
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2.
A series of equal cash flows made at the ends of periods is known as an annuity due. A. True B. False |
b
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3.
A proper method to find the monthly payment when inputs are given in annual terms is to first find the annual payment and then divide by 12. A. True B. False |
b
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4.
The annual percentage rate (APR) and the effective annual interest rate (EAR) are always the same if the number of compounding periods per year is one. A. True B. False |
a
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5.
The Truth-in-Lending Act requires that the EAR be provided to borrowers for all consumer loans. A. True B. False |
b
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6.
What is a series of equally spaced and level cash flows over a finite period of time called? A. A perpetuity B. An annuity C. Lump-sum cash flows D. An amortization |
b
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7.
If a series of nominal cash flows were discounted at a positive rate, what would be the relationship of those to the present value of those cash flows? A. The sum of the cash flows would always be greater than the present value B. The sum of the cash flows would always be less than the present value C. The sum of the cash flows would equal to the present value D. The relationship cannot be determined without further information |
a
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8.
If a series of nominal cash flows were compounded at a positive rate, what would be the relationship of those to the future value of those cash flows? A. The sum of the cash flows would always be greater than the future value B. The sum of the cash flows would always be less than the future value C. The sum of the cash flows would equal to the future value D. The relationship cannot be determined without further information |
b
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9.
The simple interest rate per payment period multiplied by the number of payment periods per year is known as the: A. simple interest B. compounded interest C. annual percentage rate D. effective annual interest rate |
c
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10.
An annuity in which the payments are made at the beginning of a period is known as: A. an ordinary annuity B. an annuity due C. a growing annuity D. a perpetual annuity |
b
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11.
What is the present value of a 5 year annuity with annual payments of $200 and a 15 percent discount rate? A. $1,000.00 B. $99.44 C. $670.43 D. $1,348.48 |
c
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12.
Evelyn is 30 years old and is saving for her retirement. She is planning on making quarterly payments into her IRA account over the next 36 years. The expected return on the account is 8%. How much will she have to deposit each month to have $650,000 when she retires? A. $26,091.98 B. $796.81 C. $3,474.04 D. $1,331.26 |
b
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13.
An investment pays you 9 percent interest compounded semiannually. What is the investment's effective interest rate? A. 8.9% B. 9% C. 9.2% D. 9.3% |
c
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14.
If the annual interest rate is 8 percent, which of the following has the largest present value? A. A five year annuity that pays you $1,000 per year. B. An investment that pays you $1000 at the end of 1 year, $2000 at the end of 2 years, and $3,000 at the end of the third year. C. A perpetuity that pays $800 annually. D. A 7-year zero coupon bond that has a face value of $8,500. |
c
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15.
You are thinking about buying a new car. The sticker price is $15,000 and you have $2,000 to put towards the down payment. If you can negotiate an annual interest rate of 10 percent and wish to pay for the car over a 5-year period, what would be your monthly payment? A. $276.21 B. $216.67 C. $285.78 D. $252.34 |
a
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1.
The expected return and the weighted average return from an investment are always the same. A. True B. False |
a
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2.
If an expected return of a potential investment is negative, then the standard deviation of the risk associated with that investment is negative. A. True B. False |
b
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3.
Historically, the standard deviation of the returns from investing in large U.S. stocks has been greater than the standard deviation of the returns from investing in small U.S. stocks. A. True B. False |
b
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4.
The coefficient of variation is a useful measure for comparing between alternatives with different expected returns and different standard deviations. A. True B. False |
a
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5.
Market risk is synonymous for systematic risk. A. True B. False |
a
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6.
The Security Market Line is the graphic representation of the Capital Asset Pricing Model. A. True B. False |
a
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7.
Diversification provides a benefit to investors when: A. the investor finds that one security that has the optimal expected rate of return B. the investor selects two or more securities for which returns are highly correlated with each other C. the investor selects two or more securities for which returns are not highly correlated with each other D. the investor invests only in risk-free Treasury securities |
c
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8.
Which of the following is the best measure of the risk of one asset's returns? A. the coefficient of variation B. the covariance C. beta D. the standard deviation |
d
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9.
A stock's beta is a measure of its: A. market risk B. unsystematic risk C. unique risk D. diversifiable risk |
a
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10.
The beta of a stock is the slope of: A. the security market line B. the plot of returns of the Dow Jones Industrial Average against returns of U.S. Treasury bills C. the tangent line connecting the risk free asset to a market portfolio D. the plot of returns of the market portfolio and the returns of the stock |
c
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11.
A stock with a beta greater than one has returns that are _____ volatile than the market and a stock with a beta less than one has returns that are _____ volatile than the market. A. more; more B. more; less C. less; more D. less; less |
b
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12.
Why is there a limit to the benefits of diversification? A. investors cannot diversify away unique risk B. investors cannot diversify away total risk C. investors cannot diversify away market risk D. investors cannot earn a rate of return greater than the expected return of a portfolio |
c
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14.
If an investor were comparing Asset Q, which has an expected return of 6.5% and a standard deviation of 4.3% to Asset U, which has an expected return of 8.8% and a standard deviation of 5.5% and to Asset B, which has an expected return of 8.8% and a standard deviation of 6.5%, which would she choose? A. Asset Q B. Asset U C. Asset B D. cannot be determined |
b
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15.
The compensation that is expected for taking on additional risk from investing in a balanced portfolio of risky investments is known as: A. real risk premium B. security risk premium C. default risk premium D. market risk premium |
d
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16.
What is the expected return for a stock that has a beta of 1.5 if the risk-free rate is 6 percent and the market rate of return is expected to be 11 percent? A. 15% B. 22.5% C. 16.5% D. 13.5% |
c
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1.
The rate of return that investors can earn on financial assets with similar risk to that of real assets is known as the opportunity cost of capital. A. True B. False |
a
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2.
The value of the assets of a project is its net present value. A. True B. False |
b
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3.
The cost of capital for a project is its return on equity, since shareholders indirectly hire the managers who operate the company. A. True B. False |
b
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4.
The acceptance decision from calculating a project's IRR will always be the same as that from calculating the project's NPV. A. True B. False |
b
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5.
The modified internal rate of return of a project will always provide a value between the cost of capital and the IRR of that project. A. True B. False |
a
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6.
Which capital budgeting decision method is always most appropriate? A. Payback Period B. Net Present Value C. Accounting Rate of Return D. Internal Rate of Return |
b
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7.
What is a general flaw in using the Payback Period? A. Project cash flows are not discounted B. The Payback Period is difficult to interpret C. Project cash flows are not easily forecasted D. Project cash flows are subject to variation over time |
a
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8.
Which discount rate is used in calculating a project's Net Present Value? A. the current Treasury bill interest rate B. the required return for the firm's equity C. the coupon interest rate of the firm's bonds D. the appropriate cost of capital reflecting the riskiness of the project's cash flows |
d
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9.
If a firm is unable to invest in all value-adding projects and limits spending on these projects, this is known as: A. capital budgeting B. capital rationing C. capital structure D. capital expenditures |
b
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10.
If a project's Internal Rate of Return exceeds _____, that project should be _____. A. its Net Present Value for the project; accepted B. the cost of capital for the project; rejected C. the MIRR for the project; rejected D. the cost of capital for the project; accepted |
d
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11.
What is a major deficiency of using the IRR? A. the decision from using the IRR generally contradicts the decision from using the NPV B. interest rate is not an intuitive measure of risk C. it ignores time value of money concepts D. under certain situations, the IRR can provide more than one result |
D
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12.
A machine costs $1,000 and has a 3 year life. The estimated salvage value at the end of three years is $100. The project will generate after tax cash flows of $600 per year. If the required rate of return is 10%, what is the NPV of the project? A. $1,567 B. $567 C. $900 D. $492 |
b
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13.
What is the payback period for a $20,000 project that is expected to return $6000 for the first two years and $3000 for years three through five? A. 3.67 years B. 4.76 years C. 4.5 years D. 4.67 years |
d
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14.
Initial Outlay Cash Flow in Period 0 1 2 3 4 -$20,000 $7,730.85 $7,730.85 $7,730.85 $7,730.85 The Internal Rate of Return (to nearest whole percent) is: A. 18% B. 10% C. 20% D. 16% |
c
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15.
Boomer Biscuit Inc. has a new automated production line it is considering. The project has a cost of $275,000 and is expected to provide after-tax cash flows of $73,306 for eight years. Management has found that the cost of capital is 12 percent. What is the project's MIRR? A. 12% B. 21% C. 10% D. 16% |
d
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1.
Free cash flows are the same as the operating cash flows of a firm. A. True B. False |
b
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2.
Overhead is typically a cost that should not be included in a project's cash flows. A. True B. False |
a
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3.
The depreciation method used in calculating a project's cash flows can make a significant difference in the acceptability of that project. A. True B. False |
a
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4.
The variable cost per unit of production will always increase as production increases. A. True B. False |
b
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5.
A financial analyst should consider the impact of the forecasted change in sales of one of a chain's existing restaurants when that company is considering opening another restaurant in a nearby town. A. True B. False |
a
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6.
A project's salvage value would most likely be ignored when using which of the following methods? A. Depreciation B. Free cash flow calculations C. Net present value D. Payback period |
d
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7.
Calculations of cash flows over a project's life should include which of the following? A. interest expense B. sunk costs C. overhead shared with other projects D. opportunity costs |
d
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8.
When discounting cash flows, the general rule to follow is: A. discount real cash flows using the real rate of return B. discount nominal cash flows using the nominal rate of return C. either a or b D. none of the above |
c
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9.
Which of the following cash flows would not be considered in the initial investment of a project? A. increase in working capital from projected increases in credit sales B. cost of issuing new bonds to finance asset purchases C. installation costs D. start-up costs of new equipment |
b
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10.
The benefit of using the MACRS compared to straight-line depreciation is: A. salvage value is incorporated into MACRS calculations B. calculating depreciation is simplified using the MACRS method C. cash flows are greater earlier in the project's life using the straight-line method D. cash flows are greater earlier in the project's life using the MACRS method |
d
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11.
Why would an analyst need to consider the recovery of working capital in the terminal year of a project's life? A. ignoring the working capital investment recovery seriously overestimates the project's NPV B. the recovery of the project's working capital investment provides a negative investment, hence a cash outflow to the firm C. the recovery of the project's working capital investment provides a negative investment, hence a cash inflow to the firm D. none of the above |
c
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12.
Depreciation expenses affect cash flows by: A. depreciation increases taxable income, thus increases taxes B. depreciation decreases taxable income, thus decreases taxes C. depreciation is a non-cash expense and has no impact on cash flows D. all of the above |
b
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13.
Why would an analyst calculate the equivalent annual cost of a project? A. An analyst can compare alternative investments that are mutually exclusive and have different lives B. An analyst can compare independent projects that have different lives C. An analyst can compare projects that have different cash flows D. An analyst can recalculate the project's cash flows if the NPV is negative |
a
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14.
Over the life of a project, what is the difference in the total tax paid when depreciation is calculated using the MACRS method compared to the straight-line method? A. total tax would be higher using the straight-line method B. total tax would be higher using the MACRS method C. total tax would be the same D. total tax is irrelevant in calculating a project's cash flows |
c
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15.
How do variable costs and fixed cost impact operating cash flows for a project? A. since variable costs change with different levels of output, this could have a significant impact on the cash flows of a project B. since variable costs remain the same with different levels of output, this has no impact on the cash flows of a project C. since fixed costs change with different levels of output, this could have a significant impact on the cash flows of a project D. none of the above |
a
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