Question 1

What is the present value of a payment of $2,000 to be received two years from today if the interest rate is 5%?

Accepted Answer

A)   $2205
B)   $2200
C)   $1818.18
D)   $1814.06E) None of the above
F) A) and B)

Question 2

Until recently, shares of stock accounted for 40 percent of Jimmy's savings. A few days ago, Jimmy sold some bonds and bought some additional shares of stock. Now shares of stock account for 70 percent of Jimmy's savings. How did this change affect Jimmy's expected retun on his savings? How did it affect the risks he faces?

Accepted Answer

The increased percentage of st...

Question 3

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) B) and C)
F) A) and C)

Question 4

Should a person who is risk averse hold a portfolio with no stock and only bonds?
Explain.

Accepted Answer

Not necessarily. Historically bonds have...

Question 5

Your boss asks you to do fundamental analysis of a corporation. What value is she asking for and how would you estimate this value?

Accepted Answer

The boss is asking for an estimate of th...

Question 6

Thompson Corporation is considering the purchase of a new piece of machinery. Thompson expects the new machinery to increase its revenues by $70,000 at the end of year 1, $60,000 at the end of year 2, and $50,000 at the end of year 3 at which point the machinery will have exhausted its useful life. If the interest rate is 4%, what is the most Thompson should be willing to pay today for this piece of machinery?

Accepted Answer

The present value of the futur...

Question 7

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 8

Happy Trails, a bicycle rental company, is considering purchasing three additional bicycles. Each bicycle would cost them $249.66. At the end of the first year the increase to their revenues would be $140 per bicycle. At the end of the second year the increase to their revenues again would be $140 per bicycle. Thereafter, there are no increases to their revenues. At which of the following interest rates is the sum of the present values of the additional revenues closest to the price of a bicycle?

Accepted Answer

A)   5 percent
B)   6 percent
C)   7 percent
D)   8 percentE) All of the above
F) A) and D)

Question 9

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

Accepted Answer

A) True 
 B)False

Question 10

If the interest rate is 4%, in which of the following cases is the future value the largest?

Accepted Answer

A)   An initial value of $1,000 deposited for 5 years.
B)   An initial value of $950 deposited for 6 years.
C)   An initial value of $900 deposited for 7 years.
D)   An initial value of $850 deposited for 8 years.E) B) and C)
F) A) and D)

Question 11

Which of the following games might a risk-averse person play?

Accepted Answer

A)   a game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1
B)   a game where she has a 50 percent chance of winning $100 and a 50 percent chance of losing $100
C)   a game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1
D)   a game where she has a 40 percent chance of winning $1 and a 60 percent chance of losing $1E) None of the above
F) C) and D)

Question 12

A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today. What is the present value of these payments?

Accepted Answer

A)   $2,000/1 + r) 2.
B)   $1,000 + $1,000/1 + r) 
C)   $1,000/1 + r)  + $1,000/1 + r) 2
D)   $1,0001 + r)  + $1,0001 + r) 2E) All of the above
F) B) and C)

Question 13

According to the efficient markets hypothesis, at any moment in time, the market price is the best estimate of the company's value based on publicly available information.

Accepted Answer

A) True 
 B)False

Question 14

Economists disagree as to whether

Accepted Answer

A)   the stock price of a company should reflect the company's expected profitability.
B)   the basic tools of finance reflect valid ideas.
C)   stock prices reflect rational estimates of a company's true worth.
D)   there is any relationship between stock market fluctuations and fluctuations in the economy more broadly.E) B) and C)
F) A) and D)

Question 15

From the standpoint of the economy as a whole, the role of insurance is

Accepted Answer

A)   to entice risk-loving people to become risk averse.
B)   to promote the phenomenon of adverse selection.
C)   not to eliminate the risks inherent in life, but to spread them around more efficiently.
D)   not to spread risks, but to eliminate them for individual policy holders.E) B) and C)
F) A) and C)

Question 16

Assuming the interest rate is 6 percent, which of the following has the greatest present value?

Accepted Answer

A)   $300 paid in two years
B)   $150 paid in one year plus $140 paid in two years
C)   $100 paid today plus $100 paid in one year plus $100 paid in two years
D)   $285 todayE) B) and C)
F) B) and D)

Question 17

Mary Beth is risk averse and has $1,000 with which to make a financial investment. She has three options. Option A is a risk-free government bond that pays 5 percent interest each year for two years. Option B is a low-risk stock that analysts expect to be worth about $1,102.50 in two years. Option C is a high-risk stock that is expected to be worth about $1,200 in four years. Mary Beth should choose

Accepted Answer

A)   option A.
B)   option B.
C)   option C.
D)   either A or B because they are the same to her.E) C) and D)
F) B) and D)

Question 18

According to the efficient markets hypothesis, worse-than-expected news about a corporation will

Accepted Answer

A)   have no effect on its stock price.
B)   raise the price of the stock.
C)   lower the price of the stock.
D)   change the price of the stock in a random direction.E) C) and D)
F) A) and D)

Question 19

Which of the following is a source of market risk?

Accepted Answer

A)   Holding stocks in many companies carries the risk of a reduced average return.
B)   Real GDP varies over time and sales and profits move with real GDP.
C)   When a paper producer has declining sales, it is likely that so will other paper producers.
D)   If stockholders become aggravated with the way a CEO runs a company, the price of that company's stock might fall in the stock market.E) A) and D)
F) All of the above

Question 20

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) B) and C)

Exam 19: The Basic Tools of Finance

According to the efficient markets hypothesis, worse-than-expected news about a corporation will

Correct Answer
verified

What is the present value of a payment of $2,000 to be received two years from today if the interest rate is 5%?

Correct Answer
verified

From the standpoint of the economy as a whole, the role of insurance is

Correct Answer
verified

Which of the following games might a risk-averse person play?

Correct Answer
verified

Correct Answer
verified
The present value of the futur...
View Answer

Assuming the interest rate is 6 percent, which of the following has the greatest present value?

Correct Answer
verified

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

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

Your boss asks you to do fundamental analysis of a corporation. What value is she asking for and how would you estimate this value?

Correct Answer
verified
The boss is asking for an estimate of th...
View Answer

Correct Answer
verified

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

Correct Answer
verified

According to the efficient markets hypothesis, at any moment in time, the market price is the best estimate of the company's value based on publicly available information.

Correct Answer
verified

Which of the following is a source of market risk?

Correct Answer
verified

A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today. What is the present value of these payments?

Correct Answer
verified

If the interest rate is 4%, in which of the following cases is the future value the largest?

Correct Answer
verified

Correct Answer
verified
The increased percentage of st...
View Answer

Economists disagree as to whether

Correct Answer
verified

Should a person who is risk averse hold a portfolio with no stock and only bonds? Explain.

Correct Answer
verified
Not necessarily. Historically bonds have...
View Answer

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

Correct Answer
verified

Exam 19: The Basic Tools of Finance

According to the efficient markets hypothesis, worse-than-expected news about a corporation will

Correct AnswerverifiedShow Answer

What is the present value of a payment of $2,000 to be received two years from today if the interest rate is 5%?

Correct AnswerverifiedShow Answer

From the standpoint of the economy as a whole, the role of insurance is

Correct AnswerverifiedShow Answer

Which of the following games might a risk-averse person play?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedThe present value of the futur...View AnswerShow Answer

Assuming the interest rate is 6 percent, which of the following has the greatest present value?

Correct AnswerverifiedShow Answer

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

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

Your boss asks you to do fundamental analysis of a corporation. What value is she asking for and how would you estimate this value?

Correct AnswerverifiedThe boss is asking for an estimate of th...View AnswerShow Answer

Correct AnswerverifiedShow Answer

Speculative bubbles may arise in part because the value of the stock to a stockholder depends on the final sale price.

Correct AnswerverifiedShow Answer

According to the efficient markets hypothesis, at any moment in time, the market price is the best estimate of the company's value based on publicly available information.

Correct AnswerverifiedShow Answer

Which of the following is a source of market risk?

Correct AnswerverifiedShow Answer

A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today. What is the present value of these payments?

Correct AnswerverifiedShow Answer

If the interest rate is 4%, in which of the following cases is the future value the largest?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedThe increased percentage of st...View AnswerShow Answer

Economists disagree as to whether

Correct AnswerverifiedShow Answer

Should a person who is risk averse hold a portfolio with no stock and only bonds? Explain.

Correct AnswerverifiedNot necessarily. Historically bonds have...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
verified

Correct Answer
verified
The present value of the futur...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The boss is asking for an estimate of th...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The increased percentage of st...
View Answer

Correct Answer
verified

Correct Answer
verified
Not necessarily. Historically bonds have...
View Answer

Correct Answer
verified