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Exam 27: The Basic Tools of Finance

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Question 201

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Daniel has $300 in a bank account. Some years ago he put $213.20 into this account, and it has earned 5 percent interest every year since then. How many years ago did Daniel open his account?

A) 4 years
B) 5 years
C) 6 years
D) 7 years

E) A) and D)
F) C) and D)

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Question 202

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Figure 27-5. The figure shows a utility function for Dexter. -Refer to Figure 27-5. Suppose Dexter begins with $1,300 in wealth. Starting from there,

A) the pain of losing $500 of his wealth would equal the pleasure of adding $500 to his wealth.
B) the pain of losing $500 of his wealth would exceed the pleasure of adding $500 to his wealth.
C) the pleasure of adding $500 to his wealth would exceed the pain of losing $500 of his wealth.
D) This cannot be determined from the graph.

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

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Question 203

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At about what number of companies does the reduction in risk from adding stocks of more companies to a portfolio do little to reduce risk?

You are expecting to receive $750 at some time in the future. Which of the following would unambiguously decrease the present value of this future payment?

If you presently have $50,000 saved and earn 15 percent interest per year, about how many years will it take for your investment to triple?

According to the rule of 70, if a person's saving doubles in 10 years, what interest rate were they earning?

Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is

What is the present value of a payment of $150 one year from today if the interest rate is 6 percent?

On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $5,000 to save for two years?

Will is risk averse and has $1,000 with which to make a financial investment. He 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. Will should choose

Suppose fundamental analysis indicates that XYZ Corporation's stock is undervalued.

According to the efficient markets hypothesis, the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

Missy recently rearranged her portfolio so that it has a higher average return. As a result of this rearranging, Missy

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.

The future value of a deposit in a savings account will be larger

Diversification

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?

At an annual interest rate of 14 percent, about how many years will it take $100 to double in value?

A firm has four 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 $5 million at the end of one year, $10 million at the end of two years, and $15 million at the end of three years. Option C 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 D will give the firm $21 million at the end of one year, nothing at the end of two years, and $9 million at the end of three years. Which of these options has the highest present value if the rate of interest is 5 percent?

Figure 27-4. The figure shows a utility function for Alex. -Refer to Figure 27-4. From the appearance of Alex's utility function, we know that