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Multiple Choice

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The more frequent the compounding, the higher the future value, other things equal.

a. True
b. False

2. For a given amount,the lower the discount rate,the less the present value.

a. True
b. False

3. Systematic Risk can be totally eliminated in a portfolio through diversification.

a. True
b. False

4. Capital structure decisions refer to the

a. dividend yield of the firm's stock
b. blend of equity and debt used by the firm.
c. capital gains available on the firms stock.
d. maturity date of the firms securities.
e. None of the above is a correct answer.

5. Which of the following is a key determinant of financial leverage?

a. Level of debt.
b. Technology.
c. Labor costs.
d. Amount of fixed assets used by the firm.
e. Variable cost of goods sold.

6. Given some amount to be received several years in the future, if the interest rate increases, the present value of the future amount will be

a. Higher.
b. Lower.
c. Stay the same.
d. Cannot tell.
e. Variable.

7. Which of the following statements is false?

a. If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.
b. To increase present consumption beyond present income normally requires either the payment of interest or else an opportunity cost of interest foregone.
c. Disregarding risk, if money has time value, it is impossible for the present value of a given sum to be greater than its future value.
d. Disregarding risk, if the present value of a sum is equal to its future value, either k = 0 or t = 0.
e. Each of the above statements is true.

8. The greater the number of compounding periods within a year, the greater the future value of a lump sum invested initially, and the greater the present value of a given lump sum to be received at maturity.

a. True
b. False

9. All other factors held constant, the present value of a given annual annuity decreases as the number of discounting periods per year increases.

a. True
b. False

10. The process of discounting or finding the present value of a cash flow to be received in the future is really the same as compounding.

a. True
b. False

11. A major disadvantage of the payback period method is that it

a. Is useless as a risk indicator.
b. Ignores cash flows beyond the payback period.
c. Does not directly account for the time value of money.
d. All of the above are correct.
e. Only answers b and c are correct.

12. The internal rate of return is that discount rate which equates the present value of the cash outflows (or costs) with the future value of the cash inflows.

a. True
b. False

13. One of the advantages of the payback period (either regular or discounted) is that it considers all cash flows throughout the entire life of a project.

a. True
b. False

14. The primary function of the capital budget is to forecast the funds required for future investments that must be raised through external funding, that is, by selling stock or bonds.

a. True
b. False

15. A firm should never undertake an investment if accepting the project would cause an increase in the firm's required rate of return.

a. True
b. False

16. The mix of debt, preferred stock, and common equity with which the firm plans to support its asset structure is known as the target capital structure.

a. True
b. False

17. Financial risk refers to the extra risk stockholders bear as a result of the use of debt as compared with the risk they would bear if no debt were used.

a. True
b. False

18. If Miller and Modigliani had considered the cost of bankruptcy, it is unlikely that they would have concluded that 100 percent debt financing is optimal for the firm.

a. True
b. False

19. An investor's ability and willingness to accept risk is termed:

a. Risk aversion.
b. Risk seeking.
c. Risk tolerance level.
d. Risk-free rate of return.
e. None of the above.

20. Fundamental analysts primarily base their investment decisions on analyses of supply and demand relationships that influence trends in price movements in stocks and general financial market conditions.

a. True
b. False
21. The dividend discount model (DDM) can only be used to value a company's stock if it is expected that the company will pay a dividend that grows at a constant rate in the future.

a. True
b. False

22. The total return earned from the time an investment is purchased until it is liquidated is called a(n)______________.

a. Ask yield
b. Current yield
c. Holding period return
d. Coupon rate
e. Dividend yield rate

23. There is an inverse relationship between bond ratings and the required return on a bond. The required return is lowest for AAA rated bonds, and required returns increase as the ratings get lower (worse).

a. True
b. False

24. A junk bond is a high risk, high yield debt instrument typically used to finance a leveraged buyout or a merger, or to provide financing to a company of questionable financial strength.

a. True
b. False

25. The terms and conditions to which a bond is subject are set forth in its

a. Debenture.
b. Underwriting agreement.
c. Indenture.
d. Restrictive covenants.
e. Call provision.

26. A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

a. True
b. False

27. Suppose you put $100 into a savings account today, the account pays a simple annual interest rate of 6 percent, but compounded semiannually, and you withdraw $100 after 6 months. What would your ending balance be 20 years after the initial $100 deposit was made?

a. $226.20
b. $115.35
c. $ 62.91
d. $ 9.50
e. $ 3.00

28. Calculate the future value of $100,000 fifteen years from today based on the following interest rates:

a. 3 percent
b. 6 percent
c. 9 percent
d. 12 percent

29. Calculate the present of $25,000 20 years from today based on the following annual discount rates:

a. 3 percent
b. 6 percent
c. 9 percent
d. 12 percent
1. The more frequent the compounding, the higher the future value, other things equal.

a. True
b. False

2. For a given amount,the lower the discount rate,the less the present value.

a. True
b. False

3. Systematic Risk can be totally eliminated in a portfolio through diversification.

a. True
b. False

4. Capital structure decisions refer to the

a. dividend yield of the firm's stock
b. blend of equity and debt used by the firm.
c. capital gains available on the firms stock.
d. maturity date of the firms securities.
e. None of the above is a correct answer.

5. Which of the following is a key determinant of financial leverage?

a. Level of debt.
b. Technology.
c. Labor costs.
d. Amount of fixed assets used by the firm.
e. Variable cost of goods sold.

6. Given some amount to be received several years in the future, if the interest rate increases, the present value of the future amount will be

a. Higher.
b. Lower.
c. Stay the same.
d. Cannot tell.
e. Variable.

7. Which of the following statements is false?

a. If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.
b. To increase present consumption beyond present income normally requires either the payment of interest or else an opportunity cost of interest foregone.
c. Disregarding risk, if money has time value, it is impossible for the present value of a given sum to be greater than its future value.
d. Disregarding risk, if the present value of a sum is equal to its future value, either k = 0 or t = 0.
e. Each of the above statements is true.

8. The greater the number of compounding periods within a year, the greater the future value of a lump sum invested initially, and the greater the present value of a given lump sum to be received at maturity.

a. True
b. False

9. All other factors held constant, the present value of a given annual annuity decreases as the number of discounting periods per year increases.

a. True
b. False

10. The process of discounting or finding the present value of a cash flow to be received in the future is really the same as compounding.

a. True
b. False

11. A major disadvantage of the payback period method is that it

a. Is useless as a risk indicator.
b. Ignores cash flows beyond the payback period.
c. Does not directly account for the time value of money.
d. All of the above are correct.
e. Only answers b and c are correct.

12. The internal rate of return is that discount rate which equates the present value of the cash outflows (or costs) with the future value of the cash inflows.

a. True
b. False

13. One of the advantages of the payback period (either regular or discounted) is that it considers all cash flows throughout the entire life of a project.

a. True
b. False

14. The primary function of the capital budget is to forecast the funds required for future investments that must be raised through external funding, that is, by selling stock or bonds.

a. True
b. False

15. A firm should never undertake an investment if accepting the project would cause an increase in the firm's required rate of return.

a. True
b. False

16. The mix of debt, preferred stock, and common equity with which the firm plans to support its asset structure is known as the target capital structure.

a. True
b. False

17. Financial risk refers to the extra risk stockholders bear as a result of the use of debt as compared with the risk they would bear if no debt were used.

a. True
b. False

18. If Miller and Modigliani had considered the cost of bankruptcy, it is unlikely that they would have concluded that 100 percent debt financing is optimal for the firm.

a. True
b. False

19. An investor's ability and willingness to accept risk is termed:

a. Risk aversion.
b. Risk seeking.
c. Risk tolerance level.
d. Risk-free rate of return.
e. None of the above.

20. Fundamental analysts primarily base their investment decisions on analyses of supply and demand relationships that influence trends in price movements in stocks and general financial market conditions.

a. True
b. False
21. The dividend discount model (DDM) can only be used to value a company's stock if it is expected that the company will pay a dividend that grows at a constant rate in the future.

a. True
b. False

22. The total return earned from the time an investment is purchased until it is liquidated is called a(n)______________.

a. Ask yield
b. Current yield
c. Holding period return
d. Coupon rate
e. Dividend yield rate

23. There is an inverse relationship between bond ratings and the required return on a bond. The required return is lowest for AAA rated bonds, and required returns increase as the ratings get lower (worse).

a. True
b. False

24. A junk bond is a high risk, high yield debt instrument typically used to finance a leveraged buyout or a merger, or to provide financing to a company of questionable financial strength.

a. True
b. False

25. The terms and conditions to which a bond is subject are set forth in its

a. Debenture.
b. Underwriting agreement.
c. Indenture.
d. Restrictive covenants.
e. Call provision.

26. A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

a. True
b. False

27. Suppose you put $100 into a savings account today, the account pays a simple annual interest rate of 6 percent, but compounded semiannually, and you withdraw $100 after 6 months. What would your ending balance be 20 years after the initial $100 deposit was made?

a. $226.20
b. $115.35
c. $ 62.91
d. $ 9.50
e. $ 3.00

28. Calculate the future value of $100,000 fifteen years from today based on the following interest rates:

a. 3 percent
b. 6 percent
c. 9 percent
d. 12 percent

29. Calculate the present of $25,000 20 years from today based on the following annual discount rates:

a. 3 percent
b. 6 percent
c. 9 percent
d. 12 percent

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The solution explains various multiple choice questions relating to finance

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