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Multiple Choice Questions

1.How much can be accumulated for retirement if $2,000 is deposited annually, beginning one year from today, and the account earns 9% interest compounded annually for 40 years?
A) $ 87,200.00
B) $675,764.89
C) $736,583.73
D) $802,876.27

2.When an investor purchases a $1,000 par value U.S. Treasury bond that was quoted at 97.16, the investor:
A) receives 97.5% of the stated coupon payments.
B) receives $975 upon the maturity date of the bond.
C) pays 97.5% of face value for the bond.
D) pays $1,025 for the bond.

3.If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year, what is the stock's current price?
A) $4.50
B) $18.00
C) $22.22
D) $40.50

4.The decision rule for net present value is to:
A) accept all projects with cash inflows exceeding initial cost.
B) reject all projects with rates of return exceeding the opportunity cost of capital.
C) accept all projects with positive net present values.
D) reject all projects lasting longer than 10 years.

5.When is it appropriate to include sunk costs in the evaluation of a project?
A) Include sunk costs when they are relatively large.
B) Include sunk costs if it improves the project's NPV.
C) Include sunk costs if they are considered to be overhead costs.
D) It is never appropriate to include sunk costs.

6.How much could NPV be affected by a worst-case scenario of 25% reduction from the $3 million in expected annual cash flows on a five-year project with 10% cost of capital?
A) $2,843,090
B) $3,750,000
C) $4,578,825
D) $6,155,274

7.If a share of stock provided a 14.0% nominal rate of return over the previous year while the real rate of return was 6.0%, then the inflation rate was:
A) 1.89%
B) 7.55%
C) 8.00%
D) 9.12%

8.If a stock consistently goes down (up) by 1.6% when the market portfolio goes down (up) by 1.2% then its beta:
A) equals 1.40.
B) equals 1.24.
C) equals 1.33.
D) equals 1.40.

9. How much will a firm need in cash flow before tax and interest to satisfy debt holders and equity holders if the tax rate is 40%, there is $10 million in common stock requiring a 12% return, and $6 million in bonds requiring an 8% return?
A) $1,392,000
B) $1,488,000
C) $2,480,000
D) $2,800,000

10.ABC Corp. stock is selling for $30 per share when a 10% stock dividend is declared. If you own 100 shares of ABC Corp. then you will receive:
A) $3.
B) $3 times 100 shares = $300.
C) $300 plus 10 shares of ABC Corp.
D) 10 shares of ABC Corp.

11.The main purpose in contracting to purchase foreign currency in the forward market is to:
A) earn a premium (interest) on the exchange.
B) lock into a price now.
C) take advantage of future price reductions.
D) avoid the more expensive spot rates.

12.The spot price of silver closes at $7 per ounce at the expiration of an option contract. Which one of the following option positions will have value?
A) The buyer of a call with $5 strike price.
B) The seller of a call with $5 strike price.
C) The buyer of a put with $5 strike price.
D) The seller of a put with $5 strike price.

Solution Preview

1.How much can be accumulated for retirement if $2,000 is deposited annually, beginning one year from today, and the account earns 9% interest compounded annually for 40 years?
A) $ 87,200.00
B) $675,764.89
C) $736,583.73
D) $802,876.27

Answer: B) $675,764.89

n= 40
r= 9.00%

FVIFA (40 periods, 9.% rate ) = 337.882445
FVIFA= Future Value Interest Factor for an Annuity
FVIFA( n, r%)= =[(1+r%)^n -1]/r%
Annual Payment= 2,000
Future Value= $675,764.89 =337.882445 x 2000

2.When an investor purchases a $1,000 par value U.S. Treasury bond that was quoted at 97.16, the investor:
A) receives 97.5% of the stated coupon payments.
B) receives $975 upon the maturity date of the bond.
C) pays 97.5% of face value for the bond.
D) pays $1,025 for the bond.

Answer: C) pays 97.5% of face value for the bond.

Treasury bonds are quoted in dollars and 32nds of a dollar . The quoted price is for a face value of $100.
Thus a quote of 97-16 means 97+ 16/32 = 97.5 for a face value of $100
Thus the price paid is 97.5/100 = 97.5% of face value for the bond.

3.If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year, what is the stock's current price?
A) $4.50
B) $18.00
C) $22.22
D) $40.50

Answer: D) $40.50

Price= P/E x EPS
P/E= 13.5
EPS= $3.00

Price= P/E x EPS= $40.50 =13.5 x 3

4.The decision rule for net present value is to:
A) accept all projects with cash inflows exceeding initial cost.
B) reject all ...

Solution Summary

Answers 12 multiple choice questions with explanations.

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