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NPV

NOTE: Unless otherwise stated, the borrowers and lenders do sell at the same market interest rate.

1. Shareholders of corporations generally do not vote on every investment decision but depend on managers to maximize value by:
(A) Choosing the highest net income projects.
(B) Investing at the market rate of return.
(C) Buying shares back from investors.
(D) Following the NPV rule to choose investments.

2. A corporation has the following opportunity to invest in a project with a return of $77,000 in one period. The current investment is $69,000.
The financial rate market rate is 8%. What is the NPV and the investment decision?
(A) -$2,296; do not invest.
(B) $2,296; invest.
(C) $2,480; do not invest.
(D) $8,000; invest.
(E) $2,480; do not invest.

3. An individual with no investment opportunities has income of $3,000 in period 0 and income of $2,500 in period 1. If the interest rate is 3% and the individual is constrained to consume all income in period 1, then which of the following consumption patterns is not possible?
(A) $0 in period 0 and $5,590 in period 1.
(B) $2,000 in period 0 and $3,530 in period 1.
(C) $0 in period 0 and $5,427 in period 1.
(D) $3,000 in period 0 and $2,500 in period 1

4. Corporate managers maximize shareholder wealth by choosing positive NPV projects because:
(A) All investors have the same preferences.
(B) Dissatisfied shareholders can sell off shares.
(C) The separation theorem in financial markets states that all investors will be satisfied with the same investment decision regardless of personal preferences.
(D) Managers are wiser than shareholders regarding investments.

5. An individual has $60,000 income in period 0 and $30,000 income in period 1. If the individual desires to consume $19,000 in period 1 and the market interest rate is 8%, what is the maximum amount of consumption in period 0?
(A) $50,000
(B) $70,185
(C) $71,000
(D) $61,880

Solution Preview

NOTE: Unless otherwise stated, the borrowers and lenders do sell at the same market interest rate.

1. Shareholders of corporations generally do not vote on every investment decision but depend on managers to maximize value by:
(A) Choosing the highest net income projects.
(B) Investing at the market rate of return.
(C) Buying shares back from investors.
(D) Following the NPV rule to choose investments.

Answer: D

2. A corporation has the following opportunity to invest in a project with a return of $77,000 in one period. The current investment is $69,000.
The financial rate market rate is 8%. What is the NPV ...

Solution Summary

This solution is comprised of a detailed explanation to answer what shareholders of corporations generally do not vote on every investment decision but depend on managers to maximize value by.

$2.19