# Multiple Choice Questions on Time Value of Money, Stocks

1) The present value of a dollar:

Increases as the interest rate increases.

Decreases as the interest rate increases.

Increases as the time period increases.

Decreases as the time period increases.

a. 1 and 3.

b. 1 and 4.

c. 2 and 3.

d. 2 and 4.

3. Discounting:

a. Expresses the present in the future.

b. Brings the future back to the present.

c. Is synonymous with compounding.

d. Depends on the rate of interest.

4. The future value of an annuity is:

Larger the higher the rate of interest.

Smaller the higher the rate of interest.

Larger the greater the number of years.

Smaller the greater the number of years.

a. 1 and 3.

b. 1 and 4.

c. 2 and 3.

d. 2 and 4.

5. Which is the largest if interest rates are 7 percent?

a. $100 compounded for three years.

b. The future value of a $100 annuity for three years.

c. The present value of $100 after three years.

d. The present value of a $100 annuity.

6) If the required rate of return is 10 percent and the stock pays a fixed $5 dividend, its value is:

a. $100.

b. $75.

c. $50.

d. $25.

7) The risk adjusted required rate of return includes:

The firm's earnings.

The firm's beta coefficient.

The treasury bill rate (i.e., the risk free rate).

a. 1 and 2.

b. 1 and 3.

c. 2 and 3.

d. All of the above.

8) A stock's price will tend to fall if:

The firm's beta declines.

The firm's beta increases.

The risk free rate declines.

The risk free rate increases.

a. 1 and 3.

b. 1 and 4.

c. 2 and 3.

d. 2 and 4.

9) A P/E ratio depends on:

The firm's dividends.

The price of the stock.

The firm's per share earnings.

a. 1 and 2.

b. 1 and 3.

c. 2 and 3.

d. all of the above.

10) The use of P/E ratios to select stocks suggests that:

a. High P/E stocks should be purchased.

b. Low P/E ratio stocks are overvalued.

c. A stock should be purchased if it is selling near its historic low P/E.

d. A stock should be purchased if it is selling near its historic high P/E.

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#### Solution Preview

The present value of a dollar:

1) Increases as the interest rate increases.

Decreases as the interest rate increases.

Increases as the time period increases.

Decreases as the time period increases.

a. 1 and 3.

b. 1 and 4.

c. 2 and 3.

d. 2 and 4.

Answer: d. 2 and 4.

Present value = Future value / (1+ interest rate)^t

(^ stands for raised to the power of)

Therefore higher the interest rate and time period, lower is the present value

3. Discounting:

a. Expresses the present in the future.

b. Brings the future back to the present.

c. Is synonymous with compounding.

d. Depends on the rate of interest.

Answer: d. Depends on the rate of interest.

4 The future value of an annuity is:

Larger the higher the rate of interest.

Smaller the higher the rate of interest.

Larger the greater the number of years. ...

#### Solution Summary

Answers multiple choice questions on time value of money, stocks.