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Multiple Choice Questions in Finance

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15. If a firm has a beta of 1.0, it is safe to make the following conclusion regarding the relative risk of the firm to the market risk in general:

a. The firm is about as risky as the market.
b. The firm is more risky than the market.
c. The firm is less risky than the market.
d. The beta of the firm does not allow any conclusion about relative risk.

16. Which of the following cash flows has the highest present value for all rates of interest greater than 0%:

a. $100 per month for a year
b. $1200 immediate payment
c. $50 every two weeks for a year
d. They all have the same present value.

17. A proposed project can generate savings of $1000 per year for 10 years. The initial cost of the project is $2500 and the project has a salvage value of $500 in the 10th year. What is the Net Present Value of the project to the nearest dollar if the discount rate is 10%?

a. $7000.00
b. $3644.00
c. $3451.00
d. $3837.00

18. If current interest rates on savings are 5% and you can save $300.00 per month toward the down payment on a house, how long will it take you to save for the down payment if the minimum down payment amount is $20,000.00?

a. 5.55 years
b. 5.00 years
c. 4.91 years
d. 6.00 years

19. The coupon rate of a bond is 12% and the bond has a par value of $1000.00. What is the annual interest payment received by the bondholder:

a. $120.00
b. $60.00
c. $1200.00
d. $12.00

20. Which of the following statements is not true:

a. When the YTM of the bond is equal to its coupon rate, the bond will sell at its par value.
b. If the coupon rate of a bond is lower than the current YTM of the bond, the bond will sell for more than its par value.
c. The par value of a $1000.00 face value bond is $1000.00.
d. The value of a bond moves in the opposite direction as its YTM.

21. Which is the proper factor to use when computing the present value of an annuity of 100 monthly payments with a discount rate of 12% per year?

a. PVIFA(100,12%)
b. PVIFA(100,1%)
c. FVIFA(100,12%)
d. None of these

22. All of the following factors are important in determining the appropriate discount rate for a project except:

a. The firms weighted average cost of capital.
b. The Debt position of the firm.
c. The risk profile of the typical investor in the firm.
d. The level of risk associated with the project

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Solution Preview

15. If a firm has a beta of 1.0, it is safe to make the following conclusion regarding the relative risk of the firm to the market risk in general:

a. The firm is about as risky as the market.
b. The firm is more risky than the market.
c. The firm is less risky than the market.
d. The beta of the firm does not allow any conclusion about relative risk.

Answer: a. The firm is about as risky as the market.
Market has a beta of 1; therefore, the stock is as risky as the market as far as systematic or market risk is concerned

16. Which of the following cash flows has the highest present value for all rates of interest greater than 0%:

a. $100 per month for a year
b. $1200 immediate payment
c. $50 every two weeks for a year
d. They all have the same present value.

Answer: c. $50 every two weeks for a year
(There is error in the question)
But this is true only for interest rate upto 15% per annum
After this $1200 immediately has the highest PV (see below)

r= 16%

A= $100.00 ,every ...

Solution Summary

Multiple Choice Questions in Finance on the topics of beta, present value, Net Present Value, Time Value of Money, Bonds, YTM, discount rate have been answerd.

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Finance - Multiple Choice Questions

1. The ________ is a weighted average of the cost of funds which reflects the interrelationship of financing decisions.

1. 1. risk-free rate
2. 2. nominal cost
3. 3. risk premium
4. 4. cost of capital

2. The firm's optimal mix of debt and equity is called its

1. 1. optimal ratio.
2. 2. maximum wealth.
3. 3. target capital structure.
4. 4. maximum book value.

3. If a corporation has an average tax rate of 40 percent, the approximate annual, after-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is

1. 1. 4.8 percent.
2. 2. 3.6 percent.
3. 3. 6 percent.
4. 4. 8 percent.

4. A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can

1. 1. decrease the proportion of common stock equity to decrease financial risk.
2. 2. increase short-term debt to decrease the cost of capital.
3. 3. increase the proportion of long-term debt to decrease the cost of capital.
4. 4. increase the proportion of common stock equity to decrease financial risk.

5.________ leverage is concerned with the relationship between sales revenue and earnings per share.

1. 1. Operating
2. 2. Financial
3. 3. Total
4. 4. Variable

6.Breakeven analysis is used by the firm

1. 1. none of these.
2. 2. Both to determine the level of operations necessary to cover all operating costs and to evaluate the profitability associated with various levels of sales.
3. 3. to determine the level of operations necessary to cover all operating costs.
4. 4. to evaluate the profitability associated with various levels of sales.

7.Noncash charges such as depreciation and amortization ________ the firm's breakeven point.

1. 1. understate
2. 2. decrease
3. 3. overstate
4. 4. do not affect

8.If a firm's fixed operating costs decrease, the firm's operating breakeven point will

1. 1. decrease.
2. 2. change in an undetermined direction.
3. 3. increase.
4. 4. remain unchanged.

9.________ is the potential use of fixed operating costs to magnify the effects of changes in sales on earnings before interest and taxes.

1. 1. Ratio analysis
2. 2. Operating leverage
3. 3. Total leverage
4. 4. Financial leverage

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