Which of the following is true about the Net Present Value method?

Which of the following is true about the Net Present Value method?

A) The NPV does not utilize time value of money concepts.
B) The NPV assumes that all cash flows are reinvested at the firm's discount rate (the firm's cost of capital).
C) The NPV allows projects to be ranked by rate of return.
D) The NPV is a rate of return that is acceptable to the firm.

Answer: B

Which one of the following cash flow patterns is NOT an unconventional cash flow pattern?

Which one of the following cash flow patterns is NOT an unconventional cash flow pattern?

A) A positive initial cash flow is followed by negative future cash flows.
B) Future cash flows from a project could include both positive and negative cash flows.
C) A negative initial cash flow is followed by positive future cash flows.
D) A cash flow stream looks similar to a conventional cash flow stream except for a final negative cash flow.

Answer: C

In evaluating capital projects, the decisions using the NPV method and the IRR method may disagree if

In evaluating capital projects, the decisions using the NPV method and the IRR method may disagree if

A) the projects are independent.
B) the cash flows pattern is unconventional.
C) the projects are mutually exclusive.
D) both b and c.

Answer: D

When evaluating capital projects, the decisions using the NPV method and the IRR method will agree if

When evaluating capital projects, the decisions using the NPV method and the IRR method will agree if

A) the projects are independent.
B) the cash flow pattern is conventional.
C) the projects are mutually exclusive.
D) both a and b.

Answer: D

The internal rate of return is

The internal rate of return is

A) the discount rate that makes the NPV greater than zero.
B) the discount rate that makes the NPV equal to zero.
C) the discount rate that makes the NPV less than zero.
D) both a and c.

Answer: B

Which one of the following statements about IRR is NOT true?

Which one of the following statements about IRR is NOT true?

A) The IRR is the discount rate that makes the NPV greater than zero.
B) The IRR is a discounted cash flow method.
C) The IRR is an expected rate of return.
D) None of the above.

Answer: A

Disadvantages of the payback method include the following.

Disadvantages of the payback method include the following.

A) It ignores the time value of money.
B) It is inconsistent with the goal of maximizing shareholder wealth.
C) It ignores cash flows beyond the payback period.
D) All of the above.

Answer: D

Advantages of the payback method include the following.

Advantages of the payback method include the following.

A) The technique is simple for managers to compute and interpret.
B) It is a good measure of liquidity risk.
C) Both a and b,
D) None of the above.

Answer: C

Which one of the following statements about the discounted payback method is NOT true?

Which one of the following statements about the discounted payback method is NOT true?

A) The discounted payback method represents the number of years it takes a project to recover its initial investment.
B) The discounted payback method calls for the project to be accepted if the payback period is greater than a target period.
C) The discount payback method is a risk indicator.
D) The expected cash flows from the project are discounted at the cost of capital.

Answer: B

Which ONE of the following statements about the payback method is true?

Which ONE of the following statements about the payback method is true?

A) The payback method is consistent with the goal of shareholder wealth maximization
B) The payback method represents the number of years it takes a project to recover its initial investment plus a required rate of return.
C) There is no economic rational that links the payback method to shareholder wealth maximization.
D) None of the above statements are true.

Answer: C

To accept a capital project when using NPV,

To accept a capital project when using NPV,

A) the project NPV should be less than zero.
B) the project NPV should be greater than zero.
C) both a and b.
D) none of the above.

Answer: B

The net present value

The net present value

A) uses the discounted cash flow valuation technique.
B) will provide a direct measure of how much the firm value will change because of the capital project.
C) is consistent with shareholder wealth maximization goal.
D) all of the above.

Answer: D

In computing the NPV of a capital budgeting project, one should NOT

In computing the NPV of a capital budgeting project, one should NOT

A) estimate the cost of the project.
B) discount the future cash flows over the project's expected life.
C) ignore the salvage value.
D) make a decision based on the project's NPV.

Answer: C

Which one of the following statements is NOT true?

Which one of the following statements is NOT true?

A) Accepting a positive-NPV project increases shareholder wealth.
B) Accepting a negative-NPV project decreases shareholder wealth.
C) Accepting a zero NPV project has a negative impact on shareholder wealth.
D) Managers are indifferent about accepting or rejecting a zero NPV project.

Answer: C

Which one of the following statements is NOT true?

Which one of the following statements is NOT true?

A) Accepting a positive-NPV project increases shareholder wealth.
B) Accepting a negative-NPV project has no impact on shareholder wealth.
C) Accepting a negative-NPV project decreases shareholder wealth.
D) Managers are indifferent about accepting or rejecting a zero NPV project.

Answer: B

Capital rationing implies that

Capital rationing implies that

A) funding resources exceed funding needs.
B) funding needs exceed funding resources.
C) funding needs equal funding resources.
D) none of the above.

Answer: B

Capital rationing implies that

Capital rationing implies that

A) the firm does not have enough resources to fund all of the available projects.
B) funding needs equal funding resources.
C) the available capital will be allocated equally to all available projects.
D) none of the above.

Answer: A

The cost of capital is

The cost of capital is

A) the minimum return that a capital budgeting project must earn for it to be accepted.
B) the maximum return a project can earn.
C) the return that a previous project for the firm had earned.
D) none of the above.

Answer: A

If both projects are positive-NPV projects, then the firm should

If both projects are positive-NPV projects, then the firm should

A) accept both projects because they are independent projects.
B) select the higher NPV project because they are mutually exclusive.
C) accept both projects because they are contingent projects.
D) Not enough information is given to make a decision.

Answer: A

The firm's decision will be to

The firm's decision will be to

A) accept both projects because they are independent projects.
B) accept both projects because they are contingent projects.
C) pick the one that adds the most value because they are mutually exclusive projects.
D) pick neither project.

Answer: A

Contingent projects would imply that

Contingent projects would imply that

A) the acceptance of one project is dependent on the acceptance of the other.
B) the projects can be either mandatory or optional.
C) Both a and b.
D) None of the above.

Answer: C

Two projects are considered to be contingent projects if

Two projects are considered to be contingent projects if

A) selecting one would automatically eliminate accepting the other.
B) the acceptance of one project is dependent on the acceptance of the other.
C) rejection of one project does not eliminate the selection of the other.
D) None of the above.

Answer: B

Two projects are considered to be mutually exclusive if

Two projects are considered to be mutually exclusive if

A) the projects perform the same function.
B) selecting one would automatically eliminate accepting the other.
C) Both a and b.
D) None of the above.

Answer: C

Two projects are considered to be independent if

Two projects are considered to be independent if

A) selecting one would have no bearing on accepting the other.
B) their cash flows are unrelated.
C) Both a and b.
D) None of the above.

Answer: C

Which of the following are aspects of independent projects?

Which of the following are aspects of independent projects?

A) Their cash flows are related.
B) Their cash flows are unrelated.
C) Selecting one would automatically eliminate accepting the other.
D) None of the above.

Answer: B

Which of the following is NOT true about capital budgeting.

Which of the following is NOT true about capital budgeting.

A) It involves identifying projects that will add to the firm's value.
B) It involves large capital investments.
C) The large capital investments can be reversed at any time.
D) It allows the firm's management to analyze potential business opportunities and decide on which ones to undertake.

Answer: C

When the law of one price is violated in that the same good is selling for two different prices, an opportunity for what type of transaction is created?

When the law of one price is violated in that the same good is selling for two different prices, an opportunity for what type of transaction is created?

a. return-to-equilibrium transaction
b. risk-assuming transaction
c. speculative transaction
d. arbitrage transaction
e. none of the above

Answer: D

The expected return minus the risk-free rate is called

The expected return minus the risk-free rate is called 

a. the risk premium
b. the percentage return
c. the asset's beta
d. the return premium
e. none of the above

Answer: A

In which one of the following types of contract between a seller and a buyer does the seller agree to sell a specified asset to the buyer today and then buy it back at a specified time in the future at an agreed future price.

In which one of the following types of contract between a seller and a buyer does the seller agree to sell a specified asset to the buyer today and then buy it back at a specified time in the future at an agreed future price. 

a. repurchase agreement
b. short selling
c. swap
d. call
e. none of the above

Answer: A

The process of selling borrowed assets with the intention of buying them back at a later date and lower price is referred to as

The process of selling borrowed assets with the intention of buying them back at a later date and lower price is referred to as 

a. longing an asset
b. asset flipping
c. shorting
d. anticipated price fall arbitrage
e. none of the above

Answer: C

The process of creating new financial products is sometimes referred to as

The process of creating new financial products is sometimes referred to as

a. financial frontiering
b. financial engineering
c. financial modeling
d. financial innovation
e. none of the above

Answer: B

Which of the following contracts obligates a buyer to buy or sell something at a later date?

Which of the following contracts obligates a buyer to buy or sell something at a later date?

a. call
b. futures
c. cap
d. put
e. swaption

Answer: B

Which of the following statements is not true about the law of one price

Which of the following statements is not true about the law of one price

a. investors prefer more wealth to less
b. investments that offer the same return in all states must pay the risk-free rate
c. if two investment opportunities offer equivalent outcomes, they must have the same price
d. investors are risk neutral
e. none of the above

Answer: D

Investors who do not consider risk in their decisions are said to be

Investors who do not consider risk in their decisions are said to be

a. speculating
b. short selling
c. risk neutral
d. traders
e. none of the above

Answer: C

Which of the following markets is/are said to provide price discovery?

Which of the following markets is/are said to provide price discovery?

a. futures
b. forwards
c. options
d. a and b
e. b and c

Answer: D

Which of the following trade on organized exchanges?

Which of the following trade on organized exchanges?

a. caps
b. forwards
c. options
d. swaps
e. none of the above

Answer: C

A market in which the price equals the true economic value

A market in which the price equals the true economic value

a. is risk-free
b. has high expected returns
c. is organized
d. is efficient
e. all of the above

Answer: D

Options on futures are also known as

Options on futures are also known as

a. spot options
b. commodity options
c. exchange options
d. security options
e. none of the above

Answer: B

A forward contract has which of the following characteristics?

A forward contract has which of the following characteristics?

a. has a buyer and a seller
b. trades on an organized exchange
c. has a daily settlement
d. gives the right but not the obligation to buy
e. all of the above

Answer: A

Which of the following are advantages of derivatives?

Which of the following are advantages of derivatives?

a. lower transaction costs than securities and commodities
b. reveal information about expected prices and volatility
c. help control risk
d. make spot prices stay closer to their true values
e. all of the above

Answer: E

A transaction in which an investor holds a position in the spot market and sells a futures contract or writes a call is

A transaction in which an investor holds a position in the spot market and sells a futures contract or writes a call is

a. a gamble
b. a speculative position
c. a hedge
d. a risk-free transaction
e. none of the above

Answer: C

The positive relationship between risk and return is called

The positive relationship between risk and return is called

a. expected return
b. market efficiency
c. the law of one price
d. arbitrage
e. none of the above

Answer: E

Which of the following instruments are contracts but are not securities

Which of the following instruments are contracts but are not securities

a. stocks
b. options
c. swaps
d. a and b
e. b and c

Answer: E

A call option gives the holder

A call option gives the holder

a. the right to buy something
b. the right to sell something
c. the obligation to buy something
d. the obligation to sell something
e. none of the above

Answer: A

Cash markets are also known as

Cash markets are also known as

a. speculative markets
b. spot markets
c. derivative markets
d. dollar markets
e. none of the above

Answer: B

The market value of the derivatives contracts worldwide totals

The market value of the derivatives contracts worldwide totals 

a. less than a trillion dollars
b. in the hundreds of trillion dollars
c. over a trillion dollars but less than a hundred trillion
d. over quadrillion dollars
e. none of the above

Answer: C

Which market adjusts the quickest in response to shocks to the economy?

Which market adjusts the quickest in response to shocks to the economy?

a. The labor market
b. The goods market
c. The asset, labor, and goods markets adjust at about the same speed to eliminate a disequilibrium in the macroeconomy.
d. The asset market

Answer: D

An increase in taxes (when Ricardian equivalence doesn't hold) causes the real interest rate to ________ and the price level to ________ in general equilibrium.

An increase in taxes (when Ricardian equivalence doesn't hold) causes the real interest rate to ________ and the price level to ________ in general equilibrium.

a. fall; fall
b. rise; fall
c. fall; rise
d. rise; rise

Answer: A

Vault cash is equal to $2 million, deposits by depository institutions at the central bank are $1 million, the monetary base is $15 million, and bank deposits are $35 million. Currency held by the nonbank public is

Vault cash is equal to $2 million, deposits by depository institutions at the central bank are $1 million, the monetary base is $15 million, and bank deposits are $35 million. Currency held by the nonbank public is

a. $15 million.
b. $12 million.
c. $20 million.
d. $3 million.

Answer: B

Assume that the currency-deposit ratio is 0.2 and the reserve-deposit ratio is 0.1. The Federal Reserve carries out open-market operations, purchasing $1 million worth of bonds from banks. This action will increase the money supply by

Assume that the currency-deposit ratio is 0.2 and the reserve-deposit ratio is 0.1. The Federal Reserve carries out open-market operations, purchasing $1 million worth of bonds from banks. This action will increase the money supply by

a. $3 million.
b. $1 million.
c. $4 million.
d. $2 million.

Answer: C

Over the past year, productivity grew 2%, capital grew 1%, and labor grew 1%. If the elasticities of output with respect to capital and labor are 0.2 and 0.8, respectively, how much did output grow?

Over the past year, productivity grew 2%, capital grew 1%, and labor grew 1%. If the elasticities of output with respect to capital and labor are 0.2 and 0.8, respectively, how much did output grow?

a. 3%
b. 4%
c. 2%
d. 1%

Answer: A

In the Solow model, if f(k) = 2k^0.5, s = 0.1, n = 0.1, and d = 0.05, what is the value of f(k) at equilibrium?

In the Solow model, if f(k) = 2k^0.5, s = 0.1, n = 0.1, and d = 0.05, what is the value of f(k) at equilibrium?

a. 8/3
b. 2
c. 2/3
d. 4/3

Answer: A

GDP differs from GNP because

GDP differs from GNP because

a. GNP = GDP - net factor payments from abroad.
b. GDP = GNP - capital consumption allowances.
c. GNP = GDP - capital consumption allowances.
d. GDP = GNP - net factor payments from abroad.

Answer: D

Which of the following is included in U.S. GDP?

Which of the following is included in U.S. GDP?

a. The purchase of a watch from a Swiss company
b. The sale of a used car
c. The sale of a new car from a manufacturer's inventory
d. A newly constructed house

Answer: D

Which of the following macroeconomic variables is procyclical and coincident with the business cycle?

Which of the following macroeconomic variables is procyclical and coincident with the business cycle?

a. Industrial production
b. Residential investment
c. Nominal interest rates
d. Unemployment

Answer: A

In the short run, an increase in export sales would cause output to ________ and the price level to ________.

In the short run, an increase in export sales would cause output to ________ and the price level to ________.

a. rise; stay constant
b. rise; rise
c. fall; stay constant
d. fall; rise

Answer: A

There's been a real depreciation of the dollar over the past month. In the long run, you would expect the quantity of

There's been a real depreciation of the dollar over the past month. In the long run, you would expect the quantity of

a. American imports to fall and the quantity of American exports to fall.
b. American imports to rise and the quantity of American exports to rise.
c. American imports to rise and the quantity of American exports to fall.
d. American imports to fall and the quantity of American exports to rise.

Answer: D

Currency unions are rare because

Currency unions are rare because

a. they're to no one's advantage.
b. having flexible exchange rates has the same benefits and none of the costs.
c. speculative attacks are likely to occur.
d. countries are reluctant to give up having their own currencies.

Answer: D

Increases in the debt-GDP ratio are primarily caused by

Increases in the debt-GDP ratio are primarily caused by

a. a high government deficit relative to GDP.
b. a high growth rate of GDP.
c. increases in interest rates.
d. increases in government borrowing through bonds.

Answer: A

Consider an economy that has the following monetary data.

Consider an economy that has the following monetary data.

Currency held by the nonbank public = $300
Bank reserves = $50
Monetary base = $350
Deposits = $700
Money supply = $1000

The monetary base and the money supply are expected to grow at a constant rate of 20% per year. Inflation and expected inflation are 20% per year. Suppose that bank reserves and currency pay no interest, all currency is held by the public, and bank deposits pay no interest. What is the cost to the public of the inflation tax?


a. $140
b. $60
c. $200
d. $190

Answer: C

The average cost of the distortion created by taxes

The average cost of the distortion created by taxes

a. increases proportionately with the tax rate.
b. is higher when the tax rate is constant than when it fluctuates.
c. is lower when the tax rate is constant than when it fluctuates.
d. equals the square root of the tax rate.

Answer: C

In goods market equilibrium in an open economy,

In goods market equilibrium in an open economy,

a. the desired amount of national saving must equal the desired amount of domestic investment.
b. the desired amount of national saving must equal the desired amount of domestic investment plus the amount lent abroad.
c. the desired amount of exports must equal the desired amount of imports less the amount lent abroad.
d. the desired amount of exports must equal the desired amount of imports.

Answer: B

An economy is considered a small open economy if it

An economy is considered a small open economy if it

a. has GDP less than 1% of world GDP.
b. has a zero trade balance.
c. is too small to affect the world real interest rate.
d. doesn't trade internationally.

Answer: C

If the price level was 100 in 2009 and 102 in 2010, the inflation rate was

If the price level was 100 in 2009 and 102 in 2010, the inflation rate was

a. 0.2%.
b. 2%.
c. 20%.
d. 102%.

Answer: B

The number of unemployed divided by the labor force equals

The number of unemployed divided by the labor force equals

a. the inflation rate.
b. the labor force participation rate.
c. the misery index.
d. the unemployment rate.

Answer: D

Suppose your company is in equilibrium, with its capital stock at its desired level. A permanent increase in the depreciation rate now has what effect on your desired capital stock?

Suppose your company is in equilibrium, with its capital stock at its desired level. A permanent increase in the depreciation rate now has what effect on your desired capital stock?

a. Raises it, because the user cost of capital is now lower
b. Lowers it, because the future marginal productivity of capital is lower
c. Raises it, because the future marginal productivity of capital is higher
d. Lowers it, because the user cost of capital is now higher

Answer: D

Desired national saving equals

Desired national saving equals

a. I(d) + G.
b. C(d) + I(d) + G.
c. Y - C(d) - G.
d. Y - I(d) - G.

Answer: C

Money demand is given by M(d)/P = 1000 + 0.2Y - 1000i. Given that P = 200, Y = 2000, and i = 0.10, real money demand is equal to

Money demand is given by
M(d)/P = 1000 + 0.2Y - 1000i.
Given that P = 200, Y = 2000, and i = 0.10, real money demand is equal to

a. 260,000.
b. 1,300.
c. 1,500.
d. 300,000.

Answer: B

An increase in expected inflation is likely to cause

An increase in expected inflation is likely to cause

a. a decline in the demand for real balances.
b. an increase in the demand for real balances.
c. no change in the demand for real balances only if the income elasticity of real money demand is zero.
d. no change in the demand for real balances.

Answer: A

The amount of output lost when the inflation rate is reduced by one percentage point is called

The amount of output lost when the inflation rate is reduced by one percentage point is called

a. the sacrifice ratio.
b. Okun's law.
c. the Solow residual.
d. Planck's constant.

Answer: A

If the expected inflation rate is unchanged, a fall in the natural rate of unemployment would

If the expected inflation rate is unchanged, a fall in the natural rate of unemployment would

a. shift the Phillips curve to the right.
b. not shift the Phillips curve.
c. shift the Phillips curve to the left and shift the long-run Phillips curve to the right.
d. shift the Phillips curve to the left.

Answer: D

Which of the following would shift the FE line to the left?

Which of the following would shift the FE line to the left?

a. A decrease in the future marginal productivity of capital
b. A decrease in the capital stock
c. An increase in labor supply
d. A beneficial supply shock

Answer: B

Which of the following changes shifts the long-run aggregate supply curve to the right?

Which of the following changes shifts the long-run aggregate supply curve to the right?

a. A decrease in the demand for labor
b. A decrease in taxes (assuming Ricardian equivalence doesn't hold)
c. An increase in consumer confidence
d. A demographic change that increases the labor supply

Answer: D

In the Keynesian model, suppose the Fed sets a target for the real interest rate. If the IS curve shifts up and to the right, and the Fed wants to keep output unchanged in the short run and the price level unchanged in the long run, it will

In the Keynesian model, suppose the Fed sets a target for the real interest rate. If the IS curve shifts up and to the right, and the Fed wants to keep output unchanged in the short run and the price level unchanged in the long run, it will

a. shift the LR curve up.
b. not shift the LR curve.
c. shift the IS curve up and to the right.
d. shift the LR curve down.

Answer: A

Changes in reserve requirements directly and immediately affect

Changes in reserve requirements directly and immediately affect

a. the monetary base.
b. banks' holdings of securities.
c. the money multiplier.
d. the Fed's holdings of foreign exchange.

Answer: C

Suppose the current level of output is 5000 and the elasticity of output with respect to capital is 0.4. A 10% increase in capital would increase the current level of output to

Suppose the current level of output is 5000 and the elasticity of output with respect to capital is 0.4. A 10% increase in capital would increase the current level of output to

a. 5050.
b. 5500.
c. 5200.
d. 5020.

Answer: C

Over the past year, output grew 5%, capital grew 5%, and labor grew 1%. If the elasticities of output with respect to capital and labor are 0.3 and 0.7, respectively, how much did productivity grow?

Over the past year, output grew 5%, capital grew 5%, and labor grew 1%. If the elasticities of output with respect to capital and labor are 0.3 and 0.7, respectively, how much did productivity grow?

a. 1.0%
b. 2.2%
c. 2.8%
d. 0.5%

Answer: C

The value of real GDP in the current year equals

The value of real GDP in the current year equals

a. the value of current-year output in prices of the current year.
b. the value of base-year output in prices of the base year.
c. the value of current-year output in prices of the base year.
d. the value of base-year output in prices of the current year.

Answer: C

The nominal interest rate minus the inflation rate is the

The nominal interest rate minus the inflation rate is the

a. real interest rate.
b. forward rate.
c. depreciation rate.
d. discount rate.

Answer: A

In the long run, an increase in consumer spending would cause output to ________ and the price level to ________.

In the long run, an increase in consumer spending would cause output to ________ and the price level to ________.

a. stay constant; stay constant
b. stay constant; rise
c. rise; stay constant
d. rise; rise

Answer: B

When plotted with the aggregate price level on the vertical axis and output on the horizontal axis, which of the following curves slopes downward?

When plotted with the aggregate price level on the vertical axis and output on the horizontal axis, which of the following curves slopes downward?

a. (i) SRAS
b. (ii) AD
c. (iii) LRAS
d. None of (i), (ii), and (iii)

Answer: B

Suppose the dollar/euro exchange rate falls. Then

Suppose the dollar/euro exchange rate falls. Then

a. the euro is more valuable relative to the dollar.
b. French firms will import more from the United States into France.
c. the dollar is less valuable relative to the euro.
d. U.S. firms will export less to France.

Answer: B

The price of one currency in terms of another is called

The price of one currency in terms of another is called

a. purchasing power parity.
b. the exchange rate.
c. a currency band.
d. the terms of trade.

Answer: B

The total value of government bonds outstanding at any particular time is called the

The total value of government bonds outstanding at any particular time is called the

a. government debt.
b. seignorage revenue.
c. yield curve.
d. government deficit.

Answer: A

According to the Ricardian equivalence proposition, current deficits

According to the Ricardian equivalence proposition, current deficits

a. will affect both consumption and national saving.
b. will not affect consumption or national saving.
c. will affect national saving but not consumption.
d. will affect consumption but not national saving.

Answer: B

Which of the following would be part of the nation's capital and financial account?

Which of the following would be part of the nation's capital and financial account?

a. A night club show seen by an American in Mexico City
b. A payment to the Philippine government for the use of military bases in their country
c. A dividend from a British equity owned by an American
d. One hundred shares of British Petroleum stock purchased by an American

Answer: D

Consider a small open economy with desired national saving of S(d)= 200 + 10,000r and desired investment of I(d) = 1,000 - 5,000r. If r = 0.05, then net exports equal

Consider a small open economy with desired national saving of S(d)= 200 + 10,000r and desired investment of I(d) = 1,000 - 5,000r. If r = 0.05, then net exports equal

a. -100.
b. -50.
c. 50.
d. 100.

Answer: B

Average labor productivity is the

Average labor productivity is the

a. amount of machines per worker
b. amount of workers per machine
c. amount of output per worker
d. ratio of employed to unemployed workers

Answer: C

The main reason that the United States has such a high standard of living is

The main reason that the United States has such a high standard of living is

a. low unemployment
b. high government budget deficits
c. low inflation
d. high average labor productivity

Answer: D

An increase in the expected real interest rate tends to

An increase in the expected real interest rate tends to

a. raise desired investment only.
b. raise both desired saving and desired investment.
c. raise desired saving only.
d. raise desired saving, but lower desired investment.

Answer: D

Aunt Agatha has just left her nephew $5000. The most likely response is for her nephew to

Aunt Agatha has just left her nephew $5000. The most likely response is for her nephew to

a. increase current consumption, but not future consumption.
b. increase future consumption, but not current consumption.
c. decrease current consumption, but increase future consumption.
d. increase both current consumption and future consumption.

Answer: D

What's the most common way for a central bank to reduce the money supply?

What's the most common way for a central bank to reduce the money supply?

a. Collect higher taxes
b. Buy bonds from the government
c. Buy bonds from the public
d. Sell bonds to the public

Answer: D

Suppose real money demand is L = 0.8Y - 100,000(r + pi(e)). If the nominal money supply is 12,000, real output is 15,000, the real interest rate is 0.02, and the expected inflation rate is 0.01, then the price level is

Suppose real money demand is
L = 0.8Y - 100,000(r + pi(e)).
If the nominal money supply is 12,000, real output is 15,000, the real interest rate is 0.02, and the expected inflation rate is 0.01, then the price level is

a. 3
b. 1
c. 4/3
d. 3/4

Answer: C

Milton Friedman and Edmund Phelps questioned

Milton Friedman and Edmund Phelps questioned

a. the existence of a full-employment level of output.
b. the existence of a natural rate of unemployment.
c. the use of expectations in the Phillips curve.
d. the stability of the relationship between inflation and unemployment.

Answer: D

Countries in which wages adjust slowly to changes in the supply of and demand for labor are likely to have ________ sacrifice ratio.

Countries in which wages adjust slowly to changes in the supply of and demand for labor are likely to have ________ sacrifice ratio.

a. a low
b. a zero
c. a high
d. an infinite

Answer: C

The fact that the long-run Phillips curve is vertical implies that

The fact that the long-run Phillips curve is vertical implies that

a. monetary policy can't affect unemployment.
b. money is neutral in the long run.
c. money can't affect inflation in the long run.
d. there is a natural rate of inflation.

Answer: B

Which of the following statements about preferred stock is false?

Which of the following statements about preferred stock is false?

A) Preferred stock has a higher-priority claim on the firm's assets than common stock.
B) Failure to pay dividends will result in default.
C) Preferred stock has a lower-priority claim on the firm's assets than the firm's creditors in the event of default.
D) Preferred stock typically pays a fixed dividend.



Answer: B

Which of the following statements is true?

Which of the following statements is true?

A) In order for the constant growth dividend model to properly value a firm's common stock, R must be greater than g.
B) From a practical perspective, the growth rate in the constant growth dividend model must be greater than the sum of the long-term rate of inflation and the long-term real growth rate of the economy.
C) In order for the constant growth dividend model to properly value a firm's common stock, g must be greater than R.
D) The constant growth dividend model can be used effectively to value the common shares of a mixed growth stock.

Answer: A

The constant-growth dividend model will provide invalid solutions when

The constant-growth dividend model will provide invalid solutions when

a. the growth rate of the stock exceeds the required rate of return for the stock.
b. the growth rate of the stock is less than the required rate of return for the stock.
c. the growth rate of the stock is smaller than 10%.
d. None of the above.

Answer: A

Which one of the following statements is NOT true about constant-growth stocks?

Which one of the following statements is NOT true about constant-growth stocks?

a. Dividend stays constant over time.
b. Mature companies with a history of stable growth show this pattern.
c. Dividends grow at a constant rate each period forever.
d. Dividends that are to be paid out in the distant future have a very small present value and add little to the stock's price.

Answer: A

Which one of the following statements is NOT true about zero-growth stocks?

Which one of the following statements is NOT true about zero-growth stocks?

a. Dividend stays constant over time.
b. The cash flow pattern resembles a perpetuity with a constant cash flow.
c. Dividend payment pattern shows constant growth over time.
d. There is no growth in dividends over time.

Answer: C

The three simplifying assumptions that cover most stock growth patterns are

The three simplifying assumptions that cover most stock growth patterns are

a. dividends that stay constant over time, dividends that grow at a constant rate, and dividends that are equal to zero.
b. dividends that have a zero-growth rate, dividends that grow at a varying rate, and dividends that are equal to zero.
c. dividends that stay constant over time, dividends that grow at a constant rate, and dividends that have a mixed growth pattern.
d. None of the above.

Answer: C

Which ONE of the following statements is true about fast growth stocks?

Which ONE of the following statements is true about fast growth stocks?

a. These are firms that grow their sales at above-average rates and are expected to do so for a length of time.
b. These are firms that grow their earnings at above-average rates and are expected to do so for a length of time.
c. They generally pay dividends during their fast growth phase.
d. None of the above.

Answer: B

Which one of the following statements is NOT true about the general dividend valuation model?

Which one of the following statements is NOT true about the general dividend valuation model?

a. The model does not assume any specific pattern for dividend growth.
b. It makes a specific assumption about when the stock is going to be sold in the future.
c. The model calls for forecasting an infinite number of dividends for a stock.
d. All of the above are true.

Answer: B

Applying the valuation procedure to common stocks is more difficult than applying it to bonds because

Applying the valuation procedure to common stocks is more difficult than applying it to bonds because

a. the size and timing of the dividend cash flows are less certain than the coupon payments for bonds.
b. common stocks have no final maturity date.
c. unlike the rate of return, or yield, on bonds, the rate of return on common stock is not directly observable.
d. All of the above are true.

Answer: D

Preferred stock is sometimes regarded like a debt security because

Preferred stock is sometimes regarded like a debt security because

a. legally preferred stock is a debt security.
b. preferred dividend payments like bond interest payments are fixed amounts regardless of the firm's earnings.
c. preferred dividends are deductable from taxable income just like interest payments on bonds.
d. preferred stock holders receive a residual value and not a stated value.

Answer: B

Owners of preferred stock

Owners of preferred stock

a. have limited voting rights.
b. usually receive fixed dividend payments.
c. are given priority treatment over common stock with respect to dividends payments and the claims against the firm's assets in the event of bankruptcy or liquidation.
d. All of the above statements are true.

Answer: D

Which ONE of the following statements is NOT true about preferred stock?

Which ONE of the following statements is NOT true about preferred stock?

a. Preferred dividend payments are fixed amounts paid regularly by the firm, similar to the interest payments on corporate bonds.
b. Preferred dividends are deductable from taxable income just like the interest on bonds.
c. Preferred stock holders have limited voting privileges relative to common-stock owners.
d. While preferred stock is legally classified as perpetuities, some issues do have a fixed maturity.

Answer: B

Which one of the following statements is NOT true about preferred stock?

Which one of the following statements is NOT true about preferred stock?

a. Preferred stock represents ownership in the firm.
b. Owners of preferred stock are not guaranteed dividend payments by the firm.
c. Preferred stock dividends are fixed financial amounts paid regularly by the firm just like bond coupon payments.
d. Preferred stock holders have limited voting privileges relative to common-stock owners.

Answer: B

Which ONE of the following statements is true about common stock?

Which ONE of the following statements is true about common stock?

a. Common stock is considered to have a fixed maturity.
b. Owners of common stock are guaranteed dividend payment by the firm.
c. Owners of common stock have the lowest-priority claim on the firm's assets in the event of bankruptcy.
d. Common-stock holders have unlimited liability.

Answer: C

Which one of the following statements is NOT true about common stock?

Which one of the following statements is NOT true about common stock?

a. Common-stock holders have the right to vote on the selection of the board of directors for the firm.
b. Common stock is considered to have no fixed maturity.
c. Owners of common stock are guaranteed dividend payments by the firm.
d. Common-stock holders have limited liability.

Answer: C

Which one of the following statements is NOT true about auction markets?

Which one of the following statements is NOT true about auction markets?

a. In an auction market, buyers and sellers face each other directly and bargain over price.
b. The NASDAQ is the most efficient stockmarket in the United States.
c. The New York Stock Exchange is the best-known example of an auction market.
d. The auctioneer in this case is the specialist, who is designated by the exchange to represent orders placed by public customers.

Answer: B

Dealer markets are characterized by

Dealer markets are characterized by

a. no time-consuming search for a fair deal.
b. a guarantee of order fulfillment because the dealer holds an inventory of securities.
c. improved market efficiency because dealers provide continuous bid and ask prices for securities.
d. All of the above characterize dealer markets.

Answer: D

Which ONE of the following statements is true about dealer markets?

Which ONE of the following statements is true about dealer markets?

a. NYSE is the best-known example of a dealer market.
b. A dealer market involves time-consuming search for a fair deal.
c. The advantage of a dealer over a brokered market is that brokers cannot guarantee that an order will be executed promptly, while dealers can because they have an inventory of securities.
d. All of the above are true of dealer markets.

Answer: C

In brokered markets

In brokered markets

a. the commission charged by brokers is a lower cost to buyers and sellers than the cost of direct search.
b. buyers and sellers are brought together for a transaction fee.
c. brokers build a pool of price information through their extensive contacts.
d. All of the above are true of broker markets.

Answer: D

Which one of the following statements is NOT true about broker markets?

Which one of the following statements is NOT true about broker markets?

a. Brokers bring buyers and sellers together to earn a fee, called a commission.
b. Brokers' extensive contacts provide them with a pool of price information that individual investors could not economically duplicate themselves.
c. Investors have an incentive to hire a broker because they charge a commission that is less than the cost of direct search.
d. Brokers can guarantee an order because they have an inventory of securities.

Answer: D

The least efficient of all the different types of secondary markets is the

The least efficient of all the different types of secondary markets is the

a. auction market.
b. direct search market.
c. dealer market.
d. broker market.

Answer: B

Direct search markets are characterized by

Direct search markets are characterized by

a. complete price information.
b. extensive broker and dealer participation
c. private placement transactions and sale of common stock of small private companies.
d. a high level of efficiency.

Answer: C

In comparison to the NYSE,

In comparison to the NYSE, 

a. NASDAQ has less companies listed.
b. total share volume is lower on the NASDAQ.
c. firms listed on the NASDAQ tend to be smaller.
d. NASDAQ firms exceed NYSE listed firms in total capitalization.

Answer: C

Which one of the following statements is NOT true about secondary markets?

Which one of the following statements is NOT true about secondary markets?

a. In terms of total volume of activity and total capitalization of the firms listed, the NASDAQ is the largest in the world and the NYSE is the second largest.
b. In terms of the number of companies listed and shares traded on a daily basis, the NASDAQ is larger than the NYSE.
c. Firms listed on the NYSE tend to be, on average, larger in size and their shares trade more frequently than firms whose securities trade on NASDAQ.
d. In the United States, most secondary market transactions are done on one of the many stock exchanges.

Answer: A

Which ONE of the following statements is true about secondary markets in the United States?

Which ONE of the following statements is true about secondary markets in the United States?

a. In terms of total volume of activity and total capitalization of the firms listed, the NASDAQ is the largest in the world and the NYSE is the second largest.
b. In terms of the number of companies listed and shares traded on a daily basis, NASDAQ is larger than the NYSE.
c. Firms listed on the NASDAQ tend to be, on average, larger in size, and their shares trade more frequently than firms whose securities trade on NYSE.
d. In the United States, most secondary market transactions are done over the counter.

Answer: B

Which ONE of the following statements is true about secondary markets?

Which ONE of the following statements is true about secondary markets?

a. In secondary markets, outstanding shares of stock are bought and sold among investors.
b. For an investor, the function of secondary markets is to provide profitability for the shares of securities they own.
c. An active secondary market causes firms to sell their new debt or equity issues at a higher cost of funds.
d. All of the above are true statements

Answer: A

The largest holders of equity securities are

The largest holders of equity securities are

a. mutual funds.
b. pension funds.
c. foreign investors.
d. households



Answer: D

When is the appropriate time to harvest an asset?

When is the appropriate time to harvest an asset?

A) That point in time where harvesting the asset yields the largest internal rate of return.
B) That point in time where harvesting the asset yields the smallest payback.
C) That point in time where harvesting the asset yields the largest accounting rate of return.
D) That point in time where harvesting the asset yields the largest net present value.

Answer: D

Your firm is evaluating the merits of several different machines. Machine A has a useful life of 5-years, generates an NPV of $53,250, an IRR of 13.6% and an equivalent annual cost of $10,316. Machine B has a useful life of 3-years, an NPV of $61,051, an IRR of 12.5%, and an equivalent annual cost of $9,724. Machine C has a useful life of 4-years, generates an NPV of $55,225, an IRR of 15.2% and an equivalent annual cost of $7,535 Machine D has a useful life of 7-years, generates an NPV of $64,020, an IRR of 11.4% and an equivalent annual cost of $8,885.

Your firm is evaluating the merits of several different machines. Machine A has a useful life of 5-years, generates an NPV of $53,250, an IRR of 13.6% and an equivalent annual cost of $10,316. Machine B has a useful life of 3-years, an NPV of $61,051, an IRR of 12.5%, and an equivalent annual cost of $9,724. Machine C has a useful life of 4-years, generates an NPV of $55,225, an IRR of 15.2% and an equivalent annual cost of $7,535 Machine D has a useful life of 7-years, generates an NPV of $64,020, an IRR of 11.4% and an equivalent annual cost of $8,885.

Which machine should be purchased and why?



A) Machine C, because it has the highest IRR.
B) Machine D, because it has the highest NPV.
C) Machine A, because it has the most positive EAC.
D) Machine B, because it has the shortest useful life.

Answer: C

Which of the following is an example of a fixed cost?

Which of the following is an example of a fixed cost?

A) Cost of equipment purchased for an assembly line to be used in the production of a new product.
B) Assembly costs associated with the production of a new product.
C) Labor costs associated with the production of a new product.
D) Shipping costs associated with the sale of a new product.

Answer: A

Which of the following should not be included in a schedule of cash flows from operations when evaluating a capital project?

Which of the following should not be included in a schedule of cash flows from operations when evaluating a capital project?

A) Fixed costs.
B) Sunk costs.
C) Depreciation and amortization.
D) Variable costs.

Answer: B

General Mills just is undertaking an analysis on a new cereal. The firm realizes that if they come out with a new product it would affect sales of existing products? What is the best course of action for General Mills in this analysis?

General Mills just is undertaking an analysis on a new cereal. The firm realizes that if they come out with a new product it would affect sales of existing products? What is the best course of action for General Mills in this analysis? 

A) Treat the reduction of sales from existing cereals as a sunk cost.
B) Account for the reduction of sales from existing cereals in the projection of cash flows on the new product.
C) Include the allocated costs of the new cereal in the sales of the pre-existing products.
D) Ignore the fact that sales of other products will be affected.

Answer: B

Which of the following statements is true?

Which of the following statements is true?

A) The calculation of free cash flow does not include the impact of income taxes.
B) Accounting earnings are an unreliable measure of the costs and benefits of a project.
C) The idea that we can evaluate the cash flows from a project independently of the cash flows for the firm is known as the incremental principle.
D) Depreciation expense should not be included in the calculation of incremental net operating profits after-tax.

Answer: B

Which of the following statements is correct?

Which of the following statements is correct?

A) Incremental net operating profits after-tax should include sunk costs associated with a project.
B) Incremental net operating profits after-tax should include the effects of financing costs associated with a project.
C) Incremental net operating profits after-tax should exclude the effects of depreciation costs associated with a project.
D) Incremental net operating profits after-tax should exclude the effects of financing costs associated with a project.

Answer: D

Norman, Inc. is considering two mutually exclusive projects. Project A is a six-year project with a NPV of $3,000 and Project B is a four-year project with an NPV of $2,278. Project A has an equivalent annual cash flow of $730 and Project B has an equivalent annual cash flow of $750. Which project should the firm select?

Norman, Inc. is considering two mutually exclusive projects. Project A is a six-year project with a NPV of $3,000 and Project B is a four-year project with an NPV of $2,278. Project A has an equivalent annual cash flow of $730 and Project B has an equivalent annual cash flow of $750. Which project should the firm select?

A) Choose Project A because it has the higher NPV.
B) Choose Project B because it has the lower NPV.
C) Choose Project B because it has the higher equivalent annual cash flow.
D) Choose Project A because it has the lower equivalent annual cash flow.

Answer: C

The proper time to harvest an asset is when

The proper time to harvest an asset is when

A) the percentage NPV increase of harvesting a project at a future point in time is at the last date where the increase is greater than the cost of capital.
B) the percentage NPV increase of harvesting a project at a future point in time is at the first date where the increase is less than the cost of capital.
C) the percentage NPV increase of harvesting a project at a future point in time is at the first date where the increase is greater than the cost of capital.
D) none of the above.

Answer: A

Stillwater Drinks is trying to determine when to harvest the water from the fountain of youth that it currently owns. If it harvests the water in year 1, the NPV of the project would increase over an immediate harvest by 18 percent. A year 2 harvest would create an NPV increase of 12 percent over that of year 1 and year 3 would create an NPV increase of 8 percent over that of year 2. If the cost of capital is 17 percent for Stillwater, then which harvest year would maximize the NPV for the firm? Assume that all NPVs are calculated from the perspective of today.

Stillwater Drinks is trying to determine when to harvest the water from the fountain of youth that it currently owns. If it harvests the water in year 1, the NPV of the project would increase over an immediate harvest by 18 percent. A year 2 harvest would create an NPV increase of 12 percent over that of year 1 and year 3 would create an NPV increase of 8 percent over that of year 2. If the cost of capital is 17 percent for Stillwater, then which harvest year would maximize the NPV for the firm? Assume that all NPVs are calculated from the perspective of today.

A) Harvest immediately.
B) Harvest in year 1.
C) Harvest in year 2.
D) Harvest in year 3.

Answer: B

Windy Burgers is trying to determine when to harvest a herd of cows that it currently owns. If it harvests the herd in year 1, the NPV of the project would increase over an immediate harvest by 25 percent. A year 2 harvest would create an NPV increase of 15 percent over that of year 1 and year 3 would create an NPV increase of 7 percent over that of year 2. If the cost of capital is 12 percent for Windy, then which harvest year would maximize the NPV for the firm? Assume that all NPVs are calculated from the perspective of today.

Windy Burgers is trying to determine when to harvest a herd of cows that it currently owns. If it harvests the herd in year 1, the NPV of the project would increase over an immediate harvest by 25 percent. A year 2 harvest would create an NPV increase of 15 percent over that of year 1 and year 3 would create an NPV increase of 7 percent over that of year 2. If the cost of capital is 12 percent for Windy, then which harvest year would maximize the NPV for the firm? Assume that all NPVs are calculated from the perspective of today.

A) Harvest immediately.
B) Harvest in year 1.
C) Harvest in year 2.
D) Harvest in year 3.

Answer: C

If you are deciding whether to take one project or another, where the projects have different useful lives, then you could utilize

If you are deciding whether to take one project or another, where the projects have different useful lives, then you could utilize

A) a repeated investment analysis to decide which project is better for the firm.
B) an equivalent annual annuity analysis to decide which project is better for the firm.
C) either of the above.
D) none of the above.

Answer: C

In order for a project to generate a positive net working capital cash flow at the conclusion of a project,

In order for a project to generate a positive net working capital cash flow at the conclusion of a project,

A) the project must have generated a cumulative negative cash flow during the life of the project.
B) the project must have generated a cumulative positive cash flow during the life of the project.
C) the project must have generated a cumulative negative cash flow at the conclusion of the project.
D) the project could not have generated a positive cash flow at the opening of the project.

Answer: A

When compared to the straight-line depreciation method, MACRS has

When compared to the straight-line depreciation method, MACRS has

A) a greater proportion of its depreciation early in the life of the asset.
B) a lesser proportion of its depreciation early in the life of the asset.
C) an equal proportion of its depreciation early in the life of the asset.
D) none of the above.

Answer: A

For a U.S. corporation with income above $20 million,

For a U.S. corporation with income above $20 million,

A) the average tax rate is less than the marginal tax rate.
B) the average tax rate is equal to the marginal tax rate.
C) the average tax rate is greater than the marginal tax rate.
D) none of the above.

Answer: B

A tax system in which taxpayers pay a progressively larger share of their income in taxes as their income rises is called

A tax system in which taxpayers pay a progressively larger share of their income in taxes as their income rises is called

A) a flat tax system.
B) a progressive tax system.
C) a digressive tax system.
D) a political tax system.

Answer: B

If you are discounting a project's cash flows using the nominal cost of capital, then that means that you have taken the following into account:

If you are discounting a project's cash flows using the nominal cost of capital, then that means that you have taken the following into account:

A) the real rate of return
B) the expected rate of inflation
C) both of the above
D) none of the above

Answer: C

If the real return on U.S. Treasury bills is 14 percent while the rate of expected inflation is anticipated to be 8 percent, then what should nominal rate of return be?

If the real return on U.S. Treasury bills is 14 percent while the rate of expected inflation is anticipated to be 8 percent, then what should nominal rate of return be?

A) 14.00%
B) 33.00%
C) 23.12%
D) all of the above

Answer: C

If inflation is anticipated to be 10 percent during the next year while a nominal rate of 20 percent will be earned on U.S. Treasury bills, then what is the accurate real rate of return on these securities?

If inflation is anticipated to be 10 percent during the next year while a nominal rate of 20 percent will be earned on U.S. Treasury bills, then what is the accurate real rate of return on these securities?

A) 20.00%
B) 10.00%
C) 9.09%
D) None of the above

Answer: C

_______ represent dollars stated in terms of constant purchasing power.

_______ represent dollars stated in terms of constant purchasing power.

A) Nominal dollars
B) Real dollars
C) Inflated dollars
D) None of the above

Answer: B

Which of the following is the best example of a sunk cost?

Which of the following is the best example of a sunk cost?

A) Future payments on a leased building.
B) Future research and development costs.
C) Historical research and development costs.
D) Historical noncash expenses.

Answer: C

If a firm has the option of leasing some factory space to another firm or utilizing it for another product line, then if the firm chose the product line how should it handle the lost lease payments on the factory space?

If a firm has the option of leasing some factory space to another firm or utilizing it for another product line, then if the firm chose the product line how should it handle the lost lease payments on the factory space?

A) Ignore it.
B) Include it as an opportunity cost.
C) Include half of it as additional revenue for the project.
D) None of the above.

Answer: B

Whenever a project has a negative impact on an existing project's cash flows, then that effect should

Whenever a project has a negative impact on an existing project's cash flows, then that effect should

A) be ignored.
B) be ignored if the project is evaluated using the correct cost of capital.
C) be included as a negative revenue amount on the new project's cash flow analysis.
D) be included if the impact is limited to noncash expenditures.

Answer: C

A firm is considering taking a project that will produce $12 million of revenue per year. Cash expenses will be $5 million, and depreciation expenses will be $1 million per year. If the firm takes that project, then it will reduce the cash revenues of an existing project by $2 million. What is the free cash flow on the project, per year, if the firm is in the 40 percent marginal tax rate?

A firm is considering taking a project that will produce $12 million of revenue per year. Cash expenses will be $5 million, and depreciation expenses will be $1 million per year. If the firm takes that project, then it will reduce the cash revenues of an existing project by $2 million. What is the free cash flow on the project, per year, if the firm is in the 40 percent marginal tax rate?

A) $2.4 million
B) $3.4 million
C) $4.6 million
D) $5.0 million



Answer: B

Brown Mack, Inc., currently has two large manufacturing divisions that share a single plant. Brown Mack owns the plant but has calculated that $6 million of overhead expenses should be allocated to the two equal-sized divisions. If Brown Mack starts a third manufacturing division, of equal size to the other two divisions, then what overhead cost should the new division take into account on its capital budgeting cash flow analysis?

Brown Mack, Inc., currently has two large manufacturing divisions that share a single plant. Brown Mack owns the plant but has calculated that $6 million of overhead expenses should be allocated to the two equal-sized divisions. If Brown Mack starts a third manufacturing division, of equal size to the other two divisions, then what overhead cost should the new division take into account on its capital budgeting cash flow analysis?

A) $0
B) $2 million
C) $3 million
D) $6 million

Answer: A

Corporate overhead allocations should only be taken into account on project analysis if

Corporate overhead allocations should only be taken into account on project analysis if

A) the firm is currently covering all of its overhead allocations.
B) the firm is currently unable to cover all of its overhead allocations.
C) the overhead allocations involve cash expenditures.
D) none of the above.

Answer: D

Which of the following should not be included in a project's cash flow calculations?

Which of the following should not be included in a project's cash flow calculations?

A) cash expenses
B) cash revenues
C) allocated expenses
D) none of the above

Answer: C

The impact of a project on a firm's overall value depends on

The impact of a project on a firm's overall value depends on

A) a firm's accounting earnings.
B) a firm's cash flow.
C) a project's cash flow.
D) none of the above.



Answer: C

Additions to tangible assets, intangible assets ,and current assets can be described as

Additions to tangible assets, intangible assets ,and current assets can be described as

A) cash flows associated with investments.
B) operating cash flows.
C) free cash flows.
D) none of the above.

Answer: A

The firm's ____________ is used to calculate NOPAT because the profits from a project are assumed to be incremental to the firm.

The firm's ____________ is used to calculate NOPAT because the profits from a project are assumed to be incremental to the firm.

A) average tax rate
B) marginal tax rate
C) lowest marginal tax rate
D) none of the above

Answer: B

The idea that we can evaluate the cash flows from a project independently of the cash flows for the firm is known as

The idea that we can evaluate the cash flows from a project independently of the cash flows for the firm is known as

A) the stand-alone principle.
B) the dependent principle.
C) the independent principle.
D) none of the above.

Answer: A

In order to calculate free cash flow by starting with incremental cash flow from operations, we should

In order to calculate free cash flow by starting with incremental cash flow from operations, we should

A) subtract the incremental capital expenditures and add the incremental additions to working capital.
B) add the incremental capital expenditures and the incremental additions to working capital.
C) subtract the incremental capital expenditures and the incremental additions to working capital.
D) None of the above.

Answer: C

______ refers to the cash flow that a project is expected to generate after all operating expenses and taxes have been paid.

______ refers to the cash flow that a project is expected to generate after all operating expenses and taxes have been paid.

A) Incremental cash flow from operations
B) Operating income
C) EBITDA
D) None of the above

Answer: A

The term ___________ refers to the fact that these cash flows reflect the amount by which the firm's total after-tax free cash flows will change if the project is adopted.

The term ___________ refers to the fact that these cash flows reflect the amount by which the firm's total after-tax free cash flows will change if the project is adopted.

A) periodic
B) ending cash flows
C) incremental
D) none of the above

Answer: C

The ___________ is intended to reconcile changes in the balance sheet cash accounts.

The ___________ is intended to reconcile changes in the balance sheet cash accounts.

A) capital budgeting cash flow calculation
B) accounting statement of cash flows
C) accounting statement of income
D) none of the above

Answer: B

The NPV of a project is estimated by

The NPV of a project is estimated by

A) discounting the expected cash flows of a project in the future.
B) discounting only the certain cash flows of a project in the future.
C) discounting the variance of the expected cash flows of a project in the future.
D) none of the above.

Answer: A

The cash flows used in capital budgeting calculations are based on.

The cash flows used in capital budgeting calculations are based on.

A) historical estimates.
B) forecasts of future cash revenues, expenses, and investment outlays.
C) forecasts of net income.
D) forecasts of retained earnings available for financing projects.

Answer: B

Which ONE of the following statements is true?

Which ONE of the following statements is true?

A) The longer the maturity of a security, the greater its interest rate risk.
B) If investors believe inflation will be subsiding in the future, the prevailing yield will be upward sloping.
C) The real rate of interest varies with the business cycle, with the lowest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession.
D) The interest risk premium always adds a downward bias to the slope of the yield curve.

Answer: A

The three economic factors that determine the shape of the yield curve are

The three economic factors that determine the shape of the yield curve are

A) the real rate of interest, the expected rate of inflation, and marketability.
B) the real rate of interest, the expected rate of inflation, and interest rate risk.
C) the nominal rate of interest, the expected rate of inflation, and interest rate risk.
D) the real rate of interest, the nominal rate of interest, and interest rate risk.

Answer: B

Which one of the following statements is NOT true?

Which one of the following statements is NOT true?

A) The relationship between yield and marketability is known as the term structure of interest rates.
B) The shape of the yield curve is not constant over time.
C) As the general level of interest rises and falls over time, the yield curve shifts up and down and has different slopes.
D) Yield curves show graphically how market yields vary as term to maturity changes.

Answer: A

Inverted yield curves are observed when

Inverted yield curves are observed when

A) the economy is growing.
B) the economy is stagnant.
C) the economy is in recession.
D) None of the above.




Answer: C

Which one of the following statements is NOT true?

Which one of the following statements is NOT true?

A) The risk that the lender may not receive payments as promised is called default risk.
B) Investors must pay a premium to purchase a security that exposes them to default risk.
C) U.S. Treasury securities do not have any default risk and are the best proxy measure for the risk-free rate.
D) All of the above are true statements.

Answer: B

Which ONE of the following statements is true?

Which ONE of the following statements is true?

A) The lower the transaction costs are, the greater a security's marketability.
B) The interest rate, or yield, on a security varies inversely with its degree of marketability.
C) U.S. Treasury bills have the largest and most active secondary market and are considered to be the most marketable of all securities.
D) All of the above are true.

Answer: D

Marketability is the ability of an investor

Marketability is the ability of an investor

A) to sell a security quickly, at a low transaction cost, and at a price close to its fair market value.
B) to sell at a profit under all circumstances.
C) to sell the security above its par value.
D) None of the above.

Answer: A

Which ONE of the following statements is true?

Which ONE of the following statements is true?

A) Long-term bonds have lower price volatility than short-term bonds.
B) As interest rates decline, the prices of bonds rise; and as interest rates rise, the prices of bonds decline.
C) All other things being equal, short-term bonds are more risky than long-term bonds.
D) Interest rate risk decreases as maturity increases.

Answer: B

Which one of the following statements is NOT true?

Which one of the following statements is NOT true?

A) Interest rate risk is the risk that bond prices will change as interest rates change.
B) Interest rate changes and bond prices are inversely related.
C) As interest rates increase, bond prices increase.
D) Long-term bonds are more price volatile than short-term bonds of similar risk.

Answer: C

Which one of the following statements is NOT true?

Which one of the following statements is NOT true?

A) The realized yield is the return earned on a bond given the cash flows actually received by the investor.
B) The realized yield is equal to the yield to maturity even if the bond is sold prior to maturity.
C) It is the interest rate at which the present value of the actual cash flows generated by the investment equals the bond's price at the time of sale of the bond.
D) All of the above are true.

Answer: C

The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments

The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments

A) exceed the price of the bond.
B) equal to zero.
C) equal to the price of the bond.
D) less than the price of the bond.

Answer: C

Which one of the following statements is NOT true?

Which one of the following statements is NOT true?

A) The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond.
B) It is the yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised.
C) A bond's yield to maturity changes daily as interest rates increase or decrease.
D) All of the above are true.

Answer: D

Which one of the following statements about zero coupon bonds is NOT true?

Which one of the following statements about zero coupon bonds is NOT true?

A) Zero coupon bonds have no coupon payments but promise a single payment at maturity.
B) Zero coupon bonds must sell for less than similar bonds that make periodic coupon payments.
C) Zero coupon bonds make coupon payments but no principal payment at maturity.
D) All of the above statements are true.

Answer: C

In calculating the current price of a bond paying semiannual coupons, one needs to

In calculating the current price of a bond paying semiannual coupons, one needs to

A) use double the number of years for the number of payments.
B) use half the annual coupon.
C) use half the annual rate as the discount rate.
D) All of the above need to be done.

Answer: D

Bonds sell at a premium over the par value when market rates for similar bonds are

Bonds sell at a premium over the par value when market rates for similar bonds are

A) less than the bond's coupon rate.
B) greater than the bond's coupon rate.
C) equal to the bond's coupon rate.
D) Market rates are irrelevant in determining a bond's price.

Answer: A

Bonds sell at a discount off the par value when market rates for similar bonds are

Bonds sell at a discount off the par value when market rates for similar bonds are

A) less than the bond's coupon rate.
B) greater than the bond's coupon rate.
C) equal to the bond's coupon rate.
D) Market rates are irrelevant in determining a bond's price.

Answer: B

If a bond's coupon rate is equal to the market rate, then the bond will sell

If a bond's coupon rate is equal to the market rate, then the bond will sell

A) at a price equal to its face value.
B) at a price greater than its face value.
C) at a price less than its face value.
D) None of the above are true.

Answer: A

Which one of the following statements about bond price is NOT true?

Which one of the following statements about bond price is NOT true?

A) To compute a bond's price, one needs to calculate the present value of the bond's expected cash flows.
B) The value, or price, of any asset is the future value of its cash flows.
C) The required rate of return, or discount rate, for a bond is the market interest rate called the bond's yield to maturity
D) Estimate the expected future cash flows using the coupons that the bond will pay and the maturity value to be received.

Answer: B

Which ONE of the following statements is true?

Which ONE of the following statements is true?

A) To secure the conversion option on a bond, bondholders would be willing to pay a premium.
B) The conversion ratio is set so that the firm's stock price must appreciate 15 to 20 percent before it is profitable to convert bonds into equity.
C) Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder.
D) All of the above are true.

Answer: D

Which ONE of the following statements is true?

Which ONE of the following statements is true?

A) Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity.
B) Zero coupon bonds sell well below their face value (at a deep discount) because they offer no coupons.
C) The most frequent and regular issuer of zero coupon securities is the U.S. Treasury Department.
D) All of the above are true.

Answer: D

Which one of the following statements about vanilla bonds is NOT true?

Which one of the following statements about vanilla bonds is NOT true?

A) They have no special provisions.
B) The face value, or par value, for most corporate bonds is $1,000.
C) Coupon payments are usually made quarterly.
D) The bond's coupon rate is calculated as the annual coupon payment divided by the bond's face value.

Answer: C

It is easy for individuals to trade in the corporate bond market because

It is easy for individuals to trade in the corporate bond market because

A) the corporate bond market is considered to be very transparent.
B) prices in the corporate bond market tend to be more stable.
C) centralized reporting of deals between buyers and sellers take place.
D) None of the above statements are true.

Answer: D

Which one of the following statements is NOT true?

Which one of the following statements is NOT true?

A) Prices in the corporate bond market also tend to be more volatile than the markets for stocks or money market securities.
B) Corporate bonds are more marketable than the securities that have higher daily trading volumes.
C) The market for corporate bonds is thin.
D) The largest investors in corporate bonds are life insurance companies and pension funds.

Answer: B

Which ONE of the following statements is true?

Which ONE of the following statements is true?

A) The largest investors in corporate bonds are life insurance companies and pension funds.
B) The market for corporate bonds is thin.
C) Prices in the corporate bond market also tend to be more volatile.
D) All of the above are true.

Answer: D

Which one of the following statements is NOT true?

Which one of the following statements is NOT true?

A) Weak-form market efficiency implies that investors who have access to inside or private information will be able to earn abnormal returns.
B) Semistrong-form market efficiency implies that investors who have access to inside or private information will be able to earn abnormal returns.
C) Strong-form market efficiency implies that investors who have access to inside or private information will be able to earn abnormal returns.
D) None of the above.

Answer: C

With semistrong-form market efficiency,

With semistrong-form market efficiency,

A) the price of a security in the market reflects all public information only.
B) it would be possible to earn abnormally high returns by trading on public information.
C) investors who have access to inside or private information will be unable to earn abnormal returns.
D) None of the above.


Answer: A

With strong-form market efficiency,

With strong-form market efficiency,

A) the price of a security in the market reflects all public information only.
B) it would not be possible to earn abnormally high returns by trading on private information.
C) investors who have access to inside or private information will be able to earn abnormal returns.
D) None of the above.

Answer: B

Which one of the following statements is NOT true?

Which one of the following statements is NOT true?

A) Competition among investors is an important driver of informational efficiency.
B) If market prices reflect all relevant information about securities at a particular point in time, the market is informationally efficient.
C) In an informationally efficient market, market prices adjust quickly to new information about a security as it becomes available.
D) All of the above are true.

Answer: D

Which one of the following statements is NOT true?

Which one of the following statements is NOT true?

A) The overall efficiency of a capital market depends on its operational efficiency and its informational efficiency.
B) Operational efficiency focuses on bringing buyers and sellers together at the lowest possible cost.
C) If market prices reflect all relevant information about securities at a particular point in time, the market is operationally efficient.
D) All of the above are true.

Answer: C

In an efficient capital market,

In an efficient capital market,

A) security prices fully reflect the knowledge and expectations of all investors at a particular point in time.
B) investors and financial managers have no reason to believe the securities are not priced at or near their true value.
C) prices of securities adjust as new information becomes available to the market.
D) All of the above are true.




Answer: D

Which one of the following statements is NOT true?

Which one of the following statements is NOT true?

A) The correct way to annualize an interest rate is to compute the effective annual interest rate (EAR).
B) The APR is the annualized interest rate using simple interest.
C) The correct way to annualize an interest rate is to compute the annual percentage rate (APR).
D) You can find the interest rate per period by dividing the quoted annual rate by the number of compounding periods.

Answer: C

Which one of the following statements is NOT true?

Which one of the following statements is NOT true?

A) The Truth-in-Lending Act was passed by Congress to ensure that the true cost of credit was disclosed to consumers.
B) The Truth-in-Savings Act was passed to provide consumers an accurate estimate of the return they would earn on an investment.
C) The above two pieces of legislation require by law that the APR be disclosed on all consumer loans and savings plans.
D) All of the above are true statements.

Answer: D

Which one of the following statements is NOT true?

Which one of the following statements is NOT true?

A) The APR is the appropriate rate to do present and future value calculations.
B) The EAR is the appropriate rate to do present and future value calculations.
C) The EAR is the true cost of borrowing and lending.
D) The EAR takes compounding into account.

Answer: A

The true cost of lending is the

The true cost of lending is the

A) annual percentage rate.
B) effective annual rate.
C) quoted interest rate.
D) none of the above.

Answer: B

The true cost of borrowing is the

The true cost of borrowing is the

A) annual percentage rate.
B) effective annual rate.
C) quoted interest rate.
D) periodic rate.

Answer: B

Which one of the following statements is TRUE about the effective annual rate (EAR)?

Which one of the following statements is TRUE about the effective annual rate (EAR)?

A) The effective annual interest rate (EAR) is defined as the annual growth rate that takes compounding into account.
B) The EAR conversion formula accounts for the number of compounding periods and, thus, effectively adjusts the annualized interest rate for the time value of money.
C) The EAR is the true cost of borrowing and lending.
D) All of the above are true.

Answer: D

Your investment in a small business venture will produce cash flows that increase by 15 percent every year for the next 25 years. This cash flow stream is called

Your investment in a small business venture will produce cash flows that increase by 15 percent every year for the next 25 years. This cash flow stream is called

A) an annuity due.
B) a growing perpetuity.
C) an ordinary annuity.
D) a growing annuity.

Answer: D