Finc600 week 5 practice quiz finc 600

FINC600 Week 5 Practice
Quiz/FINC 600
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FINC600 Week 5 Practice Quiz
Corporate Finance
Week 5 Practice Quiz
Part 1 of 1 – Week 4 REQUIRED Quiz 93.5/ 100.0 Points
Question 1 of 25 4.0/ 4.0 Points
The conceptof compound interestis mostappropriatelydescribed as:
A.Interest earned on an investment
B.The total amountof interestearned over the life of an investment
C.Interestearned on interest
D.None of the above
Which of the following investmentrules does notuse the time value of the money concept?
A.Net presentvalue
B.Internal rate of return
C.The payback period
D.All of the above use the time value concept
The unique risk is also called the:
A.Unsystematic risk
B.Diversifiable risk
C.Firm specific risk
D.All of the above

What are some ofthe importantpoints to remember while estimating the cash flows ofa project?
The mostimportantpoints are
1) They are estimates.So there can be deviations
2) Some huge loss maycompletelychange the return from product.
3) Other risks like marketrisks,reinvestmentrisk etc. may affect the cash flow pattern
A bond with duration of 10 years has yield to maturity of 10%. This bond’s volatilityis:
A.9.09%
B.6.8%
C.14.6%
D.6.0%
Major disadvantages ofthe Sarbanes-Oxley Act of 2002 (SOX) are the following except:
A.good investor protection
B.increase in compliance costs
C.that it constrains managers’ abilityto run the firm
D.that it may discourage developmentofhuman capital in the firm
According to the net presentvalue rule,an investmentin a projectshould be made ifthe:
A.Net presentvalue is greater than the costof investment
B.Net presentvalue is greater than the presentvalue of cash flows
C.Net presentvalue is positive
D.Net presentvalue is negative
If the Wall Street Journal Quotation for a companyhas the following values close:55.14;Net chg: = + 1.04; then the
closing price for the stock for the previous trading day was?
A.$56.18
B.$54.10
C.$55.66
D.None of the above.
For example,in the case of an electric car project, which of the following cash flows should be treated as incremental
flows when deciding whether to go ahead with the project?

A.The cost of research and developmentundertaken for developing the electric car in the pastthree years
B.The annual depreciation charge
C.Tax savings resulting from the depreciation charges
D.Dividend payments
The following are some ofthe actions shareholders can take if the corporation is notperforming well:
A.Replace the board of directors in an election.
B.Force the board of directors to change the management team.
C.Sell their shares ofstock in the corporation.
D.Any of the above
The mixture of debt and equity, used to finance a corporation is also known as:
A.Capital budgeting
B.Capital structure
C.Investing
D.Treasury
Discuss the general principle in the valuation of a common stock.
The value of a common stock is the presentvalue of all the dividends received by owning the stock discounted atthe
marketcapitalization rate. This is called the discounted cash flow (DCF) method.
Feedback:The value of a common stock is the presentvalue of all the dividends received by owning the stock
discounted atthe marketcapitalization rate or the costof equity. This is called the discounted cash flow (DCF)
method.
Comment:reference required
The managers ofa firm can maximize stockholder wealth by:
A.Taking all projects with positive NPVs
B.Taking all projects with NPVs greater than the cost of investment
C.Taking all projects with NPVs greater than presentvalue of cash flow
D.All of the above
Florida Company(FC) and Minnesota Company(MC) are both service companies.Their historical return for the past
three years are: FC: – 5%,15%,20%; MC: 8%, 8%, 20%.If FC and MC are combined in a portfolio with 50% of the
funds invested in each, calculate the expected return on the portfolio.
A.12%
B.10%
C.11%
D.None of the above.

The marketvalue of XYZ Corporation’s common stock is 40 million and the marketvalue of the risk-free debt is 60
million.The beta of the company’s common stock is 0.8,and the expected marketrisk premium is 10%.If the
Treasury bill rate is 6%, whatis the firm’s costof capital? (Ass ume no taxes.)
A.9.2%
B.14%
C.8.1%
D.None of the above
The following are importantfunctions offinancial markets:I) Source of financing;II) Provide liquidity; III) Reduce risk;
IV) Source of information
A.I only
B.I and II only
C.I, II, III, and IV
D.IV only
Which of the following portfolios have the leastrisk?
A.A portfolio of Treasury bills
B.A portfolio of long-term United States Governmentbonds
C.Portfolio of U.S. common stocks of small firms
D.None of the above
PresentValue of $100,000 that is,expected, to be received at the end of one year at a discountrate of 25% per year
is:
A.$80,000
B.$125,000
C.$100,000
D.None of the above
Discuss some ofthe disadvantages ofthe payback rule.
The disadvantages are thatit does not take the time value of moneyinto accountand also does notuse all the cash
flow. It has limited applications such as small projects
Feedback: The disadvantages are thatit does nottake the time value of money into account and also does notuse
all the cash flow. It has limited applications such as small projects.
What is the relationship between interestrates and bond prices?

It’s importantto understand thatbonds and interestrates have an inverse relationship,meaning thatwhen interest
rates go up, existing bond prices go down,and when interestrates are low, bond prices are high.To demonstrate the
reason behind the inverse relationship,you’ll need to understand the conceptof yield.
Feedback:Interest rates and bond prices are inversely related.High interestrates cause bond prices to fall and vice -
versa. For a given change in interestrates,prices of long-term bonds fluctuate more than for short-term bonds.
Similarly,for a given change in interestrates low coupon bond prices fluctuate more than for high coupon bonds.
Spill Oil Company’s stocks had -8%,11% and 24% rates of return during the lastthree years respectively; calculate
the average rate of return for the stock.
A.8% per year
B.9% per year
C.11% per year
D.None of the above
Which of the following statements regarding the discounted payback period rule is true?
A.The discounted payback rule uses the time value of money concept.
B.The discounted payback rule is better than the NPV rule.
C.The discounted payback rule considers all cash flows.
D.The discounted payback rule exhibits the value additive property.
The NPV value obtained by discounting nominal cash flows using the nominal discountrate is the: I) same as the
NPV value obtained by discounting real cash flows using the real discountrate II) same as the NPV value obtained
by discounting real cash flows using the nominal discountrate III) same as the NPV value obtained by discounting
nominal cash flows using the real discountrate
A.I only
B.II only
C.III only
D.II and III only
Market risk is also called:I) systematic risk,II) undiversifiable risk,III) firm specific risk.
A.I only
B.II only
C.III only
D.I and II only
The costof a resource thatmay be relevant to an investmentdecision even when no cash changes hand is called a
(an):
A.Sunk cost
B.Opportunity cost

C.Working capital
D.None of the above

Finc600 week 5 practice quiz finc 600

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