Prior Exam 3

7/21/2019 Prior Exam 3

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Final Exam (Chapter 7, 8, 9)

Name: ______________________________

Multiple Choice Questions (333!99"#$$)

1. The difference between the present value of an investment and its cost is the:%&net present value.B.internal rate of return.C.payback period.D.profitability index.E.discounted payback period.

. The !inston Co. is considerin" two mutually exclusive pro#ects with the followin" cash

flows. The crossover rate is $$$$$ and if the re%uired rate is hi"her than the crossover ratethen pro#ect $$$$$ should be accepted.

&.1'.()*+ &'&1'.()*+ BC.1,.))*+ &

D.1,.))*+ BE.1,.-*+ &

'. The discount rate that makes the net present value of an investment exactly e%ual to /ero iscalled the:&.external rate of return.'&internal rate of return.C.avera"e accountin" return.

D.profitability index.E.e%uali/er.

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4.att is analy/in" two mutually exclusive pro#ects of similar si/e and has prepared thefollowin" data. Both pro#ects have , year lives.

att has been asked for his best recommendation "iven this information. 2is recommendationshould be to accept:&.pro#ect B because it has the shortest payback period.B.both pro#ects as they both have positive net present values.C&pro#ect & and re#ect pro#ect B based on their net present values.D.pro#ect B and re#ect pro#ect & based on other criteria not mentioned in the problem.E.pro#ect B and re#ect pro#ect & based on both the payback period and the avera"e accountin"return.

,. odified internal rate of return:&.handles the multiple 344 problem by combinin" cash flows until only one chan"e in si"nchan"e remains.B.re%uires the use of a discount rate.C.does not re%uire the use of a discount rate.&Both & and B.E.Both & and C.

. & pro#ect will have more than one 344 if:&.the 344 is positive.B.the 344 is ne"ative.C.the 567 is /ero.&the cash flow pattern exhibits more than one si"n chan"e.E.the cash flow pattern exhibits exactly one si"n chan"e.

8. 3f there is a conflict between mutually exclusive pro#ects due to the 3449 one should:&.drop the two pro#ects immediately.B.spend more money on "atherin" information.

C&depend on the 567 as it will always provide the most value.D.depend on the payback because it does not suffer from these same problems.E.5one of the above.

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-. !hat is the net present value of a pro#ect with the followin" cash flows and a re%uiredreturn of 1*

&.0;-8.'&0;188.C.;188.D.;


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11. ?ack is considerin" addin" toys to his "eneral store. 2e estimates that the cost of inventorywill be ;)9


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1). & bond that makes no coupon payments and is initially priced at a deep discount is calleda $$$$$ bond.&.TreasuryB.municipalC.floatin"0rate

D.#unkE&/ero coupon

1,. The principal amount of a bond that is repaid at the end of the loan term is called thebonds:&.coupon.'&face value.C.maturity.D.yield to maturity.

E.coupon rate.

1. The rate of return re%uired by investors in the market for ownin" a bond is called the:&.coupon.B.face value.C.maturity.&yield to maturity.E.coupon rate.

18. &ll else constant9 a bond will sell at $$$$$ when the yield to maturity is $$$$$ the couponrate.&.a premium+ hi"her thanB.a premium+ e%ual toC.at par+ hi"her thanD.at par+ less thanE&a discount+ hi"her than

1-. The relationship between nominal rates9 real rates9 and inflation is known as the:&.iller and odi"liani theorem.'&@isher effect.C.ordon "rowth model.D.term structure of interest rates.E.interest rate risk premium.

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19. The relationship between nominal interest rates on default0free9 pure discount securitiesand the time to maturity is called the:&.li%uidity effect.B.@isher effect.C&term structure of interest rates.

D.inflation premium.E.interest rate risk premium.


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'. The erriweather Co. #ust announced that it will pay a dividend next year of ;1.< and isestablishin" a policy whereby the dividend will increase by '.,* annually thereafter. 2owmuch will one share be worth five years from now if the re%uired rate of return is 1*&.;1.

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Prior Exam 3