Exam 9: The Basic Tools of Finance

A firm has three different investment options, each costing $10 million. Option A will generate $12 million in revenue at the end of one year. Option B will generate $15 million in revenue at the end of two years. Option C will generate $18 million in revenue at the end of three years. Which option should the firm choose?

When a person engages in detailed analysis of a company to determine its value, he or she is engaging in

Assuming the interest rate is 6 percent, which of the following has the greatest present value?

By diversifying, the risk of holding stock

What is the present value of a payment of $100 to be made one year from today if the interest rate is 6 percent?

Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 3%. The future value of the $500 in 5 years to the nearest cent is

Suppose the interest rate is 5% and that you are to receive three annual payments of $10,000, with the first payment one year from now, the second payment two years from now, and the third payment three years from now. What is the present value of this stream of payments?

What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain.

You are expecting to receive $750 at some time in the future. Which of the following would unambiguously decrease the present value of this future payment?

Of the following interest rates, which is the highest one at which you would prefer to have $170 ten years from today instead of $100 today?

If asset markets are driven by the "animal spirits" of investors, then

Suppose you win the lottery and one of your payment options is to receive $20,000 today, $20,000 one year from now, and $20,000 two years from now. If the interest rate is 5%, what is the present value of this option?

In the 15 years ending June 2010, most active portfolio managers failed to beat the market.

Fundamental analysis shows that Quadrangle Company is fairly valued. Then Quadrangle Company unexpectedly improves its production techniques and unexpectedly hires a new CEO away from another very successful competitor. Suppose this has no effect on the price of the stock of Quadrangle Company.

As the number of stocks in a person's portfolio increases,

Cleo promises to pay Jacques $1,000 two years from today. If the interest rate is 4 percent, then how much is this future payment worth today?

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. Suppose the person to whom this utility function applies begins with $600 in wealth. Starting from there,

Which of the following is a source of market risk?

What is the present value of a payment of $100 to be made one year from today?

Because the statistic called the standard deviation measures the volatility of a variable, it is used to measure the return of a portfolio.