Question 1

You have been promised a payment of $400 in the future. In which of the following cases is the present value of this payment the lowest?

Accepted Answer

A)  You receive the payment 4 years from now and the interest rate is 4 percent. 
B)  You receive the payment 4 years from now and the interest rate is 5 percent. 
C)  You receive the payment 5 years from now and the interest rate is 4 percent. 
D)  You receive the payment 5 years from now and the interest rate is 5 percent. 
A)  You receive the payment 4 years from now and the interest rate is 4 percent. 
B)  You receive the payment 4 years from now and the interest rate is 5 percent. 
C)  You receive the payment 5 years from now and the interest rate is 4 percent. 
D)  You receive the payment 5 years from now and the interest rate is 5 percent.

Question 2

Recently, Lisa's wealth increased by $500. If her wealth were to increase by another $500 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, Lisa's utility function

Accepted Answer

A)  and marginal utility function are both upward sloping. 
B)  and marginal utility function are both downward sloping. 
C)  is upward sloping and her marginal utility function is downward sloping. 
D)  is downward sloping and her marginal utility function is upward sloping. 
A)  and marginal utility function are both upward sloping. 
B)  and marginal utility function are both downward sloping. 
C)  is upward sloping and her marginal utility function is downward sloping. 
D)  is downward sloping and her marginal utility function is upward sloping.

Question 3

According to the efficient market hypothesis, which of the following statements is not correct?

Accepted Answer

A)  Stock market prices tend to rise today if they rose yesterday. 
B)  As judged by the typical person in the market, all stocks are fairly valued all the time. 
C)  At the market price, the number of shares being offered for sale matches the number of shares people want to buy. 
D)  All of the above statements are incorrect. 
A)  Stock market prices tend to rise today if they rose yesterday. 
B)  As judged by the typical person in the market, all stocks are fairly valued all the time. 
C)  At the market price, the number of shares being offered for sale matches the number of shares people want to buy. 
D)  All of the above statements are incorrect.

Question 4

The available evidence indicates that

Accepted Answer

A)  about one-half of all managers of active mutual funds consistently outperform index funds. 
B)  outperforming the market on a consistent basis is extremely difficult to do. 
C)  there is little truth to the notion that there is a trade-off between risk and return. 
D)  there is little truth to the efficient markets hypothesis. 
A)  about one-half of all managers of active mutual funds consistently outperform index funds. 
B)  outperforming the market on a consistent basis is extremely difficult to do. 
C)  there is little truth to the notion that there is a trade-off between risk and return. 
D)  there is little truth to the efficient markets hypothesis.

Question 5

Stockholders of ComfortAir Corporation, an air conditioner and furnace manufacturer, are concerned that the companies executives may take on greater risks than stockholders desire. This example illustrates

Accepted Answer

A)  moral hazard and market risk. 
B)  moral hazard and firm specific risk. 
C)  adverse selection and market risk. 
D)  adverse selection and firm specific risk. 
A)  moral hazard and market risk. 
B)  moral hazard and firm specific risk. 
C)  adverse selection and market risk. 
D)  adverse selection and firm specific risk.

Question 6

What is the future value of $800 one year from today if the interest rate is 7 percent?

Accepted Answer

A)  $747.66 
B)  $756.00 
C)  $856.00 
D)  None of the above are correct to the nearest cent. 
A)  $747.66 
B)  $756.00 
C)  $856.00 
D)  None of the above are correct to the nearest cent.

Question 7

The fact that we observe a trade-off between risk and return is puzzling to economists, because that observation conflicts with the notion that most people are risk averse.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following changes would decrease the present value of a future payment?

Accepted Answer

A)  an increase in the size of the payment 
B)  an increase in the time until the payment is made 
C)  a decrease in the interest rate 
D)  All of the above are correct. 
A)  an increase in the size of the payment 
B)  an increase in the time until the payment is made 
C)  a decrease in the interest rate 
D)  All of the above are correct.

Question 9

Scenario 27-2
Suppose Dave has a utility function   where W is his wealth in millions of dollars and U is the utility he obtains.
-Refer to Scenario 27-2. Is Dave risk averse? Explain.

Accepted Answer

Yes, Dave is risk averse. The

Question 10

If more people think a corporation's stock is overvalued than think it is undervalued then there is a

Accepted Answer

A)  surplus, so its price will rise. 
B)  surplus, so its price will fall. 
C)  shortage, so its price will rise. 
D)  shortage, so its price will fall. 
A)  surplus, so its price will rise. 
B)  surplus, so its price will fall. 
C)  shortage, so its price will rise. 
D)  shortage, so its price will fall.

Question 11

A previously well-respected and trusted president of a corporation is accused of fraud. At the same time interest rates unexpectedly fall. Which of the above would tend to make the price of the stock rise?

Accepted Answer

A)  the announcement and the fall in interest rates 
B)  the announcement but not the fall in interest rates 
C)  the fall in interest rates, but not the announcement 
D)  neither the announcement nor the fall in interest rates 
A)  the announcement and the fall in interest rates 
B)  the announcement but not the fall in interest rates 
C)  the fall in interest rates, but not the announcement 
D)  neither the announcement nor the fall in interest rates

Question 12

Which of the following games might a risk-averse person play?

Accepted Answer

A)  a game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1 
B)  a game where she has a 50 percent chance of winning $100 and a 50 percent chance of losing $100 
C)  a game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1 
D)  a game where she has a 40 percent chance of winning $1 and a 60 percent chance of losing $1 
A)  a game where she has a 50 percent chance of winning $1 and a 50 percent chance of losing $1 
B)  a game where she has a 50 percent chance of winning $100 and a 50 percent chance of losing $100 
C)  a game where she has a 60 percent chance of winning $1 and a 40 percent chance of losing $1 
D)  a game where she has a 40 percent chance of winning $1 and a 60 percent chance of losing $1

Question 13

The present value of a future payment to be received in three years is $1,000. If the interest rate is 5%, what is the amount that will be paid in three years?

Accepted Answer

A)  $1,150.00 
B)  $1,157.63 
C)  $1,215.51 
D)  $1,250.00 
A)  $1,150.00 
B)  $1,157.63 
C)  $1,215.51 
D)  $1,250.00

Question 14

Jack's Lock and Key is considering remodeling. It estimates that the remodeling will cost $6,000 and that as a result revenues will rise by $3,000 the first year, $2,500 the second year, $1,500 the third year and have no effect after then. If the interest rate is 5%, should Jack's remodel? Defend your answer by showing your work.

Accepted Answer

Jack's should remodel. The pre

Question 15

A person with diminishing marginal utility of wealth is risk averse.

Accepted Answer

A) True 
 B)False

Question 16

Dividends

Accepted Answer

A)  are the rates of return on mutual funds. 
B)  are cash payments that companies make to shareholders. 
C)  are the difference between the price and present value per share of a stock. 
D)  are the rates of return on a company's capital stock. 
A)  are the rates of return on mutual funds. 
B)  are cash payments that companies make to shareholders. 
C)  are the difference between the price and present value per share of a stock. 
D)  are the rates of return on a company's capital stock.

Question 17

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

Accepted Answer

A)  standard deviation analysis. 
B)  informational analysis. 
C)  fundamental analysis. 
D)  efficiency analysis. 
A)  standard deviation analysis. 
B)  informational analysis. 
C)  fundamental analysis. 
D)  efficiency analysis.

Question 18

Which of the following changes would increase the present value of a future payment?

Accepted Answer

A)  a decrease in the size of the payment 
B)  an increase in the time until the payment is made 
C)  a decrease in the interest rate 
D)  All of the above are correct. 
A)  a decrease in the size of the payment 
B)  an increase in the time until the payment is made 
C)  a decrease in the interest rate 
D)  All of the above are correct.

Question 19

Suppose the McCormick Corporation releases an earnings report that fails to meet the market's expectations. What does the efficient markets hypothesis predict will happen to McCormick's stock price?

Accepted Answer

The efficient markets hypothes

Question 20

If a person is risk averse, then she has

Accepted Answer

A)  diminishing marginal utility of wealth, implying that her utility function gets flatter as wealth increases. 
B)  diminishing marginal utility of wealth, implying that her utility function gets steeper as wealth increases. 
C)  increasing marginal utility of wealth, implying that her utility function gets flatter as wealth increases. 
D)  increasing marginal utility of wealth, implying that her utility function gets steeper as wealth increases. 
A)  diminishing marginal utility of wealth, implying that her utility function gets flatter as wealth increases. 
B)  diminishing marginal utility of wealth, implying that her utility function gets steeper as wealth increases. 
C)  increasing marginal utility of wealth, implying that her utility function gets flatter as wealth increases. 
D)  increasing marginal utility of wealth, implying that her utility function gets steeper as wealth increases.

Exam 14: The Basic Tools of Finance

You have been promised a payment of $400 in the future. In which of the following cases is the present value of this payment the lowest?

Recently, Lisa's wealth increased by $500. If her wealth were to increase by another $500 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, Lisa's utility function

According to the efficient market hypothesis, which of the following statements is not correct?

The available evidence indicates that

Stockholders of ComfortAir Corporation, an air conditioner and furnace manufacturer, are concerned that the companies executives may take on greater risks than stockholders desire. This example illustrates

What is the future value of $800 one year from today if the interest rate is 7 percent?

The fact that we observe a trade-off between risk and return is puzzling to economists, because that observation conflicts with the notion that most people are risk averse.

Which of the following changes would decrease the present value of a future payment?

Scenario 27-2 Suppose Dave has a utility function where W is his wealth in millions of dollars and U is the utility he obtains. -Refer to Scenario 27-2. Is Dave risk averse? Explain.

If more people think a corporation's stock is overvalued than think it is undervalued then there is a

A previously well-respected and trusted president of a corporation is accused of fraud. At the same time interest rates unexpectedly fall. Which of the above would tend to make the price of the stock rise?

Which of the following games might a risk-averse person play?

The present value of a future payment to be received in three years is $1,000. If the interest rate is 5%, what is the amount that will be paid in three years?

A person with diminishing marginal utility of wealth is risk averse.

Dividends

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

Which of the following changes would increase the present value of a future payment?

Suppose the McCormick Corporation releases an earnings report that fails to meet the market's expectations. What does the efficient markets hypothesis predict will happen to McCormick's stock price?

If a person is risk averse, then she has

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Application: the Costs of Taxation

Application: International Trade

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

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