Question 1

Consider the following investment/dividend opportunities facing a company: 
Assume that the interest rate in the capital market is 12 per cent per period.Also assume that the company has four equal shareholders (A,B,C and D).Will the shareholders support the company's decision to invest in Projects Normal and Mega instead of just Project Mega?

Accepted Answer

A) No,only Shareholder B will support such a decision. 
B) We cannot tell,as no information has been provided with regards to the consumption choices of Shareholders C and D 
C) Both Shareholders A and B will support this decision but we need to know the consumption choices of Shareholders C and D before being able to identify their preferences. 
D) All the shareholders will support the company's decision.

Question 2

Consider the following diagram: 
In the diagram,if the optimal policy is chosen then shareholder 2,with the lower indifference curve,will optimise her consumption by:

Accepted Answer

A) lending in the second period and borrowing in the first period. 
B) borrowing in the first period and repaying in the second period. 
C) lending in the first period and recieving in the second period. 
D) borrowing in the first period and recieving in the second period.

Question 3

Consider the following graph: 
What is the interest rate per period?

Accepted Answer

A) 7.31% 
B) 7.14% 
C) 7.50% 
D) 25.00%

Question 4

Fisher's separation theorem assumes markets have imperfections.

Accepted Answer

A) True 
 B)False

Question 5

An important implication of Fisher's separation theorem is that:

Accepted Answer

A) while the level of investment will depend on management decisions (independent of shareholders' wishes),shareholders will have a preference for given levels of dividend. 
B) shareholders and firm management will have separate interests and directions in decisions on investment,financing and especially dividends,and these have come to be known as an agency problem. 
C) the extent to which a firm should invest can be determined by a simple rule. 
D) the extent of investment undertaken will determine the amount of finance to be raised,and whether that finance will be debt or equity.

Question 6

Which of the following correctly represents the equation of a market opportunity line?

Accepted Answer

A) C1 = [W1(1 + i)+ C2]/(1 + i) 
B) C1(1 + i)= W1(1 + i)+ C2 
C) W1(1 + i)- C2 = C1(1 + i) 
D) C2 = -W1(1 + i)+ C1(1 + i)

Question 7

Consider the following investment/dividend opportunities facing a company: 
Assume that the interest rate in the capital market is 12 per cent per period.What is the NPV of Project Mini?

Accepted Answer

A) ($92.86) 
B) ($3.57) 
C) $396.43 
D) $4.06

Question 8

The curve showing a set of combinations that an individual derives equal utility from any combinations in the set is the:

Accepted Answer

A) indifference curve. 
B) production possibilities curve. 
C) production frontier curve. 
D) differential curve.

Question 9

Fama (1970)outlines the sufficient conditions in order for all shareholders to agree about the exact nature of uncertainty.Which of the following statements is not one of the specified sufficient conditions?

Accepted Answer

A) There are no transaction costs in trading securities. 
B) All agree on the implication of current information for the future price and distributions of future prices of each security. 
C) All information is costlessly available to all market participants. 
D) None of the given options.

Question 10

Pursuing a goal of maximising the market value of a company's shares is easy when:

Accepted Answer

A) dividends are growing at a constant rate. 
B) there is limited uncertainty. 
C) there are limited market imperfections. 
D) there are no market imperfections and no uncertainty.

Question 11

A number of implications for investment,financing and dividend decisions can be drawn from Fisher's analysis.In terms of financing decisions Fisher's analysis states that:

Accepted Answer

A) the nominal rate is the true interest rate. 
B) there is a single market interest rate. 
C) the real rate is the true interest rate. 
D) there are multiple market interest rates.

Question 12

When there is uncertainty,the effect on the share price due to decisions made by managers:

Accepted Answer

A) is no longer perfectly predictable. 
B) can only be predicted by Fisher's separation theorem. 
C) can only be predicted by the market opportunity line. 
D) can be predicted by Fisher's separation theorem,but only to a limited extent.

Question 13

Which statement is false with respect to the decision rule: accept a project if and only if [Return at Time 2 / (1 + i)- Δ] > 0?

Accepted Answer

A) The decision rule is completely consistent with Fisher's separation theorem. 
B) The decision rule is the same as the net present value rule. 
C) A company that always applies the decision rule to its investment decisions will be able to locate the optimal investment/dividend policy and will maximise the wealth of its shareholders. 
D) None of the given options.

Question 14

According to Fisher's Theorem,provided that the company does not alter its investment decision,the dividend decision does not affect _______________________.

Accepted Answer

The answer of According to Fisher's Theorem,provided that the company...

Question 15

The assumed overall financial objective of a company is to:

Accepted Answer

A) raise capital. 
B) reduce debt. 
C) maximise profits. 
D) maximise the market value of its ordinary shares.

Question 16

Share prices change as a result of investors' reaction to _________ provided through investment,financing and dividend decisions made by the managers of a company.

Accepted Answer

The answer of Share prices change as a result of...

Question 17

An indifference curve represents a set of possible consumption outcomes,which yields equal utility to the individual.

Accepted Answer

A) True 
 B)False

Question 18

Consider the following investment/dividend opportunities facing a company: 
Assume that the interest rate in the capital market is 12 per cent per period.Calculate the rate of return on Project Normal.

Accepted Answer

A) 14.3% 
B) 120.0% 
C) 13.6% 
D) 150.0%

Question 19

In the absence of _______________ companies are unable to make decisions about dividend policy that will please all share holders.

Accepted Answer

The answer of In the absence of _______________ companies are...

Question 20

The AlhpaBeta company is considering considering several investment opportunities.The interest rate for both borrowing and lending is 15 per cent per period and the investment/dividend opportunities are given in the following table: 
(a)What is the net present value of each project?
(b)Based on the NPV rule which project(s)should the company invest in?
(c)What is the IRR of project AOne?
(d)The company has 2 equal shareholders,Alpha and Beta,and invests in the project CThree.Alpha would prefer to consume $500 today.What can she do? How much will she be able to consume later?

Accepted Answer

The answer of The AlhpaBeta company is considering considering several...

Exam 2: Consumption, Investment and the Capital Market

Consider the following diagram: In the diagram,if the optimal policy is chosen then shareholder 2,with the lower indifference curve,will optimise her consumption by:

Consider the following graph: What is the interest rate per period?