Question 1

A company that produces wallpaper is considering buying some new equipment that it expects will increase future profits. If the interest rate falls, then the present value of these future earnings

Accepted Answer

A)  rises. The company is more likely to buy the equipment. 
B)  rises. The company is less likely to buy the equipment. 
C)  falls. The company is more likely to buy the equipment. 
D)  falls. The company is less likely to buy the equipment.

Question 2

Figure 27-1. The figure shows a utility function. 
-Refer to Figure 27-1. The properties exhibited by this utility function help to explain various things we observe in the economy, including

Accepted Answer

A)  the risk-return tradeoff. 
B)  insurance. 
C)  diversification. 
D)  All of the above are correct.

Question 3

If you are convinced that stock prices are impossible to predict from available information, then you probably also believe that

Accepted Answer

A)  the efficient markets hypothesis is not a correct hypothesis. 
B)  the stock market is informationally efficient. 
C)  the stock market is informationally inefficient. 
D)  there is no reason to establish a diversified portfolio of stocks.

Question 4

Which of the following statements best describes the economist's view of finance and the financial system?

Accepted Answer

A)  The financial system is very important to the functioning of the economy, and the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions. 
B)  The financial system, while interesting, is not very important to the functioning of the economy; however, the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions. 
C)  The financial system is very important to the functioning of the economy; however, the tools of finance are not particularly helpful to us as individuals since we seldom make decisions for which those tools are useful. 
D)  The field of finance is intimately concerned with the financial system and the tools of finance, and financial economists see great importance in them; however, the "mainstream" economist sees little value in studying financial markets or the tools of finance.

Question 5

Which of the following has a present value of $100?

Accepted Answer

A)  $109.12 in two years when the interest rate is 4 percent 
B)  $113.98 in two years when the interest rate is 6 percent 
C)  $116.64 in two years when the interest rate is 8 percent 
D)  $123.17 in two years when the interest rate is 10 percent

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

If a savings account pays 3.5% interest, then according to the rule of 70 how long will it take for the account balance to double?

Accepted Answer

The answer of If a savings account pays 3.5% interest,...

Question 8

According to fundamental analysis, a saver should prefer to buy stocks that are

Accepted Answer

A)  undervalued. This means the price of the stock is low given the value of the corporation. 
B)  undervalued. This means the value of the corporation is low given the price of stock. 
C)  overvalued. This means the price of the stock is high given the value of the corporation. 
D)  overvalued. This means the value of the corporation is high given the price of stock.

Question 9

Halvorson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. What is the highest interest rate at which Halvorson would find this project profitable?

Accepted Answer

A)  7% 
B)  6% 
C)  5% 
D)  It is not profitable at any of these interest rates.

Question 10

The sooner a payment is received and the higher the interest rate, the greater the present value of a future payment.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following best illustrates diversification?

Accepted Answer

A)  A company that produces many different products decides to produce fewer. 
B)  After selling stock, corporate management spends funds on projects with greater risks than shareholders had anticipated. 
C)  Instead of holding only the stocks of companies engaged in the banking business, a person decides to hold stock in a number of different companies producing different goods and services. 
D)  A person decides to purchase only stocks that have paid high dividends in the past.

Question 12

If you believe the stock market is informationally efficient, then it is a waste of time to engage in fundamental analysis.

Accepted Answer

A) True 
 B)False

Question 13

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.

Accepted Answer

A)  Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
B)  Fundamental analysis would now show the corporation is overvalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis. 
C)  Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is consistent with the efficient markets hypothesis. 
D)  Fundamental analysis would now show the corporation is undervalued. The fact that the price was unchanged is not consistent with the efficient markets hypothesis.

Question 14

A payment of $10,000 is to be made in the future. The interest rate 3%. Is this payment worth more if it is paid in 5 years or 10 years? How much more is it worth?

Accepted Answer

The answer of A payment of $10,000 is to be...

Question 15

Zoey wants to have about $750,000 when she retires in 10 years. She has $300,000 to deposit now. At which of the following interest rates would Zoey's deposit come closest to $750,000 after 10 years?

Accepted Answer

A)  9.6 percent 
B)  9.9 percent 
C)  10.2 percent 
D)  10.5 percent

Question 16

Suppose the interest rate is 10 percent. Which of the following payments has the largest present value?

Accepted Answer

A)  You receive $90.91 two years from today. 
B)  You receive $82.64 one year from today. 
C)  You receive $75.13 today. 
D)  All of these payments have the same present value to the nearest cent.

Question 17

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 9%, should the firm undertake the project? Show evidence to support your answer.

Accepted Answer

The answer of A company has an investment project that...

Question 18

Figure 27-1. The figure shows a utility function. 
-Refer to Figure 27-1. Let 0A represent the distance between the origin and point A; let AB represent the distance between point A and point B; etc. Which of the following ratios best represents the marginal utility per dollar when wealth increases from $400 to $600?

Accepted Answer

A)  
B)  
C)  
D)

Question 19

Suppose you win a small lottery and you are given the following choice: You can receive (1) an immediate payment of $5,000 or (2) two annual payments, each in the amount of $2,700, with the first payment coming one year from now, and the second payment coming two years from now. You would choose to take the two annual payments if the interest rate is

Accepted Answer

A)  2 percent, but not if the interest rate is 3 percent. 
B)  3 percent, but not if the interest rate is 4 percent. 
C)  4 percent, but not if the interest rate is 5 percent. 
D)  5 percent, but not if the interest rate is 6 percent.

Question 20

Using the rule of 70, about how much would $100 be worth after 50 years if the interest rate were 7 percent?

Accepted Answer

A)  $400 
B)  $800 
C)  $1,600 
D)  $3,200

Exam 27: The Basic Tools of Finance

A company that produces wallpaper is considering buying some new equipment that it expects will increase future profits. If the interest rate falls, then the present value of these future earnings

Figure 27-1. The figure shows a utility function. -Refer to Figure 27-1. The properties exhibited by this utility function help to explain various things we observe in the economy, including

If you are convinced that stock prices are impossible to predict from available information, then you probably also believe that

Which of the following statements best describes the economist's view of finance and the financial system?

Which of the following has a present value of $100?

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

If a savings account pays 3.5% interest, then according to the rule of 70 how long will it take for the account balance to double?

According to fundamental analysis, a saver should prefer to buy stocks that are

Halvorson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. What is the highest interest rate at which Halvorson would find this project profitable?

The sooner a payment is received and the higher the interest rate, the greater the present value of a future payment.

Which of the following best illustrates diversification?

If you believe the stock market is informationally efficient, then it is a waste of time to engage in fundamental analysis.

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.

A payment of $10,000 is to be made in the future. The interest rate 3%. Is this payment worth more if it is paid in 5 years or 10 years? How much more is it worth?

Zoey wants to have about $750,000 when she retires in 10 years. She has $300,000 to deposit now. At which of the following interest rates would Zoey's deposit come closest to $750,000 after 10 years?

Suppose the interest rate is 10 percent. Which of the following payments has the largest present value?

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 9%, should the firm undertake the project? Show evidence to support your answer.

Using the rule of 70, about how much would $100 be worth after 50 years if the interest rate were 7 percent?