Unit 15 Final Exam -- 4pts each

1. Which of the following statements is correct?

a. If a bank uses quarterly compounding for saving accounts, the simple rate will be greater
than the effective annual rate.
b. The present value of a future sum increases as the simple interest rate increases or the
number of discount periods per year decreases.
c. The present value of a future sum increases as either the simple interest rate or the number
of discount periods per year increases.
d. The present value of a future sum decreases as either the simple interest rate or the
number of discount periods per year increases.

2. Which of the following statements is correct?

a. Simple rates can't be used in present value or future value calculations because they fail to
account for compounding effects.
b. The periodic interest rate can be used directly in calculations as long as the number of
payments per year is greater than or equal to the number of compounding periods per year.
c. In all cases where interest is added or payments are made more frequently than
annually, the periodic rate is less than the annual rate.
d. Generally, the APR is greater than the EAR as a result of compounding effects.

3. At an effective annual interest rate of 20 percent, how many years will it take a given amount to triple in
value? (Round to the closest year.)
a. 5
b. 8
c. 6
d. 10

4. You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning
to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky
Mountains to become a ski instructor rather than continue in school, so you close out your account. How
much money will you receive?
a. $1,171
b. $1,126
c. $1,082
d. $1,163

5. What is the present value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15
percent interest rate?
a. $670.43
b. $842.91
c. $1,169.56
6. At an inflation rate of 9 percent, the purchasing power of $1 would be cut in half in 8.04 years. How long
to the nearest year would it take the purchasing power of $1 to be cut in half if the inflation rate were
only 4%?
a. 12 years
b. 15 years
c. 18 years
d. 20 years

7. You have developed the following data on three stocks:

Stock Standard Deviation Beta

A 0.15 0.79
B 0.25 0.61
C 0.20 1.29

If you are a risk minimizer, you should choose Stock ____ if it is to be held in isolation and Stock ____ if
it is to be held as part of a well-diversified portfolio.
a. A; A
b. A; B
c. B; A
d. C; A

8. In a portfolio of three different stocks, which of the following could not be true?
a. The riskiness of the portfolio is less than the riskiness of each of the stocks if they were
held in isolation.
b. The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.
c. The beta of the portfolio is less than the beta of each of the individual stocks.
d. The beta of the portfolio is greater than the beta of one or two of the individual stock's
betas.

9. Calculate the required rate of return for Mercury Inc., assuming that investors expect a 5 percent rate of
inflation in the future. The real risk-free rate is equal to 3 percent and the market risk premium is 5
percent. Mercury has a beta of 2.0, and its realized rate of return has averaged 15 percent over the last 5
years.
a. 15%
b. 16%
c. 17%
d. 18%

10. If the risk-free rate is 7 percent, the expected return on the market is 10 percent, and the expected return
on Security J is 13 percent, what is the beta of Security J?
a. 1.0
b. 1.5
c. 2.0
d. 2.5
11. You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common
stocks. The portfolio beta is equal to 1.15. You have decided to sell one of your stocks, a lead mining
stock whose  = 1.0, for $5,000 net and to use the proceeds to buy $5,000 of stock in a steel company
whose  = 2.0. What will be the new beta of the portfolio?
a. 1.12
b. 1.20
c. 1.22
d. 1.10

12. Choose the correct answer for the following: (1) Which is the best measure of risk for choosing an asset
which is to be held in isolation? (2) Which is the best measure for choosing an asset to be held as part of
a diversified portfolio?
a. Variance; correlation coefficient.
b. Standard deviation; correlation coefficient.
c. Beta; variance.
d. Coefficient of variation; beta.

13. Which of the following is not a cash flow that results from the decision to accept a project?
a. Changes in working capital.
b. Shipping and installation costs.
c. Sunk costs.
d. Opportunity costs.

14. Risk in a revenue producing project can best be adjusted for by

a. Ignoring it.
b. Adjusting the discount rate upward for increasing risk.
c. Adjusting the discount rate downward for increasing risk.
d. Picking a risk factor equal to the average discount rate.

15. When a project's NPV exceeds zero,

a. The project will also be acceptable using payback criteria.
b. The IRR should be calculated to insure that the project's projected rate of return exceeds
the required rate of return.
c. The project should be accepted without any further consideration, assuming we are
confident that the cash flows and the required rate of return have been properly
estimated.
d. Only answers a and c are correct.

16. Which of the following statements is false?

a. The NPV will be positive if the IRR is less than the required rate of return.
b. If the multiple IRR problem does not exist, any independent project acceptable by the
NPV method will also be acceptable by the IRR method.
c. When IRR = r (the required rate of return), NPV = 0.
d. The IRR can be positive even if the NPV is negative.
17. Michigan Mattress Company is considering the purchase of land and the construction of a new plant.
The land, which would be bought immediately (at t = 0), has a cost of $100,000 and the building, which
would be erected at the end of the first year (t = 1), would cost $500,000. It is estimated that the firm's
after-tax cash flow will be increased by $100,000 starting at the end of the second year, and that this
incremental flow would increase at a 10 percent rate annually over the next 10 years. What is the
approximate payback period?
a. 2 years
b. 4 years
c. 6 years
d. 8 years

18. Scott Corporation's new project calls for an investment of $10,000. It has an estimated life of 10 years.
The IRR has been calculated to be 15 percent. If cash flows are evenly distributed and the tax rate is 40
percent, what is the annual before-tax cash flow each year? (Assume depreciation is a negligible
amount.)
a. $1,993
b. $3,321
c. $1,500
d. $4,983

19. ____ are decisions about whether to purchase capital assets to take the place of existing assets so as to
maintain existing operations.
20. a. 21. Replacement decisions
b. Expansion decisions
c. Independent decisions
d. Mutually exclusive decisions

20.____ projects are a set of projects where the acceptance of one project means that other projects cannot be
accepted.
a. Mutually exclusive
b. Independent
c. Replacement
d. Expansion

21.The ____ is the average length of time required to convert materials into finished goods and then to sell
those goods.
a. payables deferral period
b. receivables collection period
c. cash conversion period
d. inventory conversion period

22. Working capital management involves decisions related to

a. labor contracts
b. current assets and liabilities
c. fixed asset acquisition
d. long term debt
23. If the current ratio is equal to four and we double the current liabilities and half the current assets, what
will the new current ratio equal?
a. 1
b. 2
c. 8
d. 16

24. Net working capital is defined as

a. current assets plus current liabilities
b. current liabilities
c. current assets
d. current assets minus current liabilities

25. A firm is offered trade credit terms of 3/15, net 45. The firm does not take the discount, and it pays after
67 days. What is the approximate annual cost of not taking the discount?
a. 21.41%
b. 22.07%
c. 22.95%
d. 23.48%