1
The present value of $115,000 expected to be received one year from today at an
interest rate (discount rate) of 10% per year is:
A) $121,000
B) $100,500
C) $110,000
D) $104,545
FV = 115000
RATE = 10%
CV = FV / 1+RATE
= 115000 / (1+10/100)
=115000/ 1.1
= 104545
2
A two-year discount factor at a discount rate of 10% per year is:
A) 0.826
B) 1.000
C) 0.909
D) 0.814
DISCOUNT FACTOR is used in calculating current value of money if rate of interest
and future values are known
DF = 1 / 1 + R
DF = 1 / 1+0.10
= 1/1.1
=0.909 FOR THE FIRST YEAR
RECALCULATING BY THE SAME FORMULA FOR 2ND YEAR
= 0.909 / 1 +0.10
= 0.826
OR CALCULATE THE EFFECTIVE RATE OF INTERST
EG ON A 10% RATE the effective rate would be 21% 110 in first year and add another
10% for the second year 121 and hence 21%
DF = 1 / 1 + 21% = 1/1.21 = 0.826
3
If the one year discount factor is 0.8333, what is the discount rate (interest rate) per
year?
A) 10%
B) 20%
C) 30%
D) None of the above
DF = 1 / 1 + R
.8333 = 1 / 1 + R
(1 + R) 0.8333 = 1
.8333 + .8333R = 1
0.8333R = 1-0.8333
0.8333 R = 0.1667
R = 0.1667 / 0.8333
R = 20%
4
If the present value of $444 to be paid at the end of one year is $400, what is the one
year discount factor?
A) 0.9009
B) 1.11
C) 0.11
D) None of the above
CV = FV / 1 + RATE OF INTERST or FV / DF
444 = 400 / DF
DF = 400/444
DF = .9009
5
If you invest $100,000 today at 12% interest rate for one year, what is the amount you
will have at the end of the year?
A) $90,909
B) $112,000
C) $100,000
D) None of the above
6
If the present value of a cash flow generated by an initial investment of $100,000 is
$120,000, what is the NPV of the project?
A) $120,000
B) $20,000
C) $100,000
D) None of the above
NPV = PV – Reqd Investment
NPV = 120000 – 100000 = 20000
7
The following statements regarding the NPV rule and the rate of return rule are true
except:
A) Accept a project if its NPV > 0
B) Reject a project if its NPV < 0
C) Accept a project if its rate of return > 0
D) Accept a project if its rate of return > opportunity cost of capital
8
A building is purchased for $300,000 and later sold for $365,000. All other things
being equal, what is the return on the investment in the building?
A) 10.52%
B) 15.52%
C) 21.67%
D) 24.65%
Rate of Return = PROFIT / INVESTMENT
(365000 - 300000) / 300000 = 65000/300000 = 0.21667 = 21.67%
9
The opportunity cost of capital for a risky project is
The expected rate of return on a government security having the same
A)
maturity as the project
The expected rate of return on a well diversified portfolio of common
B)
stocks
The expected rate of return on a portfolio of securities of similar risks
C)
as the project
D) None of the above
10
Mrs. Smith has $100 today and the market interest rate is 10% per year. Mr. DiCaprio
also has an investment opportunity in which he can invest $50 today and receive $60
next year. Suppose Mrs. Smith consumes $50 this year and invests in the project.
What is the maximum amount she can consume next year?
A) $50
B) $55
C) $60
D) $65
This lady is extremely calculative
She deposits all $100 in Dcaprios scheme and earns $120
And borrows $50 from market @ 10%
Return Dicaprios investment = 120
Payable on other 50 @ 10% = 55
Nett = 65
11
A stock is purchased for $85 and sold later at a price of $92.50. What is the expected
return on the stock investment?
A) 7.52%
B) 8.82%
C) 9.93%
D) 10.22%
I DON’T KNOW HOW THIS WAS DONE
12
The financial goal of a corporation is to:
A) Maximize stockholder wealth
B) Maximize profit
C) Maximize value of the corporation to the stockholders
D) None of the above
13
The managers of a firm can maximize stockholder wealth by:
A) Taking all projects with positive NPVs
B) Taking all projects with NPVs greater than the cost of investment
C) Taking all projects with NPVs greater than present value of cash flow
D) All of the above
14
The appropriate rate used in calculating NPV is
A) The discount rate
B) The borrowing rate
C) The return on equity
D) The opportunity cost of capital
15
The threat of takeover is most pronounced when
A) The company has high growth
B) The managers are not maximizing NPV
C) Projects are making much more than expected
D) The opportunity cost of capital is below the return on investments
16
Best practices in what area may insure managers serve shareholder interests?
A) Audits
B) Board of director selection
C) Corporate governance
D) Hiring consultants
17
In Japan, whose interests are considered paramount?
A) Bondholders
B) Employees
C) Shareholders
D) All stakeholders
18
What mechanism allows consumption desires and investment requirements to co-exist
in an economy?
A) Borrowing
B) Delayed consumption
C) Expanded investment opportunities
D) Management oversight
19
If the opportunity cost of capital is 12%, which of the following returns will generate
a positive NPV?
A) 10%
B) 11%
C) 12%
D) 13%
20
What is the net present value on a project with an opportunity cost of capital of 13%,
an initial investment of $45,000 and a payoff after one year of $47,000?
A) –$177
B) –$145
C) $145
D) $177
I DON’T KNOW HOW THIS WAS DONE
21
What causes the opportunity cost of capital to be higher in one project versus another?
A) Borrowing rates
B) Expected stock returns
C) Poor management
D) Risk