Question

# 1. An unsecured loan carries a 7.3% annual percentage rate (APR) and compounds monthly. What is the

APY?

a. 7.55

b. 7.30

c. 8.23

d. 8.02

2. Which security type includes the right to vote in annual meetings?

a. Demand deposit

b. Options

c. Common Stock

d. Bonds

3. Economists forecast the probability of an expansion at 42%. During periods of expansion a company has had returns averaging 7%. Returns for the company have been 3% during a recessionary period. What is the forecast probability of the recessionary period?

a. 50%

b. 66%

c. 42%

d. 58%

4. What is true about the efficient frontier?

a. It maximizes the collectivity of accounts receivable

b. It provides the lowest level of risk for a given return

c. It is a function of the idiosyncratic risk

d. It disregards the aspects of return relative to risk

5. What is beta?

a. A multiplier applied to weighted average cost of capital

b. A measure of the volatility of the risk-free return

c. A factor used with the market return to determine free cash flow

d. A measure of the volatility of stock's specific risk

6. What are two items that would affect differential cash flows? Choose two answers

a. A new study on the payback of the investment

b. An increase in the salvage value of the equipment

c. The value of working capital

d. An increase in the investment of new equipment

e. A decrease in projected annual revenue

7. A company is considering a project with the following cash flows and an assumed discount rate of 10% Initial outlay=-50,000, Year 1=18,000, Year 2 = 17,000, Year 3 = 15,000, Year 4 = 14,000, Year 5 = 12,000. What is the internal rate of return?

a. 10%

b. 25%

c. 15%

d. 17%

8. If a person is saving up for the future and they want to have the equivalent of $500,000 in purchasing power in the bank in fifteen years, what is the effect of an inflation rate?

a. The purchasing power of the inflation rate will mean a lower goal

b. There will be no affect on the goal regardless of the inflation rate

c. The goal will have to be increased to accommodate the inflation rate

d. The goal will have to be decreased to accommodate the inflation rate

9. Why is it important for a company to create accurate forecasts?

a. The forecast may affect interest rates.

b. Demand will increase if the forecast is inaccurate

c. Accurate forecasts will result in higher planned profits

d. The company needs the accuracy to plan the proper capacity.

10. A company is considering a project requiring the purchase of new equipment. The firm requires $500,000 in working capital. If the project has a five-year life what is the effect on the initial outlay?

a. It will be amortized 100,000 per year

b. Working capital is ignored when calculating initial outlay

c. The working capital is included as part of the investment

d. Working capital is deducted from the cost of the equipment

11. How is the dollar result of the capital budget analysis evaluated?

a. The actual cash value of the differential cash flows.

b. The number of years required to pay back the investment

c. The internal rate of return less the investment

d. The present value of all cash flows less the investment