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Introduction

1. Present value of $121,000 expected to be received one year from today at an interest rate

(discount rate) of 10% per year is:

a. $121,000

b. $100,000

C. $110,000

d. None of the above

2. One year discount factor at a discount rate of 25% per year is:

a. 1.25

b. 1.0

C. 0.8

d. None of the above

3. The one-year discount factor at an interest rate of 100% per year is:

a. 1.5

B. 0.5

c. 0.25

d. None of the above

4. Present Value of $100,000 that is, expected, to be received at the end of one year at a

discount rate of 25% per year is:

A. $80,000

b. $125,000

c. $100,000

d. None of the above

5. 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

6. If the present value of $480 to be paid at the end of one year is $400, what is the one-year

discount factor?

A. 0.8333

b. 1.20

c. 0.20

d. None of the above

7. If the present value of $250 expected to be received one year from today is $200, what is the

discount rate?

a. 10%

b. 20%

1

Junjie Liu – Econ 282 Practice Multiple Choice

C. 25%

d. None of the above

8. If the one-year discount factor is 0.90, what is the present value of $120 to be received one

year from today?

a. $100

b. $96

C. $108

d. None of the above

9. If the present value of $600 expected to be received one year from today is $400, what is the

one-year discount rate?

a. 15%

b. 20%

c. 25%

D. 50%

10. The present value formula for one period cash flow is:

a. PV = C 1 (1 + r)

B. PV = C 1 /(1 + r)

c. PV = C 1 /r

d. None of the above

11. The net present value formula for one period is: I) NPV = C 0 + [C 1 /(1 + r)]; II) NPV = PV -

required investment; and III) NPV = C 0 /C 1

a. I only

B. I and II only

c. III only

d. None of the above

12. An initial investment of $400,000 will produce an end of year cash flow of $480,000. What

is the NPV of the project at a discount rate of 20%?

a. $176,000

b. $80,000

C. $0 (zero)

d. None of the above

13. If the present value of a cash flow generated by an initial investment of $200,000 is

$250,000, what is the NPV of the project?

a. $250,000

B. $50,000

c. $200,000

d. None of the above

14. Which of the following statements about risk are (is) true:

a. A safe dollar is worth the same as a risky one

2

Junjie Liu – Econ 282 Practice Multiple Choice

C. A safe dollar is worth more than a risky one

d. None of the above statements are true

15. 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 the 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

16. An initial investment of $500 produces a cash flow $550 one year from today. Calculate the

rate of return on the project

A. 10%

b. 15%

c. 25%

d. None of the above

17. According to the net present value rule, an investment in a project should be made if the:

a. Net present value is greater than the cost of investment

b. Net present value is greater than the present value of cash flows

C. Net present value is positive

d. Net present value is negative

18. Which of the following statements regarding the net present value rule and the rate of return

rule is not true?

A. Accept a project if NPV > cost of investment

b. Accept a project if NPV is positive

c. Accept a project if return on investment exceeds the rate of return on an equivalent

investment in the financial market

d. Reject a project if NPV is negative

19. The payoffs of an investment are dependent on the state of the economy. The economy can

have two states, recession or growth, with equal probability. If the payoff in the event of

growth is $140 and in the event of recession is $60, what is the expected payoff for the

investment?

A. $100

b. $110

c. $120

d. None of the above

20. If the probability of a recession is 0.2, normal growth is 0.5 and a boom is 0.3, and the payoff

in the event of a recession is $100, normal growth is $400 and boom is $500, what is the

expected payoff?

a. $200

B. $330

3

Junjie Liu – Econ 282 Practice Multiple Choice

c. $400

d. None of the above

21. Current price of Company X's stock is $90. The table below gives the data on end of the year

prices and probabilities dependent on the state of the economy. Calculate the expected return

for the stock.

a. 10%

b. 15%

C. 22.2%

d. None of the above

a. The expected rate of return on a government security having the same maturity as the

project

b. The expected rate of return on a well-diversified portfolio of common stocks

C. The expected rate of return on a portfolio of securities of similar risks as the project

d. None of the above

23. Mr. Free has $100 dollars income this year and zero income next year. The market interest

rate is 10% per year. If Mr. Free consumes $30 this year, and invests the rest in the market,

what will be his consumption next year?

a. $50

b. $100

C. $77

d. $55

24. Mr. Bird has $100 income this year and zero income next year. The market interest rate is

10% per year. Mr. Bird also has an investment opportunity in which he can invest $50 today

and receive $80 next year. Suppose Mr. Bird consumes $30 this year and invests in the

project. What will be his consumption next year?

a. $88

B. $102

c. $80

d. $100

25. Ms. Venus has $100 income this year and $110 next year. The market interest rate is 10% per

year. Suppose Ms. Venus consumes $60 this year. What will be her consumption next year?

A. $154

b. $170

c. $120

d. None of the above

4

Junjie Liu – Econ 282 Practice Multiple Choice

26. Mr. Thomas has $100 income this year and zero income next year. The market interest rate is

10% per year. Mr. Thomas also has an investment opportunity in which he can invest $50

this year and receive $80 next year. Suppose Mr. Thomas consumes $50 this year and invests

in the project. What will be his consumption next year?

a. $55

B. $80

c. $50

d. None of the above

27. Mr. Dell has $100 income this year and zero income next year. The market interest rate is

10% per year. Mr. Dell also has an investment opportunity in which he can invest $50 this

year and receive $80 next year. Suppose Mr. Dell consumes $50 this year and invests in the

project. What is the NPV of the investment opportunity?

a. $5

B. $22.73

c. $0 (zero)

d. None of the above

28. Ms. Anderson has $60,000 income this year and $40,000 next year. The market interest rate

is 10% per year. Suppose Ms. Anderson consumes $80,000 this year. What will be her

consumption next year?

a. $60,000

b. $30,000

c. $70,000

D. $18,000

29. The line that connects the maximum that one can consume this year (now) and the maximum

one can consume next year:

a. Has a slope of (1 + r)

B. Has a slope of -(1 + r)

c. Has a slope of r

d. Has a slope of 1/r

30. Ms. Newcastle has $60,000 income this year and $40,000 next year. The market interest rate

is 10% per year. Suppose Ms. Newcastle wishes to consume $62,000 next year. What will be

her consumption this year?

a. $60,000

B. $40,000

c. $70,000

d. $19,000

31. Mr. Smith has an income of $40,000 this year and $60,000 next year. He can invest in a

project that costs $30,000 this year, which generates an income of $36,000 next year. The

market interest rate is 10%. What will be his consumption next year, if Mr. Smith invests in

the project and consumes $50,000 this year?

a. $40,000

5

Junjie Liu – Econ 282 Practice Multiple Choice

B. $52,000

c. $60,000

d. None of the above

32. The discount rate is used for calculating the NPV is:

A. Determined by the financial markets

b. Found by the government

c. Found by the CEO

d. None of the above

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

6

Junjie Liu – Econ 282 Practice Multiple Choice

1. The present value of $100 expected in two years from today at a discount rate of 6% is:

a. $116.64

b. $108.00

c. $100.00

D. $89.00

A. Future cash flows discounted to the present at an appropriate discount rate

b. Inverse of future cash flows

c. Present cash flow compounded into the future

d. None of the above

A. 0.7972

b. 0.8929

c. 1.2544

d. None of the above

4. If the present value of the cash flow X is $240, and the present value cash flow Y $160, then

the present value of the combined cash flow is:

a. $240

b. $160

c. $80

D. $400

5. If the 2-year discount factor is 0.64, what is the rate of interest (in APR)?

a. 10%

B. 25%

c. 40%

d. None of the above

6. What is the present value of the following cash flow at a discount rate of 9%?

A. $372,431.81

b. $450,000

c. $405,950.68

d. None of the above

7

Junjie Liu – Econ 282 Practice Multiple Choice

7. At an interest rate of 10%, which of the following cash flows should you prefer?

Year 1 Year 2 Year 3

A. 500 300 100

b. 100 300 500

c. 300 300 300

d. Any of the above as they all add up to $900

8. What is the net present value of the following cash flow at a discount rate of 11%?

A. $69,108.03

b. $231,432.51

c. $80,000

d. None of the above

9. What is the present value of the following cash flow at a discount rate of 16% APR?

A. $136,741.97

b. $122,948.87

c. $158,620.69

d. None of the above

10. What is the net present value (NPV) of the following cash flows at a discount rate of 9%?

A. $122,431.81

b. $200,000

c. $155,950.68

d. None of the above

a. Equal cash flows at equal intervals of time for a specific number of periods

B. Equal cash flows at equal intervals of time forever

c. Unequal cash flows at equal intervals of time forever

d. None of the above

12. What is the present value of $10,000 per year perpetuity at an interest rate of 10%?

a. $10,000

B. $100,000

c. $200,000

d. None of the above

8

Junjie Liu – Econ 282 Practice Multiple Choice

13. You would like to have enough money saved to receive $100,000 per year perpetuity after

retirement so that you and your family can lead a good life. How much would you need to

save in your retirement fund to achieve this goal (assume that the perpetuity payments start

one year from the date of your retirement. The interest rate is 12.5%)?

a. $1,000,000

b. $10,000,000

C. $800,000

d. None of the above

14. You would like to have enough money saved to receive $80,000 per year perpetuity after

retirement so that you and your family can lead a good life. How much would you need to

save in your retirement fund to achieve this goal (assume that the perpetuity payments start

one year from the date of your retirement. The interest rate is 8%)?

a. $7,500,000

b. $750,000

C. $1,000,000

d. None of the above

15. You would like to have enough money saved to receive a $50,000 per year perpetuity after

retirement so that you and your family can lead a good life. How much would you need to

save in your retirement fund to achieve this goal (assume that the perpetuity payments starts

on the day of retirement. The interest rate is 8%)?

a. $1,000,000

B. $675,000

c. $625,000

d. None of the above

16. You would like to have enough money saved to receive an $80,000 per year perpetuity after

retirement so that you and your family can lead a good life. How much would you need to

save in your retirement fund to achieve this goal (assume that the perpetuity payments starts

on the day of retirement. The interest rate is 10%)?

a. $1,500,000

B. $880,000

c. $800,000

d. None of the above

A. Equal cash flows at equal intervals of time for a specified period of time

b. Equal cash flows at equal intervals of time forever

c. Unequal cash flows at equal intervals of time forever

d. None of the above

9

Junjie Liu – Econ 282 Practice Multiple Choice

18. If you receive $1,000 payment at the end each year for the next five years, what type of cash

flow do you have?

a. Uneven cash flow stream

B. An annuity

c. An annuity due

d. None of the above

19. If the three-year present value annuity factor is 2.673 and two-year present value annuity

factor is 1.833, what is the present value of $1 received at the end of the 3 years?

a. $1.1905

B. $0.84

c. $0.89

d. None of the above

20. If the five-year present value annuity factor is 3.60478 and four-year present value annuity

factor is 3.03735, what is the present value at the $1 received at the end of five years?

a. $0.63552

b. $1.76233

C. $0.56743

d. None of the above

21. What is the present value annuity factor at a discount rate of 11% for 8 years?

a. 5.7122

b. 11.8594

C. 5.1461

d. None of the above

22. What is the present value annuity factor at an interest rate of 9% for 6 years?

a. 7.5233

B. 4.4859

c. 1.6771

d. None of the above

23. What is the present value of $1000 per year annuity for five years at an interest rate of 12%?

a. $6,352.85

B. $3,604.78

c. $567.43

d. None of the above

24. What is the present value of $5000 per year annuity at a discount rate of 10% for 6 years?

a. $21,776.30

b. $3,371.91

C. $16,760.78

d. None of the above

10

Junjie Liu – Econ 282 Practice Multiple Choice

25. After retirement, you expect to live for 25 years. You would like to have $75,000 income

each year. How much should you have saved in the retirement to receive this income, if the

interest is 9% per year (assume that the payments start on the day of retirement)?

a. $736,693.47

B. $802,995.88

c. $2,043,750

d. None of the above

26. After retirement, you expect to live for 25 years. You would like to have $75,000 income

each year. How much should you have saved in the retirement to receive this income, if the

interest is 9% per year (assume that the payments start one years after the retirement)?

A. $736,693.47

b. $6,352,567.22

c. $1,875,000

d. None of the above

27. For $10,000 you can purchase a 5-year annuity that will pay $2504.57 per year for five years.

The payments are made at the end of each year. Calculate the effective annual interest rate

implied by this arrangement: (approximately)

A. 8%

b. 9%

c. 10%

d. None of the above

28. If the present value annuity factor for 10 years at 10% interest rate is 6.1446, what is the

present value annuity factor for an equivalent annuity due?

a. 6.1446

b. 7.38

C. 6.759

d. None of the above

29. If the present annuity factor is 3.8896, what is the present value annuity factor for an

equivalent annuity due if the interest rate is 9%?

a. 3.5684

B. 4.2397

c. 3.8896

d. None of the above

30. For $10,000 you can purchase a 5-year annuity that will pay $2358.65 per year for five years.

The payments are made at the beginning of each year. Calculate the effective annual interest

rate implied by this arrangement: (approximately)

a. 8%

B. 9%

c. 10%

d. None of the above

11

Junjie Liu – Econ 282 Practice Multiple Choice

31. John House has taken a $250,000 mortgage on his house at an interest rate of 6% per year. If

the mortgage calls for twenty equal annual payments, what is the amount of each payment?

A. $21,796.14

b. $10,500.00

c. $16,882.43

d. None of the above

32. John House has taken a 20-year, $250,000 mortgage on his house at an interest rate of 6%

per year. What is the value of the mortgage after the payment of the fifth annual installment?

a. $128,958.41

B. $211,689.53

c. $141,019.50

d. None of the above

33. If the present value of $1.00 received n years from today at an interest rate of r is 0.3855,

then what is the future value of $1.00 invested today at an interest rate of r% for n years?

a. $1.3855

B. $2.594

c. $1.70

d. Not enough information to solve the problem

34. If the present value of $1.00 received n years from today at an interest rate of r is 0.621, then

what is the future value of $1.00 invested today at an interest rate of r% for n years?

a. $1.00

B. $1.61

c. $1. 621

d. Not enough information to solve the problem

35. If the future value of $1 invested today at an interest rate of r% for n years is 9.6463, what is

the present value of $1 to be received in n years at r% interest rate?

a. $9.6463

b. $1.00

C. $0.1037

d. None of the above

36. If the future value annuity factor at 10% and 5 years is 6.1051, calculate the equivalent

present value annuity factor

a. 6.1051

B. 3.7908

c. 6.7156

d. None of the given ones

12

Junjie Liu – Econ 282 Practice Multiple Choice

37. If the present value annuity factor at 10% APR for 10 years is 6.1446, what is the equivalent

future value annuity factor?

a. 3.108

B. 15.9374

c. 2.5937

d. None of the above

38. If the present value annuity factor at 12% APR for 5 years is 3.6048, what is the equivalent

future value annuity factor?

a. 2.0455

B. 6.3529

c. 1.7623

d. None of the above

a. Present value of an annuity due is always less than the present value of an equivalent

annuity factor for a given interest rate

B. The present value of an annuity approaches the present value of a perpetuity as n goes to

infinity for a given interest rate

c. Both A and B are true

d. Both A and B are false

40. If the present value annuity factor at 8% APR for 10 years is 6.71, what is the equivalent

future value annuity factor?

a. 3.108

B. 14.487

c. 2.159

d. None of the above

41. You are considering investing in a retirement fund that requires you to deposit $5,000 per

year, and you want to know how much the fund will be worth when you retire. What

financial technique should you use to calculate this value?

a. Future value of a single payment

B. Future value of an annuity

c. Present value of an annuity

d. None of the above

42. Mr. Hopper is expected to retire in 25 years and he wishes accumulate $750,000 in his

retirement fund by that time. If the interest rate is 10% per year, how much should Mr.

Hopper put into the retirement fund each year in order to achieve this goal? [Assume that the

payments are made at the end of each year]

a. $4,559.44

b. $2,500

C. $7,626.05

d. None of the above

13

Junjie Liu – Econ 282 Practice Multiple Choice

43. Mr. Hopper is expected to retire in 30 years and he wishes accumulate $1,000,000 in his

retirement fund by that time. If the interest rate is 12% per year, how much should Mr.

Hopper put into the retirement fund each year in order to achieve this goal?

A. $4,143.66

b. $8,287.32

c. $4,000

d. None of the above

a. Present value of an annuity is always greater than the present value of equivalent annuity

due for a given interest rate

B. The future value of an annuity due is always greater than the future value of an equivalent

ordinary annuity at the same interest rate

c. Both A and B are true

d. Both A and B are false

45. You would like to have enough money saved to receive a growing perpetuity, growing at a

rate of 5% per year, the first payment being $50,000 after retirement, so that you and your

family can lead a good life. How much would you need to save in your retirement fund to

achieve this goal? (assume that the growing perpetuity payments start one year from the date

of your retirement. The interest rate is 10%)?

A. $1,000,000

b. $10,000,000

c. $2,000,000

d. None of the above

46. You would like to have enough money saved to receive a growing perpetuity, growing at a

rate of 4% per year, the first payment being $60,000 after retirement, so that you and your

family can lead a good life. How much would you need to save in your retirement fund to

achieve this goal? (assume that the growing perpetuity payments start one year from the date

of your retirement. The interest rate is 10%)?

a. $1,500,000

B. $1,000,000

c. $600,000

d. None of the above

47. You would like to have enough money saved to receive a growing annuity for 20 years,

growing at a rate of 5% per year, the first payment being $50,000 after retirement. That way,

you hope that you and your family can lead a good life after retirement. How much would

you need to save in your retirement fund to achieve this goal.(assume that the growing

annuity payments start one year from the date of your retirement. The interest rate is 10%)?

a. $1,000,000

b. $425,678.19

C. $605,604.20

d. None of the above

14

Junjie Liu – Econ 282 Practice Multiple Choice

48. You would like to have enough money saved to receive a growing annuity for 25 years,

growing at a rate of 4% per year, the first payment being $60,000 after retirement, so that you

and your family can lead a good life. How much would you need to save in your retirement

fund to achieve this goal? (assume that the growing perpetuity payments start one year from

the date of your retirement. The interest rate is 12%)?

a. $1,500,000

B. $632,390

c. $452,165

d. None of the above

49. In the growing annuity and growing perpetuity formulas; the most important assumption that

is needed for the formulas to work correctly is:

a. r < g

b. r = g

C. r > g

d. No assumption is needed

50. Which of the following statements regarding simple interest and compound interest are true?

a. Problems in finance generally use the simple interest concept

B. Problems in finance generally use the compound interest concept

c. It does not really matter whether you use simple interest or compound interest for solving

problems in finance

d. None of the above

51. If you invest $100 at 12% APR for three years, how much would you have at the end of 3

years using simple interest?

A. $136

b. $140.49

c. $240.18

d. None of the above

52. If you invest $100 at 12% APR for three years, how much would you have at the end of 3

years using compound interest?

a. $136

B. $140.49

c. $240.18

d. None of the above

A. The process of discounting is the inverse of the process of compounding

b. Ending balances using simple interest is always greater than the ending balance using

compound interest at positive interest rates

c. Present value of an annuity due is always less than the present value of an equivalent

annuity at positive interest rates

d. All of the above are true

15

Junjie Liu – Econ 282 Practice Multiple Choice

a. Interest earned on an investment

b. The total amount of interest earned over the life of an investment

C. Interest earned on interest

d. None of the above

55. Ms. Colonial has just taken out a $150,000 mortgage at an interest rate of 6% per year. If the

mortgage calls for equal monthly payments for twenty years, what is the amount of each

payment? (Assume monthly compounding or discounting.)

A. $1254.70

b. $1625.00

c. $1263.06

d. None of the above are true

56. An investment at 10.47% effective rate compounded monthly is equal to a nominal (annual)

rate of:

a. 10.99%

b. 9.57%

C. 10%

d. None of the above

57. An investment at 12% nominal rate compounded monthly is equal to an annual rate of:

A. 12.68%

b. 12.36%

c. 12%

d. None of the above

58. Mr. William expects to retire in 30 years and would like to accumulate $1 million in the

pension fund. If the annual interest rate is 12% per year, how much should Mr. Williams put

into the pension fund each month in order to achieve his goal? Assume that Mr. Williams

will deposit the same amount each month into his pension fund and also use monthly

compounding.

A. $286.13

b. $771.60

c. $345.30

d. None of the above

annual rate of:

a. 10.250%

B. 10.517%

c. 10.381%

d. None of the above

16

Junjie Liu – Econ 282 Practice Multiple Choice

60. The present value of a $100 per year perpetuity at 10% per year interest rate is $1000. What

would be the present value if the payments were compounded continuously?

a. $1000.00

B. $1049.21

c. $1024.40

d. None of the above

17

Junjie Liu – Econ 282 Practice Multiple Choice

Valuing Bonds

1. A government bond issued in Germany has a coupon rate of 5%, face value of euros 100 and

maturing in five years. The interest payments are made annually. Calculate the price of the

bond (in euros) if the yield to maturity is 3.5%.

a. 100

B. 106.77

c. 106.33

d. None of the above

2. Generally, a bond can be valued as a package of: I) annuity, II) Perpetuity, III) single

payment

a. I and II only

b. II and III only

C. I and III only

d. None of the above

3. A government bond issued in Germany has a coupon rate of 5%, face value of euros 100 and

maturing in five years. The interest payments are made annually. Calculate the yield to

maturity of the bond (in euros) if the price of the bond is 106 euros.

a. 5.00%

B. 3.80%

c. 3.66%

d. None of the above

a. Interest is paid once a year

B. Interest is paid every six months

c. Interest is paid every three months

d. None of the above

5. A 3-year bond with 10% coupon rate and $1000 face value yields 8% APR. Assuming annual

coupon payment, calculate the price of the bond.

a. $857.96

b. $951.96

c. $1000.00

D. $1051.54

6. A 5-year treasury bond with a coupon rate of 8% has a face value of $1000. What is the

semi-annual interest payment?

a. $80

B. $40

c. $100

d. None of the above

18

Junjie Liu – Econ 282 Practice Multiple Choice

7. A three-year bond has 8.0% coupon rate and face value of $1000. If the yield to maturity on

the bond is 10%, calculate the price of the bond assuming that the bond makes semi-annual

coupon interest payments.

a. $857.96

B. $949.24

c. $1057.54

d. $1000.00

8. A four-year bond has an 8% coupon rate and a face value of $1000. If the current price of the

bond is $878.31, calculate the yield to maturity of the bond (assuming annual interest

payments).

a. 8%

b. 10%

C. 12%

d. 6%

9. A 5-year bond with 10% coupon rate and $1000 face value is selling for $1123. Calculate the

yield to maturity on the bond assuming annual interest payments.

a. 10.0%

b. 8.9%

C. 7.0%

d. None of the above

10. Which of the following statements about the relationship between interest rates and bond

prices is true? I) There is an inverse relationship between bond prices and interest rates II)

There is a direct relationship between bond prices and interest rates III) The price of short-

term bonds fluctuates more than the price of long-term bonds for a given change in interest

rates. (Assuming that coupon rate is the same for both) IV) The price of long-term bonds

fluctuates more than the price of short-term bonds for a given change in interest rates.

(Assuming that the coupon rate is the same for both)

A. I and IV only

b. I and III only

c. II and III only

d. None of the given statements are true

11. Consider a bond with a face value of $1,000, a coupon rate of 6%, a yield to maturity of 8%,

and ten years to maturity. This bond's duration is:

a. 8.7 years

B. 7.6 years

c. 0.1 years

d. 6.5 years

19

Junjie Liu – Econ 282 Practice Multiple Choice

12. A bond with a face value of $1,000 has coupon rate of 7%, yield to maturity of 10%, and

twenty years to maturity. The bond's duration is:

A. 10.0 years

b. 7.4 years

c. 20.0 years

d. 12.6 years

13. A bond with has face value of $1,000, coupon rate of 0%, yield to maturity of 9%, and ten

years to maturity. This bond's duration is:

a. 6.7 years

b. 7.5 years

c. 9.6 years

D. 10.0 years

14. A bond with duration of 10 years has yield to maturity of 10%. This bond's volatility is:

A. 9.09%

b. 6.8%

c. 14.6%

d. 6.0%

15. A bond with duration of 5.7 years has yield to maturity of 9%. The bond's volatility is:

a. 1.9 %

B. 5.2 %

c. 5.7 %

d. 9.0 %

16. If a bond's volatility is 10% and the interest rate goes down by 0.75% (points) then the price

of the bond:

a. Decreases by 10%

b. Decreases by 7.5%

C. Increases by 7.5%

d. Increases by 0.75%

17. If a bond's volatility is 5% and the interest rate changes by 0.5% (points) then the price of the

bond:

a. Changes by 5%

B. Changes by 2.5 %

c. Changes by 7.5%

d. None of the above

20

Junjie Liu – Econ 282 Practice Multiple Choice

18. Volatility of a bond is given by: I) Duration/ (1+yield) II) Slope of the curve relating the

bond price to the interest rate III) Yield to maturity

a. I only

b. II only

c. III only

D. I and II only

a. Relationship between the spot interest rates and the bond prices

b. Relationship between spot interest rates and stock prices

C. Relationship between spot interest rates and maturity of a bond

d. None of the above

20. Which of the following statements is true? I) The spot interest rate is a weighted average of

yields to maturity II) Yield to maturity is the weighted average of spot interest rates and

estimated forward rates III) The yield to maturity is always higher than the spot rates

a. I only

B. II only

c. III only

d. I and III only

21. A forward rate prevailing from period three through to period four can be: I) Readily

observed in the market place II) Extracted from spot interest rate with 3 and 4 years to

maturity III) Extracted from 1 and 2 year spot interest rates

a. I only

B. II only

c. III only

d. I and III only

22. If the 3-year spot rate is 10.5% and the 2-year spot rate is 10%, what is the one-year forward

rate of interest two years from now?

a. 3.7%

b. 9.5%

C. 11.5%

d. None of the above

23. If the 5-year spot rate is 10% and the 4-year spot rate is 9%, what is the one-year forward rate

of interest four years from now?

A. 14.1%

b. 9.5%

c. 1.0%

d. 11.0%

21

Junjie Liu – Econ 282 Practice Multiple Choice

24. If the 4-year spot rate is 7% and the 3-year spot rate is 6%, what is the one-year forward rate

of interest three years from now?

A. 10.0%

b. 6.5%

c. 9.6%

d. None of the above

25. How can one invest today at the 2-year forward rate of interest? I) By buying a 2-year bond

and selling a 1-year bond with the same coupon II) By buying a 1-year bond and selling a 2-

year bond with the same coupon III) By buying a 1-year bond and then after a year

reinvesting in a further 1-year bond

A. I only

b. II only

c. III only

d. II and III only

26. The expectations hypothesis states that the forward interest rate is the: I) Expected future spot

rate II) Always greater than the spot rate III) yield to maturity

A. I only

b. II only

c. III only

d. II and III only

27. If the nominal interest rate per year is 10% and the inflation rate is 4%, what is the real rate

of interest?

a. 10%

b. 4%

C. 5.8%

d. None of the above

28. Mr. X invests $1000 at 10% nominal rate for one year. If the inflation rate is 4%, what is the

real value of the investment at the end of one year?

a. $1100

b. $1000

C. $1058

d. None of the above

22

Junjie Liu – Econ 282 Practice Multiple Choice

Stock Valuation

1. General Electric (GE) has about 10.3 billion shares outstanding and the stock price is $37.10.

The P/E ratio is about 18.3. Calculate the market capitalization for GE. (Approximately)

a. $679 billion

b. $188 billion

C. $382 billion

d. None of the above

2. The Wall Street Journal quotation for a company has the following values: Div: $1.12, PE:

18.3, Close: $37.22. Calculate the dividend payout ratio for the company (Approximately).

a. 18%

B. 55%

c. 45%

d. None of the above

3. If the Wall Street Journal Quotation for a company has the following values close: 55.14; Net

chg: = +1.04; then the closing price for the stock for the previous trading day was?

a. $56.18

B. $54.10

c. $55.66

d. None of the above

4. Super Computer Company's stock is selling for $100 per share today. It is expected that this

stock will pay a dividend of 6 dollars per share, and then be sold for $114 per share at the end

of one year. Calculate the expected rate of return for the shareholders.

A. 20%

b. 15%

c. 10%

d. 25%

a. Number of shares outstanding and the number of shareholders

B. The expected future dividends and the discount rate

c. The Wall Street analysts

d. Present value of the future earnings per share

6. CK Company stockholders expect to receive a year-end dividend of $5 per share and then be

sold for $115 dollars per share. If the required rate of return for the stock is 20%, what is the

current value of the stock?

A. $100

b. $122

c. $132

d. $110

23

Junjie Liu – Econ 282 Practice Multiple Choice

7. Deluxe Company expects to pay a dividend of $2 per share at the end of year-1, $3 per share

at the end of year -2 and then be sold for $32 per share. If the required rate on the stock is

15%, what is the current value of the stock?

A. $28.20

b. $32.17

c. $32.00

d. None of the given answers

8. Casino Inc. is expected to pay a dividend of $3 per share at the end of year-1 (D1) and these

dividends are expected to grow at a constant rate of 6% per year forever. If the required rate

of return on the stock is 18%, what is current value of the stock today?

A. $25

b. $50

c. $100

d. $54

9. The constant dividend growth formula P0= Div1/ (r-g) assumes: I) the dividends are growing

at a constant rate g forever II) r > g III) g is never negative.

a. I only

b. II only

C. I and II only

d. III only

10. Will Co. is expected to pay a dividend of $2 per share at the end of year -1(D 1 ) and the

dividends are expected to grow at a constant rate of 4% forever. If the current price of the

stock is $20 per share calculate the expected return or the cost of equity capital for the firm:

a. 10%

b. 4%

C. 14%

d. None of the above

11. World-Tour Co. has just now paid a dividend of $2.83 per share (D 0 ); the dividends are

expected to grow at a constant rate of 6% per year forever. If the required rate of return on

the stock is 16%, what is the current value on stock, after paying the dividend?

a. $30

b. $56

C. $70

d. $48

12. The expected rate of return or the cost of equity capital is estimated as follows:

a. Dividend yield - expected rate of growth in dividends

B. Dividend yield + expected rate of growth in dividends

c. Dividend yield / expected rate of growth in dividends

d. (Dividend yield) * (expected rate of growth in dividends)

24

Junjie Liu – Econ 282 Practice Multiple Choice

13. Dividend growth rate for a stable firm can be estimated as:

a. Plow back rate / the return on equity (ROE)

B. Plow back rate * the return on equity (ROE)

c. Plow back rate + the return on equity (ROE)

d. Plow back rate - the return on equity (ROE)

14. MJ Co. pays out 60% of its earnings as dividends. Its return on equity is 15%. What is the

stable dividend growth rate for the firm?

a. 9%

b. 5%

C. 6%

d. 15%

15. Michigan Co. is currently paying a dividend of $2.00 per share. The dividends are expected

to grow at 20% per year for the next four years and then grow 6% per year thereafter.

Calculate the expected dividend in year 5.

a. $4.15

b. $2.95

C. $4.40

d. $3.81

16. Great Motor Company is currently paying a dividend of $1.40 per year. The dividends are

expected to grow at a rate of 18% for the next three years and then a constant rate of 5 %

thereafter. What is the expected dividend per share in year 5?

a. $2.35

B. $2.54

c. $2.91

d. $1.50

17. The In-Tech Co. has just paid a dividend of $1 per share. The dividends are expected to grow

at 25% per year for the next three years and at the rate of 5% per year thereafter. If the

required rate of return on the stock is 18%(APR), what is the current value of the stock?

A. $12.97

b. $11.93

c. $15.20

d. None of the above

18. R&D Technology Corporation has just paid a dividend of $0.50 per share. The dividends are

expected to grow at 24% per year for the next two years and at 8% per year thereafter. If the

required rate of return in the stock is 16% (APR), calculate the current value of the stock.

a. $1.11

b. $7.71

C. $8.82

d. None of the above

25

Junjie Liu – Econ 282 Practice Multiple Choice

19. Ocean Co. has paid a dividend $2 per share out of earnings of $4 per share. If the book value

per share is $25, what is the expected growth rate in dividends (g)?

a. 16%

b. 12%

C. 8%

d. 4%

20. Seven-Seas Co. has paid a dividend $3 per share out of earnings of $5 per share. If the book

value per share is $40 and the market price is 52.50 per share, calculate the required rate of

return on the stock.

a. 12%

B. 11%

c. 5%

d. 6%

21. River Co. has paid a dividend $2 per share out of earnings of $4 per share. If the book value

per share is $25 and is currently selling for $40 per share, calculate the required rate of return

on the stock.

a. 15.2%

b. 7.2%

c. 14.7%

D. 13.4%

22. Lake Co. has paid a dividend $3 per share out of earnings of $5 per share. If the book value

per share is $40, what is the expected growth rate in dividends?

a. 7.5%

b. 8%

c. 12.5%

D. 5%

23. The growth rate in dividends is a function of two ratios. They are:

a. ROA and ROE

b. Dividend yield and growth rate in dividends

C. ROE and the Retention Ratio

d. Book value per share and EPS

24. Company X has a P/E ratio of 10 and a stock price of $50 per share. Calculate earnings per

share of the company.

a. $6 per share

b. $10 per share

c. $0.20 per share

D. $5 per share

26

Junjie Liu – Econ 282 Practice Multiple Choice

25. Which of the following formulas regarding earnings to price ratio is true:

a. EPS/Po = r[1 + (PVGO/Po]

B. EPS/Po = r[1 - (PVGO/Po)]

c. EPS/Po = [r + (PVGO/Po)]

d. EPS/Po =[r + (1+(PVGO/Po)]/r

A. Low or no dividends

b. High dividends

c. Erratic dividends

d. Both A and C

a. Past dividend payments

b. Past earnings

C. PVGO (Present Value of the Growth Opportunities)

d. Both A and B

28. Summer Co. is expected to pay a dividend or $4.00 per share out of earnings of $7.50 per

share. If the required rate of return on the stock is 15% and dividends are growing at a

current rate of 10% per year, calculate the present value of the growth opportunity for the

stock (PVGO).

a. $80

B. $30

c. $50

d. $26

29. Parcel Corporation is expected to pay a dividend of $5 per share next year, and the dividends

pay out ratio is 50%. If the dividends are expected to grow at a constant rate of 8% forever

and the required rate of return on the stock is 13%, calculate the present value of the growth

opportunity.

a. $100

b. $76.92

C. $23.08

d. None of the above

30. Universal Air is a no growth firm and has two million shares outstanding. It is expected to

earn a constant 20 million per year on its assets. If all earnings are paid out as dividends and

the cost of capital is 10%, calculate the current price per share for the stock.

a. $200

b. $150

C. $100

d. $50

27

Junjie Liu – Econ 282 Practice Multiple Choice

1. Which of the following investment rules does not use the time value of the money concept?

a. Net present value

b. Internal rate of return

C. The payback period

d. All of the above use the time value concept

a. Invest the funds in projects with positive NPVs

b. Pay high dividends to the shareholders

c. Buy another firm

D. All of the above

3. The following are measures used by firms when making capital budgeting decisions except:

a. Payback period

b. Internal rate of return

C. P/E ratio

d. Net present value

4. The survey of CFOs indicates that NPV method is always, or almost always, used for

evaluating investment projects by:

a. 12% of firms

b. 20% of firms

c. 57% of firms

D. 75% of firms

5. The survey of CFOs indicates that IRR method is used for evaluating investment projects

by:

a. 12% of firms

b. 20% of firms

C. 76% of firms

d. 57% of firms

a. The payback period method

B. Net present value method

c. The book rate of return method

d. The internal rate of return method

28

Junjie Liu – Econ 282 Practice Multiple Choice

7. If the net present value (NPV) of project A is +$100, and that of project B is +$60, then the

net present value of the combined project is:

a. +$100

b. +$60

C. +$160

d. None of the above

8. If the NPV of project A is +$30 and that of project B is -$60, then the NPV of the combined

project is:

a. +$30

b. -$60

C. -$30

d. None of the above

9. You are given a job to make a decision on project X, which is composed of three independent

projects A, B, and C which have NPVs of +$70, -$40 and +$100, respectively. How would

you go about making the decision about whether to accept or reject the project?

a. Accept the firm's joint project as it has a positive NPV

b. Reject the joint project

C. Break up the project into its components: accept A and C and reject B

d. None of the above

10. If the NPV of project A is +$120, and that of project B is -$40 and that of project C is +$40,

what is the NPV of the combined project?

a. +$100

b. -$40

c. +$70

D. +$120

a. Company's choice of accounting method

b. Manager's tastes and preferences

C. Project's cash flows and opportunity cost of capital

d. All of the above

12. Which of the following investment rules may not use all possible cash flows in its

calculations?

a. NPV

B. Payback period

c. IRR

d. All of the above

29

Junjie Liu – Econ 282 Practice Multiple Choice

a. Varies the cut-off point with the interest rate

b. Determines a cut-off point so that all projects accepted by the NPV rule will be accepted

by the payback period rule

C. Requires an arbitrary choice of a cut-off point

d. Both A and C

14. The payback period rule accepts all projects for which the payback period is:

a. Greater than the cut-off value

B. Less than the cut-off value

c. Is positive

d. An integer

a. Adjustment for uncertainty of early cash flows

B. It is simple to use

c. Does not discount cash flows

d. Both A and C

16. The following are disadvantages of using the payback rule except:

a. The payback rule ignores all cash flow after the cutoff date

b. The payback rule does not use the time value of money

C. The payback period is easy to calculate and use

d. The payback rule does not have the value additive property

17. Which of the following statements regarding the discounted payback period rule is true?

A. The discounted payback rule uses the time value of money concept

b. The discounted payback rule is better than the NPV rule

c. The discounted payback rule considers all cash flows

d. The discounted payback rule exhibits the value additive property

18. Given the following cash flows for project A: C 0 = -1000, C 1 = +600, C 2 = +400, and C 3 =

+1500, calculate the payback period.

a. One year

B. Two years

c. Three years

d. None of the above

19. The cost of a new machine is $250,000. The machine has a 3-year life and no salvage value.

If the cash flow each year is equal to 40% of the cost of the machine, calculate the payback

period for the project:

a. 2 years

B. 2.5 years

c. 3 years

d. Cannot be determined because of insufficient data

30

Junjie Liu – Econ 282 Practice Multiple Choice

20. Given the following cash flows for project Z: C 0 = -1,000, C 1 = 600, C 2 = 720 and C 3 = 2000,

calculate the discounted payback period for the project at a discount rate of 20%.

a. 1 year

B. 2 years

c. 3 years

d. None of the above

a. Discounted payback period method

B. Discounted cash-flow (DCF) rate of return method

c. Modified internal rate of return (MIRR) method

d. None of the above

22. The quickest way to calculate the internal rate of return (IRR) of a project is by:

a. Trial and error method

b. Using the graphical method

C. Using a financial calculator

d. Guessing the IRR

23. If an investment project (normal project) has IRR equal to the cost of capital, the NPV for

that project is:

a. Positive

b. Negative

c. Zero

D. Unable to determine

24. Given the following cash flows for Project M: C 0 = -1,000, C 1 = +200, C 2 = +700, C 3 = +698,

calculate the IRR for the project.

A. 23%

b. 21%

c. 19%

d. None of the above

A. The discount rate that makes the NPV equal to zero

b. The difference between the cost of capital and the present value of the cash flows

c. The discount rate used in the NPV method

d. The discount rate used in the discounted payback period method

31

Junjie Liu – Econ 282 Practice Multiple Choice

26. Which of the following methods of evaluating capital investment projects incorporates the

time value of money concept? I) Payback Period, II) Discounted Payback Period, III) Net

Present Value (NPV), IV) Internal Rate of Return

a. I, II, and III only

B. II, III, and IV only

c. III and IV only

d. I, II, III, and IV

27. Driscoll Company is considering investing in a new project. The project will need an initial

investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years.

Calculate the IRR for the project.

a. 14.5%

b. 18.6%

c. 20.2%

D. 23.4%

28. The following are some of the shortcomings of the IRR method except:

A. IRR is conceptually easy to communicate

b. Projects can have multiple IRRs

c. IRR method cannot distinguish between a borrowing project and a lending project

d. It is very cumbersome to evaluate mutually exclusive projects using the IRR method

29. Project X has the following cash flows: C 0 = +2000, C 1 = -1,300 and C 2 = -1,500. If the IRR

of the project is 25% and if the cost of capital is 18%, you would:

a. Accept the project

B. Reject the project

30. Project X has the following cash flows: C 0 = +2000, C 1 = -1,150 and C 2 = -1,150. If the IRR

of the project is 9.85% and if the cost of capital is 12%, you would:

A. Accept the project

b. Reject the project

31. If the sign of the cash flows for a project changes two times then the project has:

a. One IRR

B. Two IRRs

c. Three IRRs

d. None of the above

32. Project Y has following cash flows: C 0 = -800; C 1 = +5,000; C 2 = -5,000; Calculate the IRRs

for the project:

A. 25% & 400%

b. 125% & 500%

c. -44% & 11.6%

d. None of the above

32

Junjie Liu – Econ 282 Practice Multiple Choice

33. Music Company is considering investing in a new project. The project will need an initial

investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years.

Calculate the NPV for the project if the cost of capital is 15%.

a. $169, 935

b. $1,200,000

C. $339,870

d. $125,846

34. Muscle Company is investing in a giant crane. It is expected to cost 6.5 million in initial

investment and it is expected to generate an end of year cash flow of 3.0 million each year

for three years. Calculate the IRR approximately.

a. 14.6 %

b. 16.4 %

C. 18.2 %

d. 22.1%

35. A project will have only one internal rate of return if:

a. The net present value is positive

b. The net present value is negative

c. The cash flows decline over the life of the project

D. There is a one sign change in the cash flows

36. Story Company is investing in a giant crane. It is expected to cost 6.0 million in initial

investment and it is expected to generate an end of year cash flow of 3.0 million each year

for three years. Calculate the NPV at 12% (approximately).

a. 2.4 million

B. 1.2 million

c. 0.80 million

d. 0.20 million

37. Dry-Sand Company is considering investing in a new project. The project will need an initial

investment of $1,200,000 and will generate $600,000 (after-tax) cash flows for three years.

Calculate the MIRR (modified internal rate of return) for the project if the cost of capital is

15%.

a. 14.5%

b. 18.6%

C. 20.2%

d. 23.4%

33

Junjie Liu – Econ 282 Practice Multiple Choice

38. Mass Company is investing in a giant crane. It is expected to cost 6.6 million in initial

investment and it is expected to generate an end of year cash flow of 3.0 million each year

for three years. Calculate the MIRR for the project if the cost of capital is 12% APR.

a. 17.3%

B. 15.3%

c. 23.8%

d. 22.1%

39. Given the following cash flow for project A: C 0 = -3,000, C 1 = +500, C 2 = +1,500 and C 3 =

+5,000, calculate the NPV of the project using a 15% discount rate.

a. $5,000

b. $2,352

c. $3,201

D. $1,857

A. Capital rationing

b. Mutually exclusive projects

c. Non-normal projects

d. None of the above

41. The following table gives the available projects for a firm.

If the firm has a limit of 210 million to invest, what is the maximum NPV the company can

obtain?

a. 200

b. 283

C. 307

d. None of the above

34

Junjie Liu – Econ 282 Practice Multiple Choice

42. The following table gives the available projects for a firm

The firm has only twenty million to invest. What is the maximum NPV that the company can

obtain?

a. 3.5

b. 4.0

C. 4.5

d. None of the above

a. Net present value cash flow to initial investment

B. Present value of cash flow to initial investment

c. Net present value of cash flow to IRR

d. Present value of cash flow to IRR

35

Junjie Liu – Econ 282 Practice Multiple Choice

a. Cash flows before taxes

B. Cash flows after taxes

c. Accounting profits before taxes

d. Accounting profits after taxes

2. When a firm has the opportunity to add a project that will utilize excess factory capacity (that

is currently not being used), which costs should be used to determine if the added project

should be undertaken?

a. Opportunity cost

b. Sunk cost

C. Incremental costs

d. None of the above

3. The cost of a resource that may be relevant to an investment decision even when no cash

changes hand is called a (an):

a. Sunk cost

B. Opportunity cost

c. Working capital

d. None of the above

4. Net Working Capital is the: I) Short-term assets II) Short term liabilities III) Long-term

assets IV) Long term liabilities

a. I only

B. (I - II)

c. (III - I)

d. (III - IV)

a. It is not a cash flow

B. It is recovered during or at the end of the project and is not a depreciating asset

c. It is a sunk cost

d. All of the above

A. Firms must invest cash in short-term assets to produce finished goods

b. They are sunk costs

c. Firms need positive NPV projects for investment

d. None of the above

36

Junjie Liu – Econ 282 Practice Multiple Choice

7. Investment in inventories includes investment in: I) Raw material II) Work-in-progress III)

Finished goods

a. I only

b. I and II only

C. I, II, and III

d. III only

8. For example, in case of an electric car project, the following cash flows should be treated as

incremental flows when deciding whether to go ahead with the project except:

a. The consequent reduction in sales of the company's existing gasoline models (i.e.:

incidental effects)

B. Interest payment on debt

c. The value of tools that can be transferred from the company's existing plants

d. The expenditure on new plants and equipment

9. The principal short-term assets are: I) Cash, II) Accounts receivable, III) Inventories and IV)

Accounts Payable

a. I only

b. I and IV only

C. I, II, and III

d. IV only

10. The value of a previously purchased machine to be used by a proposed project is an example

of:

a. Sunk cost

B. Opportunity cost

c. Fixed cost

d. None of the above

11. Money that a firm has already spent or committed to spend regardless of whether a project is

taken is called:

a. Fixed cost

b. Opportunity cost

C. Sunk cost

d. None of the above

12. The cost that is incurred as a result of past, irrevocable decisions and is irrelevant to future

decisions is called:

a. Opportunity cost

B. Sunk cost

c. Incremental cost

d. None of the above

37

Junjie Liu – Econ 282 Practice Multiple Choice

13. For example, in the case of an electric car project, which of the following cash flows should

be treated as incremental flows when deciding whether to go ahead with the project?

a. The cost of research and development undertaken for developing the electric car in the past

three years

b. The annual depreciation charge

C. Tax savings resulting from the depreciation charges

d. Dividend payments

a. Book value

B. Market value

c. Historical value

d. None of the above

15. If the discount rate is stated in nominal terms, then in order to calculate the NPV in a

consistent manner requires that project: I) cash flows be estimated in nominal terms II) cash

flows be estimated in real terms III) accounting income be used

A. I only

b. II only

c. III only

d. None of the above

16. If the discount rate is stated in real terms, then in order to calculate the NPV in a consistent

manner requires that project: I) cash flows be estimated in nominal terms II) cash flows be

estimated in real terms III) accounting income be used

a. I only

B. II only

c. III only

d. None of the above

17. A firm owns a building with a book value of $150,000 and a market value of $250,000. If the

building is utilized for a project, then the opportunity cost ignoring taxes is:

a. $100,000

b. $150,000

C. $250,000

d. None of the above

18. The real interest rate is 3% and the inflation rate is 5%. What is the nominal interest rate?

a. 3%

b. 5%

C. 8.15%

d. 2%

38

Junjie Liu – Econ 282 Practice Multiple Choice

19. If the nominal interest rate is 7. 5% and the inflation rate is 4%, what is the real interest rate?

a. 4%

b. 9.5%

C. 3.4%

d. None of the above

20. A cash flow received in two years is expected to be $10,816 in nominal terms. If the real rate

of interest is 2% and the inflation rate is 4%, what is the real cash flow for year-2?

a. $11,236

b. $10,816

C. $10,000

d. $9,246

Nominal discount rate = 10%

Calculate the NPV of the project:

A. $51.70

b. $35.54

c. $45.21

d. None of the above

Nominal discount rate = 10%

Calculate the NPV of the project:

a. $25.85

B. $17.77

c. $22.65

d. None of the above

23. The real rate of interest is 3% and the inflation is 4%. What is the nominal rate of interest?

a. 3%

b. 4%

C. 7.12%

d. 1%

39

Junjie Liu – Econ 282 Practice Multiple Choice

24. The NPV value obtained by discounting nominal cash flows using the nominal discount rate

is the: I) same as the NPV value obtained by discounting real cash flows using the real

discount rate II) same as the NPV value obtained by discounting real cash flows using the

nominal discount rate III) same as the NPV value obtained by discounting nominal cash

flows using the real discount rate

A. I only

b. II only

c. III only

d. II and III only

25. Real cash flow occurring in year-2 is $60,000. If the inflation rate is 5% per year, the real

rate of interest is 2%, calculate the cash flow for the year-2

a. $60,000

b. $55,422

C. $66,150

d. None of the above

26. Proper treatment of inflation in the NPV calculation involves: I) Discounting nominal cash

flows using the nominal discount rate II) Discounting real cash flows using the real discount

rate III) Discounting nominal cash flows using the real discount rates

a. I only

b. II only

c. III only

D. I and II only

27. A firm has a general-purpose machine, which has a book value of $300,000 and is sold for

$500,000 in the market. If the tax rate is 35%, what is the opportunity cost of using the

machine in a project?

a. $500,000

B. $430,000

c. $300,000

d. None of the above

28. Capital equipment costing $250,000 today has 50,000 salvage value at the end of 5 years. If

the straight line depreciation method is used, what is the book value of the equipment at the

end of two years?

a. $200,000

B. $170,000

c. $140,000

d. $50,000

40

Junjie Liu – Econ 282 Practice Multiple Choice

29. A capital equipment costing $400,000 today has no (zero) salvage value at the end of 5 years.

If straight-line depreciation is used, what is the book value of the equipment at the end of

three years?

a. $120,000

b. $80,000

C. $160,000

d. $240,000

30. For project Z, year - 5 inventories increase by $6,000, accounts receivables by $4,000 and

accounts payables by $3,000. Calculate the increase or decrease in working capital for year-

5.

a. Increases by $6,000

b. Decreases by $4,000

C. Increases by $7,000

d. Decreases by $7,000

31. For project A in year-2, inventories increase by $12,000 and accounts payable by $2,000.

Calculate the increase or decrease in net working capital for year-2.

a. Decreases by $14,000

b. Increases by $14,000

c. Decreases by $10,000

D. Increases by $10,000

32. Working capital is one of the most common causes of misunderstanding in estimating project

cash flows. The following are the most common errors: I) forgetting about working capital

entirely II) forgetting that working capital may change during the life of the project III)

forgetting that working capital is recovered at the end of the project IV) forgetting to

depreciate the working capital

a. I and II only

B. I, II, and III only

c. II, III and IV only

d. I, II and IV only

33. If the depreciation amount is 600,000 and the marginal tax rate is 35%, then the tax shield

due to depreciation is:

a. $210,000

b. $600,000

C. $390,000

d. None of the above

41

Junjie Liu – Econ 282 Practice Multiple Choice

34. If the depreciation amount is $100,000 and the marginal tax rate is 35%, then the tax shield

due to depreciation is:

A. $35,000

b. $100,000

c. $65,000

d. None of the above

35. If the depreciable investment is $600,000 and the MACRS 5-Year class schedule is: Year-1:

20%; Year-2: 32%; Year-3: 19.2%; Year-4: 11.5%; Year-5: 11.5% and Year-6: 5.8%

Calculate the depreciation for Year-2.

a. $120,000

B. $192,000

c. $96,000

d. $115,200

36. If the depreciable investment is $1,000,000 and the MACRS 5-Year class schedule is: Year-

1: 20%; Year-2: 32%; Year-3: 19.2%; Year-4: 11.5%; Year-5: 11.5% and Year-6: 5.8%

Calculate the depreciation tax shield for Year-2 using a tax rate of 30%:

a. $224,000

b. $60,000

C. $96,000

d. $300,000

37. A project requires an initial investment of $200,000 and is expected to produce a cash flow

before taxes of 120,000 per year for two years. [i.e. cash flows will occur at t = 1 and t = 2].

The corporate tax rate is 30%. The assets will be depreciated using MACRS - 3 year

schedule:(t = 1, 33%); (t = 2: 45%); (t = 3: 15%); (t = 4: 7%). The company's tax situation is

such that it can make use of all applicable tax shields. The opportunity cost of capital is 12%.

Assume that the asset can be sold for book value. Calculate the NPV of the project:

(Approximately)

a. $22,463

B. $19,315

c. $16,244

d. None of the above

42

Junjie Liu – Econ 282 Practice Multiple Choice

38. A project requires an initial investment of $200,000 and is expected to produce a cash flow

before taxes of 120,000 per year for two years. [i.e. cash flows will occur at t = 1 and t = 2].

The corporate tax rate is 30%. The assets will be depreciated using MACRS - 3 year

schedule: (t = 1, 33%); (t = 2: 45%); (t = 3: 15%); (t = 4: 7%). The company's tax situation is

such that it can make use of all applicable tax shields. The opportunity cost of capital is 11%.

Assume that the asset can be sold for book value. Calculate the IRR for the project:

(approximately)

a. 12.00%

b. 11.00%

C. 17.73%

d. None of the above

39. You have been asked to evaluate a project with infinite life. Sales and costs are projected to

be $1000 and $500 respectively. There is no depreciation and the tax rate is 30%. The real

required rate of return is 10%. The inflation rate is 4% and is expected to be 4% forever.

Sales and costs will increase at the rate of inflation. If the project costs $3000, what is the

NPV?

a. $500.00

b. $1629.62

C. $365.38

d. None of the above

40. A project requires an investment of $900 today. It has sales of $1,100 per year forever. Costs

will be $600 the first year and increase by 20% per year. Ignoring taxes calculate the NPV of

the project at 12% discount rate.

a. $65.00

B. $57.51

c. $100.00

d. Cannot be calculated as g > r

41. Two machines, A and B, which perform the same functions, have the following costs and

lives.

Which machine would you choose? The two machines are mutually exclusive and the cost of

capital is 15%.

A. Machine A as the EAC is $1789.89

b. Machine B as the EAC is $1922.88

c. Don't buy either machine

d. Accept both A and B

43

Junjie Liu – Econ 282 Practice Multiple Choice

42. Two mutually exclusive projects have the following NPVs and project lives.

A. A

b. B

c. Both A and B

d. Reject both A and B

43. OM Construction Company must choose between two types of cranes. Crane A costs

$600,000, will last for 5 years, and will require $60,000 in maintenance each year. Crane B

costs $750,000 and will last for seven years and will require $30,000 in maintenance each

year. Maintenance costs for cranes A and B are incurred at the end of each year. The

appropriate discount rate is 12% per year. Which machine should OM Construction

purchase?

a. Crane A as EAC is $226,444

B. Crane B as EAC is $194,336

c. Crane A as the PV is $816,286

d. Cannot be calculated as the revenues for the project are not given

44. You are considering the purchase of one of two machines required in your production

process. Machine A has a life of two years. Machine A costs $50 initially and then $70 per

year in maintenance. Machine B has an initial cost of $90. It requires $40 in maintenance for

each year of its 3 year life. Either machine must be replaced at the end of its life. Which is

the better machine for the firm? The discount rate is 15% and the tax rate is zero.

a. Machine A as EAC for Machine A is $100.76

B. Machine B as EAC for Machine B is $79.42

c. Machine A as PV of costs for Machine A is $163.80

d. Machine B as PV of costs for Machine B is $181.33

44

Junjie Liu – Econ 282 Practice Multiple Choice

1. You are given the following data for year-1. Revenue = $43; Total costs = $30; Depreciation

= $3; Tax rate = 30%. Calculate the operating cash flow for the project for year-1.

a. $7

B. $10

c. $13

d. None of the above

2. A project has an initial investment of 100. You have come up with the following estimates of

the projects with cash flows.

If the cash flows are perpetuities and the cost of capital is 10%. What does a sensitivity

analysis of NPV (no taxes) show?

A. -50, 20, +100

b. -100, -50, +80

c. -50, +50, +70

d. None of the above

3. You are given the following data for year-1: Revenues = 100, Fixed costs = 30; Total

variable costs = 50; Depreciation = $10; Tax rate = 30%. Calculate the after tax cash flow for

the project for year-1.

A. $17

b. $7

c. $10

d. None of the above

100,000. If the discount rate changes from 12% to 15%, what is the change in the NPV of the

project (approximately)?

a. 12,750 increase

B. 12,750 decrease

c. 122,650 increase

d. 135,400 decrease

45

Junjie Liu – Econ 282 Practice Multiple Choice

5. You have come up with the following estimates of project cash flows:

The cash flows are perpetuities and the cost of capital is 8%. What does a sensitivity analysis

of NPV (without taxes) show?

A. 25, +232.50, +440

b. 100, +500, +800

c. 90, -55, -20

d. One of the above

6. A project has an initial investment of $150. You have come up with the following estimates

of revenues and costs. Calculate the NPV assuming that cash flow and perpetuities. (No

taxes.) (Cost of capital =10%)

b. 50, +300, +500

C. 100, +150, +350

d. One of the above

investment in working capital of $10,000 at the beginning (t = 0). The project is expected to

produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be

60% of the revenues. The assets are depreciated using straight-line depreciation. At the end

of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and

the cost of capital is 15%. Cash flows from the project are:

a. CF 0 : -90,000; CF 1 : 12,600; CF 2 : 12,600; CF 3 : 29,600

B. CF 0 : -100,000; CF 1 : 42,600; CF 2 : 42,600; CF 3 : 59,600

c. CF 0 : -100,000; CF 1 : 42,600; CF 2 : 42,600; CF 3 : 42,600

d. None of the above

investment in working capital of $10,000 at the beginning (t = 0). The project is expected to

produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be

60% of the revenues. The assets are depreciated using straight-line depreciation. At the end

of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and

the cost of capital is 15%. Calculate the NPV of the project:

a. 3840

B. 8443

c. -2735

d. None of the above

46

Junjie Liu – Econ 282 Practice Multiple Choice

investment in working capital of $10,000 at the beginning (t = 0). The project is expected to

produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be

60% of the revenues. The assets are depreciated using straight-line depreciation. At the end

of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and

the cost of capital is 12%. Calculate the NPV of the project:

A. 14,418

b. 8443

c. -2735

d. None of the above

10. A project requires an initial investment in equipment of $90,000 and then requires an

investment in working capital of $10,000 at the beginning (t = 0). The project is expected to

produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be

60% of the revenues. The assets are depreciated using straight-line depreciation. At the end

of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and

the cost of capital is 15%.What would the NPV of the project be if the revenues were higher

by 10% and the costs were 65% of the revenues?

a. $8443

b. $964

C. $5566

d. None of the above

11. A project requires an initial investment in equipment of $90,000 and then requires an

investment in working capital of $10,000 at the beginning (t = 0). The project is expected to

produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be

60% of the revenues. The assets are depreciated using straight-line depreciation. At the end

of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and

the cost of capital is 15%.What would the NPV if the discount rate were higher by 10%?

A. $5648

b. $3840

c. -$2735

d. None of the above

a. It provides ambiguous results

b. Underlying variables are likely to be interrelated

C. It provides additional information about the project that is useful

d. All of the above statements are drawbacks of sensitivity analysis

13. Which of the following statements most appropriately describes "Scenario Analysis"

a. It looks at the project by changing one variable at a time

b. It provides the break-even level of sales for the project

C. It looks at different but consistent combination of variables

d. Each of the above statements describes "Scenario Analysis" correctly

47

Junjie Liu – Econ 282 Practice Multiple Choice

14. Financial Calculator Company proposes to invest $12 million in a new calculator making

plant. Fixed costs are $3 million a year. A financial calculator costs $10 per unit to

manufacture and can be sold for $30 per unit. If the plant lasts for 4 years and the cost of

capital is 20%, what is the break-even level (i.e. NPV = 0) of annual rates? (Approximately)

(Assume no taxes.)

a. 150,000 units

b. 342,290 units

C. 381,777 units

d. None of the above

15. Calculator Company proposes to invest $5 million in a new calculator making plant. Fixed

costs are $2 million a year. A calculator costs $5/unit to manufacture and can be sold for

$20/unit. If the plant lasts for 3 years and the cost of capital is12%, what is the approximate

break-even level (i.e. NPV = 0) of annual sales? (Assume no taxes.) (Approximately)

a. $133,333 units

B. $272,117 units

c. $227,533 units

d. None of the above

16. Firms often calculate a project's break-even sales using book earnings. Generally, break-even

sales based on NPV is:

A. Higher than the one calculated using book earnings

b. Lower than the one calculated using book earnings

c. Equal to the one calculated using book earnings

d. None of the above

a. The total revenue line cuts the fixed cost line

b. The present value of inflows line cuts the present value of outflows line

C. The total revenue line cuts the total cost line

d. None of the above

A. The present value of inflows line cuts the present value of outflows line

b. The total revenue line cuts the fixed cost line

c. The total revenue line cuts the total cost line

d. None of the above

48

Junjie Liu – Econ 282 Practice Multiple Choice

19. Financial Calculator Company proposes to invest $12 million in a new calculator making

plant. Fixed costs are $3 million a year. A financial calculator costs $10 per unit to

manufacture and can be sold for $30 per unit. If the plant lasts for 4 years and the cost of

capital is 20%, what is the accounting break-even level? (Approximately) (Assume no

taxes.)

A. 300,000 units

b. 150,000 units

c. 381,777 units

d. None of the above

20. Calculator Company proposes to invest $5 million in a new calculator making plant. Fixed

costs are $2 million a year. A calculator costs $5/unit to manufacture and can be sold for

$20/unit. If the plant lasts for 3 years and the cost of capital is12%, what is the approximate

break-even level (accounting) of annual sales? (Assume no taxes.) (Approximately)

a. $133,334 units

b. $272,117 units

C. $244,444 units

d. None of the above

21. Taj Mahal Tour Company proposes to invest $3 million in a new tour package project. Fixed

costs are $1 million per year. The tour package costs $500 and can be sold at $1500 per

package to tourists. This tour package is expected to be attractive for the next five years. If

the cost of capital is 20%, what is the NPV break-even number of tourists per year? (Ignore

taxes, give an approximate answer)

a. 1000

B. 2000

c. 15000

d. None of the above

equipment. The fixed costs are $0.5 million per year. The equipment is expected to last for

five years. The manufacturing cost per hammer is $1and the selling price per hammer is $6.

Calculate the break-even (i.e. NPV = 0) volume per year. (Ignore taxes.)

A. 500,000 units

b. 600,000 units

c. 100,000 units

d. None of the above

49

Junjie Liu – Econ 282 Practice Multiple Choice

equipment. The fixed costs are $1.0 million per year. The equipment is expected to last for

five years. The manufacturing cost per hammer is $1 and the selling price per hammer is $6.

Calculate the break-even (i.e. NPV = 0) volume per year. (Ignore taxes.)

a. 500,000 units

B. 600,000 units

c. 100,000 units

d. None of the above

24. Everything else remaining the same, an increase in fixed costs: I) Increases the break-even

point based on NPV II) Increases the accounting break-even point III) Decreases the break-

even point based on NPV IV) Decreases the accounting break-even point

a. I and III only

b. III and IV only

c. II and III only

D. I and II only

25. Petroleum Inc. owns a lease to extract crude oil from sea. It is considering the construction of

a deep-sea oil rig at a cost of $50 million (I 0 ) and is expected to remain constant. The price of

oil is $50 /bbl and the extraction costs are $20 /bbl. The quantity of oil Q = 200,000 bbl per

year forever. The risk-free rate is 10% per year, which is also the cost of capital (Ignore

taxes). Calculate the NPV to invest today

A. +10,000,000

b. +6,000,000

c. +4,000,000

26. Petroleum Inc. owns a lease to extract crude oil from sea. It is considering the construction of

a deep-sea oil rig at a cost of $50 million (I 0 ) and is expected to remain constant. The price of

oil is $50 /bbl and the extraction costs are $20 /bbl. The quantity of oil Q = 200,000 bbl per

year forever. The risk-free rate is 10% per year which is also the cost of capital (Ignore

taxes). Suppose the oil price is uncertain and can be $70 /bbl or $40 /bbl next year and then

expected NPV of the project if postponed by one year is:

a. +10,000,000

B. +25,000,000

c. +5,000,000

d. None of the above

50

Junjie Liu – Econ 282 Practice Multiple Choice

27. Petroleum Inc. owns a lease to extract crude oil from sea. It is considering the construction of

a deep-sea oil rig at a cost of $50 million (I 0 ) and is expected to remain constant. The price of

oil is $50 /bbl and the extraction costs are $20 /bbl. The quantity of oil Q = 200,000 bbl per

year forever. The risk-free rate is 10% per year which is also the cost of capital (Ignore

taxes). Suppose the oil price is uncertain and can be $70 /bbl or $40 /bbl next year. If the

project if postponed by one year, calculate the value of the option to wait for one year:

(approximately)

A. +15,000,000

b. +40,000,000

c. +10,000,000

d. None of the above

28. You are planning to produce a new action figure called "Hillary ". However, you are very

uncertain about the demand for the product. If it is a hit, you will have net cash flows of $50

million per year for 3 years (starting next year). If it fails, you will only have net cash flows

of $10 million per year for 2 years (starting next year). There is an equal chance that it will

be a hit or failure (probability = 50%) You will not know whether it is a hit or a failure until

the first year's cash flows are in. You have to spend $80 million immediately for equipment

and the rights to produce the figure. If the discount rate is 10%, calculate the NPV without

the abandonment option.

A. -9.15

b. +13.99

c. +9.15

d. -14.4

29. You are planning to produce a new action figure called "Hillary". However, you are very

uncertain about the demand for the product. If it is a hit, you will have net cash flows of $50

million per year for 3 years (starting next year). If it fails, you will only have net cash flows

of $10 million per year for 2 years (starting next year). There is an equal chance that it will

be a hit or failure (probability = 50%) You will not know whether it is a hit or a failure until

the first year's cash flows are in. You have to spend $80 million immediately for equipment

and the rights to produce the figure. If you can sell your equipment for $60 million once the

first year's cash flows are received, calculate the NPV with the abandonment option. (The

discount rate is 10%)

a. -9.1

b. +9.1

C. +13.99

d. -14.4

51

Junjie Liu – Econ 282 Practice Multiple Choice

30. You are planning to produce a new action figure called "Hillary". However, you are very

uncertain about the demand for the product. If it is a hit, you will have net cash flows of $50

million per year for 3 years (starting next year). If it fails, you will only have net cash flows

of $10 million per year for 2 years (starting next year). There is an equal chance that it will

be a hit or failure (probability = 50%) You will not know whether it is a hit or a failure until

the first year's cash flows are in. You have to spend $80 million immediately for equipment

and the rights to produce the figure. .If you can sell your equipment for $60 million once the

first year's cash flows are received, calculate the value of the abandonment option. (The

discount rate is 10%)

a. -9.15

b. +13.99

C. +23.14

d. None of the above

31. Given the following net future values for harvesting trees: (one time harvest):

a. Year 1

b. Year 2

C. Year 3

d. Year 4

32. The Consumer-Mart Company is going to introduce a new consumer product. If brought to

market without research about consumer tastes the firm believes that there is a 60% chance

that the product will be successful. If successful, the project has a NPV = $500,000. If the

product is a failure (40%) and withdrawn from the market, then NPV = -$100,000. A

consumer survey will cost $60,000 and delay the introduction by one year. If the survey is

successful, then there is an 80% chance of consumer acceptance, in which case the NPV =

$500,000. If, on the other hand the survey is a failure, then NPV = -$100,000. The discount

rate is 10%. By how much does the marketing survey change the expected net present value

of the project? (Approximately)

A. Increase the NPV by $25,455

b. Decrease the NPV by $5950

c. Decrease the NPV by $8955

d. Decrease the NPV by $25,455

52

Junjie Liu – Econ 282 Practice Multiple Choice

A. A portfolio of Treasury bills

b. A portfolio of long-term United States Government bonds

c. Portfolio of U.S. common stocks of small firms

d. None of the above

2. If the average annual rate of return for common stocks is 11.7%, and for treasury bills it is

4.0%, what is the market risk premium?

a. 15.8%

b. 4.1%

C. 7.7%

d. None of the above

3. Spill Oil Company's stocks had -8%, 11% and 24% rates of return during the last three years

respectively; calculate the average rate of return for the stock.

a. 8% per year

B. 9% per year

c. 11% per year

d. None of the above

4. Given the following data: risk-free rate = 4%, average risk premium = 7.7%. Calculate the

required rate of return:

a. 5.6%

b. 7.6%

C. 11.7%

d. None of the given answers

5. Mega Corporation has the following returns for the past three years: 8%, 12% and 10%.

Calculate the variance of the return and the standard deviation of the returns.

a. 64 and 8%

b. 124 and 11.1%

C. 4 and 2%

d. None of the above

6. Macro Corporation has had the following returns for the past three years, -10%, 10%, and

30%. Calculate the standard deviation of the returns.

a. 10%

B. 20%

c. 30%

d. None of the above

53

Junjie Liu – Econ 282 Practice Multiple Choice

7. Sun Corporation has had returns of -6%, 16%, 18%, and 28% for the past four years.

Calculate the standard deviation of the returns.

a. 11.6%

B. 14.3%

c. 13.4 %

d. None of the above

8. A statistical measure of the degree to which securities' returns move together is called:

a. Variance

B. Correlation Coefficient

c. Standard Deviation

d. None of the above

a. Market risk

B. Unique risk

c. Interest rate risk

d. Default risk

a. Unsystematic risk

b. Diversifiable risk

c. Firm specific risk

D. All of the above

11. Market risk is also called: I) Systematic risk, II) Undiversifiable risk, III) Firm specific risk.

a. I only

b. II only

c. III only

D. I and II only

12. Stock A has an expected return of 10% per year and stock B has an expected return of 20%.

If 40% of the funds are invested in stock A, and the rest in stock B, what is the expected

return on the portfolio of stock A and stock B?

a. 10%

b. 20%

C. 16%

d. None of the above

A. Unique risk decreases and approaches to zero

b. Market risk decreases

c. Unique risk decreases and becomes equal to market risk

d. Total risk approaches to zero

54

Junjie Liu – Econ 282 Practice Multiple Choice

14. Stock M and Stock N have had the following returns for the past three years of -12%. 10%,

32%; and 15%, 6%, 24% respectively. Calculate the covariance between the two securities.

a. -99

B. +99

c. +250

d. None of the above

15. Stock P and stock Q have had annual returns of -10%, 12%, 28% and 8%, 13%, 24%

respectively. Calculate the covariance of return between the securities.

a. -149

B. +149

c. 100

d. None of the above

16. Stock X has a standard deviation of return of 10%. Stock Y has a standard deviation of return

of 20%. The correlation coefficient between stocks is 0.5. If you invest 60% of the funds in

stock X and 40% in stock Y, what is the standard deviation of a portfolio?

a. 10%

b. 20%

C. 12.2%

d. None of the above

17. If the correlation coefficient between stock C and stock D is +1.0% and the standard

deviation of return for stock C is 15% and that for stock D is 30%, calculate the covariance

between stock C and stock D.

a. +45

b. -450

C. +450

d. None of the above

18. The range of values that correlation coefficients can take can be:

a. Zero to +1

B. -1 to +1

c. -infinity to +infinity

d. Zero to +infinity

19. If the covariance between stock A and stock B is 100, the standard deviation of stock A is

10% and that of stock B is 20%, calculate the correlation coefficient between the two

securities.

a. -0.5

b. +1.0

C. +0.5

d. None of the above

55

Junjie Liu – Econ 282 Practice Multiple Choice

20. For a two-stock portfolio, the maximum reduction in risk occurs when the correlation

coefficient between the two stocks is:

a. +1

b. -0.5

C. -1

d. 0

21. In the case of a portfolio of N-stocks, the formula for portfolio variance contains:

A. N variance terms

b. N(N - 1)/2 variance terms

c. N2 variance terms

d. None of the above

22. In the case of a portfolio of N-stocks, the formula for portfolio variance contains:

a. N covariance terms

B. N(N - 1)/2 covariance terms

c. N2 covariance terms

d. None of the above

a. Unique risk

b. Total risk

C. Market risk

d. None of the above

A. + 1.0

b. +0.5

c. 0

d. -1.0

25. For each additional 1% change in the market return, Amazon stock return on the average

changes by:

a. 1.26%

b. 1.59%

C. 2.2%

d. None of the above

26. The beta of Nestle measured relative to its home market is:

A. 0.17

b. 1.54

c. 1.01

d. None of the above

56

Junjie Liu – Econ 282 Practice Multiple Choice

27. If the standard deviation of returns of the market is 20% and the beta of a well-diversified

portfolio is 1.5, calculate the standard deviation of the portfolio:

A. 30%

b. 20%

c. 10%

d. None of the above

28. The correlation coefficient between stock A and the market portfolio is +0.6. The standard

deviation of return of the stock is 30% and that of the market portfolio is 20%. Calculate the

beta of the stock.

a. 1.1

b. 1.0

C. 0.9

d. 0.6

29. Historical nominal return for stock A is -8%, +10% and +22%. The nominal return for the

market portfolio is +6%, +18% and 24%. Calculate the beta for stock A.

A. 1.64

b. 0.61

c. 1.0

d. None of the above

30. The annual return for three years for stock B comes out to be 0%, 10% and 26%. Annual

returns for three years for the market portfolios are +6%, 18%, 24%. Calculate the beta for

the stock.

a. 0.74

B. 1.36

c. 1.0

d. None of the above

31. The correlation coefficient between stock B and the market portfolio is 0.8. The standard

deviation of the stock B is 35% and that of the market is 20%. Calculate the beta of the

stock.

a. 1.0

B. 1.4

c. 0.8

d. 0.7

57

Junjie Liu – Econ 282 Practice Multiple Choice

a. Merton Miller

b. Richard Brealey

c. Franco Modigliani

D. Harry Markowitz

2. The distribution of returns, measured over a short interval of time, like daily returns, can be

approximated by:

A. Normal distribution

b. Lognormal distribution

c. Binomial distribution

d. None of the above

3. Florida Company (FC) and Minnesota Company (MC) are both service companies. Their

historical return for the past three years are: FC: -5%, 15%, 20%; MC: 8%, 8%, 20%.

Calculate the mean of returns for each company.

a. FC: 12% MC: 6%

B. FC: 10%, MC: 12%

c. FC: 20%, MC: 32%

d. None of the above

4. Florida Company (FC) and Minnesota Company (MC) are both service companies. Their

historical return for the past three years are: FC: -5%, 15%, 20%; MC: 8%, 8%, 20%.

Calculate the variances of return for FC and MC.

a. FC: 100 MC: 256

b. FC: 350 MC: 96

C. FC: 175 MC: 48

d. None of the above

5. Florida Company (FC) and Minnesota Company (MC) are both service companies. Their

historical return for the past three years are: FC: -5%, 15%, 20%; MC: 8%, 8%, 20%.

Calculate the covariance between the returns of FC and MC.

A. 60

b. 80

c. 40

d. None of the above

58

Junjie Liu – Econ 282 Practice Multiple Choice

6. Florida Company (FC) and Minnesota Company (MC) are both service companies. Their

historical return for the past three years are: FC: -5%, 15%, 20%; MC: 8%, 8%, 20%.

Calculate the standard deviation (S.D.) of return for FC and MC.

a. FC: 10% MC: 12%

b. FC: 18.7% MC: 9.8%

C. FC: 13.2% MC: 6.9%

d. None of the above

7. Florida Company (FC) and Minnesota Company (MC) are both service companies. Their

historical return for the past three years are: FC: -5%, 15%, 20%; MC: 8%, 8%, 20%.

Calculate the correlation coefficient between the return of FC and MC.

a. 0.0

b. -0.655

C. +0.655

d. None of the above

8. Florida Company (FC) and Minnesota Company (MC) are both service companies. Their

historical return for the past three years are: FC: -5%, 15%, 20%; MC: 8%, 8%, 20%. If FC

and MC are combined in a portfolio with 50% of the funds invested in each, calculate the

expected return on the portfolio.

a. 12%

b. 10%

C. 11%

d. None of the above

9. Florida Company (FC) and Minnesota Company (MC) are both service companies. Their

historical return for the past three years are: FC: -5%, 15%, 20%; MC: 8%, 8%, 20%.What is

the variance of the portfolio with 50% of the funds invested in FC and 50% in MC

(approximately)?

A. 85.75

b. 111.50

c. 55.75

d. None of the above

10. Florida Company (FC) and Minnesota Company (MC) are both service companies. Their

historical return for the past three years are: FC: -5%, 15%, 20%; MC: 8%, 8%, 20%. What is

the standard deviation of the portfolio with 50% of the funds invested in FC and 50% in

MC?

a. 10.6%

b. 14.4%

C. 9.3%

d. None of the above

59

Junjie Liu – Econ 282 Practice Multiple Choice

11. Investments A and B both offer an expected rate of return of 12%. If the standard deviation

of A is 20% and that of B is 30%, then investors would:

A. Prefer A to B

b. Prefer B to A

c. Prefer a portfolio of A and B

d. Cannot answer without knowing investor's risk preferences

12. Investments B and C both have the same standard deviation of 20%. If the expected return on

B is 15% and that of C is 18%, then the investors would

a. Prefer B to C

B. Prefer C to B

c. Reject both B and C

d. None of the above

13. The efficient portfolios: I) Have only unique risk II) Provide highest returns for a given level

of risk III) Provide the least risk for a given level of returns IV) Have no risk at all

a. I only

B. II and III only

c. IV only

d. II only

14. By combining lending and borrowing at the risk-free rate with the efficient portfolios, we can

I) extend the range of investment possibilities II) change efficient set of portfolios from being

curvilinear to a straight line III) provide a higher expected return for any level of risk except

the tangential portfolio

a. I only

b. I and II only

C. I, II, and III

d. None of the above

15. Suppose you invest equal amounts in a portfolio with an expected return of 16% and a

standard deviation of returns of 20% and a risk-free asset with an interest rate of 4%;

calculate the expected return on the resulting portfolio:

A. 10%

b. 4%

c. 12%

d. None of the above

16. Suppose you invest equal amounts in a portfolio with an expected return of 16% and a

standard deviation of returns of 20% and a risk-free asset with an interest rate of 4%;

calculate the standard deviation of the returns on the resulting portfolio:

a. 8%

B. 10%

c. 20%

d. None of the above

60

Junjie Liu – Econ 282 Practice Multiple Choice

17. Suppose you borrow at the risk-free rate an amount equal to your initial wealth and invest in

a portfolio with an expected return of 16% and a standard deviation of returns of 20%. The

risk-free asset has an interest rate of 4%; calculate the expected return on the resulting

portfolio:

a. 20%

b. 32%

C. 28%

d. None of the above

18. Suppose you borrow at the risk-free rate an amount equal to your initial wealth and invest in

a portfolio with an expected return of 20% and a standard deviation of returns of 16%. The

risk-free asset has an interest rate of 4%; calculate standard deviation of the resulting

portfolio:

a. 28%

b. 40%

C. 32%

d. None of the above

19. If the covariance of Stock A with Stock B is -100, what is the covariance of Stock B with

Stock A?

a. +100

B. -100

c. 1/100

d. Need additional information

a. Rate of movements of the return of individual stocks

b. Direction of movement of the return of individual stocks

C. Direction of movement between the returns of two stocks

d. Stock market volatility

21. If the correlation coefficient between Stock A and Stock B is +0.6, what is the correlation

between Stock B with Stock A?

A. +0.6

b. -0.6

c. +0.4

d. -0.4

22. The correlation between the efficient portfolio and the risk-free asset is:

a. +1

b. -1

C. 0

d. Cannot be calculated

61

Junjie Liu – Econ 282 Practice Multiple Choice

23. In the presence of a risk-free asset, the investor's job is to: I) invest in the market portfolio II)

find an interior portfolio using quadratic programming III) borrow or lend at the risk-free rate

IV) read and understand Markowitz's portfolio theory

a. I and II only

B. I and III only

c. II and IV only

d. IV only

A. (r P - r f )/σ P

b. (r P - r M )/σ P

c. (r P - r f )/β P

d. None of the above

a. +1.0

b. +0.5

c. -1.0

D. 0

a. Zero

b. +0.5

c. -1.0

D. +1.0

A. The expected risk premium on an investment is proportional to its beta

b. The expected rate of return on an investment is proportional to its beta

c. The expected rate of return on an investment depends on the risk-free rate and the market

rate of return

d. The expected rate of return on an investment is dependent on the risk-free rate

28. The graphical representation of CAPM (Capital Asset Pricing Model) is called:

a. Capital Market Line

b. Characteristic Line

C. Security Market Line

d. None of the above

a. The ability to diversify risk

B. The change in the rate of return on an investment for a given change in the market return

c. The actual return on an asset

d. A and C

62

Junjie Liu – Econ 282 Practice Multiple Choice

a. Expected rate on investment (Y-axis) vs. variance of return

b. Expected return on investment vs. standard deviation of return

C. Expected rate of return on investment vs. beta

d. A and B

31. If the beta of Microsoft is 1.13, risk-free rate is 3% and the market risk premium is 8%,

calculate the expected return for Microsoft.

A. 12.04%

b. 15.66%

c. 13.94%

d. 8.65%

32. If the beta of Amazon.com is 2.2, risk-free rate is 5.5% and the market risk premium is 8%,

calculate the expected rate of return for Amazon.com stock:

a. 15.8%

B. 14.3%

c. 35.2%

d. 23.1%

33. If the beta of Exxon Mobil is 0.65, risk-free rate is 4% and the market rate of return is 14%,

calculate the expected rate of return from Exxon:

a. 12.6%

B. 10.5%

c. 13.1%

d. 6.5%

a. Have a rate of return equal to zero

b. Have a rate of return equal to the market risk premium

C. Have a rate of return equal to the risk-free rate

d. Have a rate of return equal to the market rate of return

A. Increase in returns 25% faster than the market in up markets

b. Increase in returns 25% faster than the market in down markets

c. Increase in returns 125% faster than the market in up markets

d. Increase in returns 125% faster than the market in down markets

36. If the market risk premium is (r m - r f ) is 8%, then according to the CAPM, the risk premium

of a stock with beta value of 1.7 must be:

a. Less than 12%

b. 12%

C. Greater than 12%

d. Cannot be determined

63

Junjie Liu – Econ 282 Practice Multiple Choice

a. Ignores the return on the market portfolio

b. Uses too many factors

C. Requires a single risk measure of systematic risk

d. Ignores risk-free rate of return

a. Above the security market line

B. Below the security market line

c. On the security market line

d. On the Y-axis

A. Above the security market line

b. Below the security market line

c. On the security market line

d. On the Y-axis

40. Given the following data for a stock: beta = 1.5; risk-free rate = 4%; market rate of return =

12%; and Expected rate of return on the stock = 15%. Then the stock is:

A. Overpriced

b. Underpriced

c. Correctly priced

d. Cannot be determined

41. Given the following data for a stock: beta = 0.5; risk-free rate = 4%; market rate of return =

12%; and Expected rate of return on the stock = 10%. Then the stock is:

a. Overpriced

B. Under priced

c. Correctly priced

d. Cannot be determined

42. Given the following data for a stock: beta = 0.9; risk-free rate = 4%; market rate of return =

14%; and Expected rate of return on the stock = 13%. Then the stock is:

a. Overpriced

b. Under priced

C. Correctly priced

d. Cannot be determined

a. Is pure "noise"

b. Correlates with risky asset returns in an unsystematic manner

C. Affects the return of risky assets in a systematic manner

d. Affects the return of a risky asset in a random manner

64

Junjie Liu – Econ 282 Practice Multiple Choice

44. Given the following data for a stock: risk-free rate = 4%; factor-1 beta = 1.5; factor-2 beta =

0.5 factor-1 risk-premium = 8%; factor-2 risk-premium = 2%. Calculate the expected rate of

return on the stock using the two-factor APT model.

a. 13%

B. 17%

c. 10%

d. None of the above

45. The three factors in the Three-Factor Model are: I) Market factor II) Size factor III) Book-to-

market factor

a. I only

b. I and II only

C. I, II, and III

d. III only

46. Given the following data for the a stock: risk-free rate = 5%; beta (market) = 1.5; beta (size)

= 0.3; beta (book-to-market) = 1.1; market risk premium = 7%; size risk premium = 3.7%;

and book-to-market risk premium = 5.2%. Calculate the expected return on the stock using

the Fama-French three-factor model.

A. 22.3%

b. 7.8%

c. 11.5%

d. None of the above

47. Given the following data for the a stock: risk-free rate = 5%; beta (market) = 1.4; beta (size)

= 0.4; beta (book-to-market) = -1.1; market risk premium = 7%; size risk premium = 3.7%;

and book-to-market risk premium = 5.2%. Calculate the expected return on the stock using

the Fama-French three-factor model.

a. 22.3%

b. 7.8%

C. 10.6%

d. None of the above

65

Junjie Liu – Econ 282 Practice Multiple Choice

1. The company cost of capital is the appropriate discount rate for a firm's:

a. Low risk projects

b. High risk projects

C. Average-risk projects

d. All of the above

a. Financed entirely by debt

b. Financed by both debt and equity

C. Financed entirely by equity

d. None of the above

a. The company's cost of capital

B. The use to which the capital is put, i.e. the project

c. The industry cost of capital

d. All of the above

4. Using the company cost of capital to evaluate a project is: I) Always correct II) Always

incorrect III) Correct for projects that are about as risky as the average of the firm's other

assets

a. I only

b. II only

C. III only

d. I and III only

5. If a firm uses the same company cost of capital for evaluating all projects, which of the

following is likely? I) Rejecting good low risk projects II) Accepting poor high risk projects

III) Correctly accept projects with average risk

a. I only

b. I and II only

C. I, II, and III

d. II only

6. If firms use the company cost of capital for evaluating all of their projects, which of the

following is likely? I) Accepting poor low risk projects II) Rejecting good high risk projects

III) Correctly accept projects with average risk

a. I only

b. II only

C. III only

d. I, II and III

66

Junjie Liu – Econ 282 Practice Multiple Choice

A. Speculation ventures

b. New products

c. Expansion of existing business

d. Cost improvement, (known technology)

8. A firm might categorize its projects into: I) Cost improvement projects II) Expansion projects

(existing business) III) New products projects IV) Speculative ventures

a. III only

b. I, II and III only

c. II and IV only

D. I, II, III, and IV

a. Speculation ventures

b. New products

c. Expansion of existing business

D. Cost improvement

a. Speculation ventures

b. New products

C. Expansion of existing business

d. Cost improvement

11. The market value of Charter Cruise Company's equity is $15 million, and the market value of

its risk-free debt is $5 million. If the required rate of return on the equity is 20% and that on

the debt is 8%, calculate the company's cost of capital. (Assume no taxes.)

a. 20%

B. 17%

c. 14%

d. None of the above

12. The market value of Cable Company's equity is $60 million, and the market value of its risk-

free debt is $40 million. If the required rate of return on the equity is 15% and that on the

debt is 5%, calculate the company's cost of capital. (Assume no taxes.)

a. 5%

b. 0%

C. 1%

d. One of the above

67

Junjie Liu – Econ 282 Practice Multiple Choice

13. The company cost of capital when debt as well as equity is used for financing is:

a. Cost of debt

b. Cost of equity

C. The weighted average cost of capital (WACC)

d. None of the above

14. The after-tax weighted average cost of capital (WACC) is calculated using the formula:

a. WACC = (r D ) (D/V) + (r E ) (E/V) where: V = D + E

B. WACC = (r D ) (1 - T C ) (D/V) + (r E ) (E/V) where: V = D + E

c. WACC = (r D ) (D/E) + (r E ) (E/D)

d. None of the above

15. The market value of Charcoal Corporation's common stock is $20 million, and the market

value of its risk-free debt is $5 million. The beta of the company's common stock is 1.25, and

the market risk premium is 8%. If the Treasury bill rate is 5%, what is the company's cost of

capital? (Assume no taxes.)

a. 5%

b. 4.6%

C. 3%

d. One of the above

16. The market value of XYZ Corporation's common stock is 40 million and the market value of

the risk-free debt is 60 million. The beta of the company's common stock is 0.8, and the

expected market risk premium is 10%. If the Treasury bill rate is 6%, what is the firm's cost

of capital? (Assume no taxes.)

A. 9.2%

b. 14%

c. 8 1%

d. None of the above

a. Discounted cash flow (DCF) approach

b. Capital Asset Pricing Model (CAPM)

c. Arbitrage Pricing Theory (APT)

D. All of the above

a. The Fama-French three-factor model

b. Capital Asset Pricing Model (CAPM)

c. Arbitrage Pricing Theory (APT)

D. All of the above

68

Junjie Liu – Econ 282 Practice Multiple Choice

19. The historical returns data for the past three years for Company A's stock is -6%, 15%, 15%

and that of the market portfolio is 10%, 10% and 16%. Calculate the beta for Stock A.

A. 1.75

b. 1.0

c. 0.57

d. None of the above

20. The historical returns data for the past three years for Company A's stock is -6.0%, 15%,

15% and that of the market portfolio is 10%, 10% and 16%. If the risk-free rate of return is

4%, what is the cost of equity capital (required rate of return of company A's common stock)

using CAPM?

A. 18%

b. 14%

c. 12%

d. None of the above

21. The historical data for the past three years for the market portfolio are 10%, 10% and 16%. If

the risk-free rate of return is 4%, what is the market risk premium?

a. 4%

B. 8%

c. 16%

d. None of the above

22. The historical returns data for the past three years for Company A's stock is -6.0%, 15%,

15% and that of the market portfolio is 10%, 10% and 16%. According to the security market

line (SML), the Stock A is:

A. Over priced

b. Under priced

c. Correctly priced

d. Need more information

23. The historical returns data for the past three years for Stock B and the stock market portfolio

are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate the expected

return for Stock B and the market portfolio.

A. Stock B 16%, Market Portfolio: 14%

b. Stock B 14%, Market Portfolio: 16%

c. Stock B 24%, Market Portfolio: 12%

d. None of the above

69

Junjie Liu – Econ 282 Practice Multiple Choice

24. The historical returns data for the past three years for Stock B and the stock market portfolio

are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate the variance of

the market portfolio returns.

a. 192

b. 128

C. 28

d. None of the above

25. The historical returns data for the past three years for Stock B and the stock market portfolio

are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate the covariance of

returns between Stock B and the market portfolio.

A. 24

b. 28

c. 292

d. None of the above

Solution: Cov(R B , R M ) = [(24 - 16)(10 - 14) + (0 - 16)(12 - 14) + (24 - 16)(20 - 14)]/2 = 24

26. The historical returns data for the past three years for Stock B and the stock market portfolio

are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate the beta for

Stock B.

A. 0.86

b. 1.0

c. 0.125

d. None of the above

Solution: Using answers for (24) and (25), beta = 24/28 = 0.86

27. The historical returns data for the past three years for Stock B and the stock market portfolio

are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. If the risk-free rate is 4%,

calculate the market risk premium.

a. 18.1%

b. 14%

C. 10%

d. None of the above

28. On a graph with common stock returns on the Y-axis and market returns on the X-axis, the

slope of the regression line represents the:

a. Alpha

B. Beta

c. R-squared

d. Adjusted beta

70

Junjie Liu – Econ 282 Practice Multiple Choice

29. The historical returns data for the past three years for Stock B and the stock market portfolio

are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate the required rate

of return (cost of equity) for Stock B using CAPM. (The risk-free rate of return = 4%)

a. 8.6%

B. 12.6%

c. 14.3%

d. None of the above

30. The historical returns data for the past four years for Stock C and the stock market portfolio

returns are: Stock C: 10%, 30%, 20%,20%; Market Portfolio: 5%, 15%, 25%, 15%. Calculate

the beta for the stock:

a. 0.86

B. 0.5

c. 1.5

d. None of the above

Solution:

Cov(R C , R M ) = [(5 - 15)(10 - 20) + (15 - 15)(30 - 20) + (25 - 15)(20 - 20) + (15 - 15)(20 -

20)]/(4 - 1) = 33.3

Var(R M ) = [(5 - 15)^2 + (15 - 15)^2 + (25 - 15)^2 + (15 - 15)^2]/(4 - 1) = 66.6

Beta = 33.3/66.6 = 0.5

31. The historical returns data for the past four years for Stock C and the stock market portfolio

returns are: Stock C: 10%, 30%, 20%,20%; Market Portfolio: 5%, 15%, 25%, 15%. If the

risk-free rate of return is 5%, calculate the required rate of return on the Stock C using

CAPM.

a. 5%

B. 10%

c. 15%

d. None of the above

32. The beta of the computer company is 1.7 and the standard error of the estimate is 0.3. What

is the range of values for beta, that has 95% chance of being right?

A. 1.1 - 2.3

b. 1.4 - 2.0

c. 1.5 - 2.0

d. None of the above

33. Generally, the value to use for the risk-free interest rate is:

A. Short-term Treasury bill rate

b. Long-term Corporate bond rate

c. Medium-term Corporate bond rate

d. None of the above

71

Junjie Liu – Econ 282 Practice Multiple Choice

34. A project has an expected risky cash flow of $200, in year 1. The risk-free rate is 6%, the

market rate of return is 16%, and the project's beta is 1.5. Calculate the certainty equivalent

cash flow for year 1.

A. $175.21

b. $164.29

c. $228.30

d. None of the above

35. A project has an expected risky cash flow of $500, in year 2. The risk-free rate is 4%, the

market rate of return is 14%, and the project's beta is 1.2. Calculate the certainty equivalent

cash flow for year 2.

a. $622.04

b. $164.29

C. $401.90

d. None of the above

36. A project has an expected risky cash flow of $500, in year 3. The risk-free rate is 4%, the

market rate of return is 14%, and the project's beta is 1.2. Calculate the certainty equivalent

cash flow for year 3.

a. $622.04

B. $360.33

c. $401.90

d. None of the above

37. A project has an expected cash flow of $300 in year 3. The risk-free rate is 5%, the market

risk premium is 8% and the project's beta is 1.25. Calculate the certainty equivalent cash flow

for year 3.

A. $228.35

b. $197.25

c. $300

d. None of the above

72

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