CHAPTER 8

TRUE OR FALSE STATEMENTS

1. Future value is the value of a future amount at the present value, found by applying compound interest
over a specified period of time.
2. Interest earned on a given deposit that has become part of the principal at the end of a specified period is
called compound interest.
3. The nominal and effective rates are equivalent for annual compounding.
4. The ordinary annuity is an annuity for which the cash flow occurs at the beginning of each period.
5. The present value interest factor for i percent and n periods is the inverse of the future value interest
factor for k percent and n periods.
6. For any the interest rate and or any period of time, the more frequently interest is compounded, the
greater the amount of money that has to be invested today in order to accumulate a given future.
7. In general, with an amortized loan, the payment amount remains constant over the life of the loan, the
principal portion of each payment grows over the life of the loan, and the interest portion of each payment
declines over the life of the loan.
8. When computing an interest or growth rate, the rate will increase the larger the future value, holding
present value and the number of periods constant.
9. Given discount rate of zero percent and n periods of time, the present value interest factor and future
value interest factor are equal.
10. The future value of an annuity due is always greater than the future value of an otherwise identical
ordinary annuity.
11. Time value of money is based on the belief that a peso that will be received at some future date is worth
more than a peso today.
12. For a given interest rate, the future value of P100 increases with the passage of time. Thus, the longer the
period of time the greater the future value.
13. Annuity due is an amount that occurs at the beginning of each period.
14. The annual percentage rate (APR) s the nominal rate of interest, found by multiplying the periodic rate by
the number of periods in one year.
15. The loan amortization process involves finding the future payments (over the term of the loan) whose
present value at the loan interest rate equals the sum of the amount of initial principal borrowed and the
amount of interest on the loan.
16. When computing the number of deposits needed to accumulate a future sum, it will take longer the lower
the interest rate, holding the future value and deposit size constant.
17. The effective rate of interest differs from the nominal rate of interest in that it reflects the impact of
compounding frequency.
18. Future value interest factor annuity is the future value of P1 ordinary annuity for n period compounded at
k percent.
19. The future increase with increases in the interest rate or the period of time funds are left on deposit.
20. The future value interest factor if the future value of P1 per period compounded at 1 percent for n periods.
21. Since individuals are always confronted with opportunities to warn positive rates of return on their funds,
the timing of cash flows does not have any significant economic consequences.
22. The annual percentage yield is the effective rate of interest that must be disclosed to customers by banks
on their savings products as a result of “truth in saving laws”
23. When computing an interest or growth rate, the rate will decrease the larger the future value, holding
present value and the number of periods constant.
24. The effective rate of interest and compounding frequency are inversely related.
25. In general, with amortization loan, the payment amount remains constant over the life of the loan, the
principal portion of each payment declines over the life of the loan, and the interest portion declines over
the life of the loan.
26. The greater the potential return on an investment and the longer the period of time, the higher the present
value
27. Everything else being equal, the longer the period of time, the lower the present value.
28. The nominal (stated) annual rate is the rate of interest actually paid or earned.
 29. When computing the number of deposits needed to accumulate a future sum, it will take longer the higher
the interest rate, holding the future value and deposit size constant.
30. The effective rate of interest is the contractual rate of interest charged by a lender or promised by a
borrower.

MULTIPLE CHOICE THEORIES

1. When the amount earned on a deposit has become part of the principal at the end of a specified time period
when the concept is called?
a) Discount interest
b) Compound interest
c) Primary interest
d) Future value
2. As the interest rate increases for any given period, the future value interest factor will
a) Decrease
b) Increase
c) Remain unchanged
d) Move toward 1
3. The amount of money that would have to be invested today at a given interest rate over a specified period
in order to equal a future amount called
a) Future value
b) Present value
c) Future value interest factor
d) Present value interest factor
4. The future value of a peso _______ as interest rate increases and _____ the farther in the future an initial
deposit is to be received.
a) Decreases; decreases
b) Decreases; increases
c) Increases; increases
d) Increases; decreases
5. For a given interest rate, as the length of time until receipt of the funds increases, the present value
interest factor
a) Changes proportionally
b) Increases
c) Decreases
d) Remains unchanged
6. Indicate which formula is correct to determine the future value of an annuity due.
a) FVAs = PMT x FVIFAi,n
b) FVAs = PMT x [FVIFAi,n x (1 + i)]
c) FVAs = PMT x [FVIFA i,n / (1 + i)]
d) FVAs = PMT x FVIFA i,n + 1
7. Indicate which of the following is true about annuities
a) An ordinary annuity is an equal payment paid or received at the beginning of each period
b) An annuity due is a payment paid or received at the beginning of each period that increases by an
equal amount each period
c) An annuity due is an equal payment paid or received at the beginning of each period
d) An ordinary annuity is an equal payment or received at the end of each period that increases by
an equal amount each period.
8. An annuity with an infinite life is called a(n)
a) Perpetuity
b) Primia
c) Indefinite
d) Deep discount
9. ____________ is an annuity with an infinite life making continual annual payments
a) An amortized loan
b) A principal
c) A perpetuity
d) An APR
10. In comparing an ordinary annuity and an annuity due, which of the following is true?
a) The future value of an annuity due is always greater than the future value of an otherwise
identical ordinary annuity.
b) The future value of an ordinary annuity is always greater than the future value of an otherwise
identical annuity due.
c) The future value of an annuity is always less than the future value of an otherwise identical
ordinary annuity, since one less payment is received with an annuity due.
d) All things being equal, one would prefer to receive an ordinary annuity compared to an annuity
due.
11. Which of the following statements is most correct?
a) A 5-year P100 annuity due will have a higher present value than a 5-year P100 ordinary annuity
b) A 15.year mortgage will have larger monthly payments than a 30-year mortgage of the same
amount and same interest rate
c) If an investment pays 10 percent interest compounded annually, its effective rate will also be 10
d) Statements A and C are correct
e) All of the statements above are correct
12. Which of the following bank accounts has the highest effective annual return?
a) An account that pays 10 percent annual nominal interest with monthly compounding
b) An account that pays 10 percent annual nominal interest with daily compounding
c) An account that pays 10 percent annual nominal interest with annual compounding
d) An account that pays 9 percent annual nominal interest with daily compounding
e) All of the investments have the same effective annual return
13. You vides are interested in investing your money in a bank account. Which of the following banks
provides you with the highest effective rate of interest?
a) Bank 1; 8% with monthly compounding
b) Bank 2; 8% with annual compounding
c) Bank 3; 8% with quarterly compounding
d) Bank 4; 8% with daily (365-day) compounding
e) Bank 5; 7.8% with annual compounding
14. A 10,000 loan is to be amortized over 5 years, with annual end-of-year payments. Given the following
facts, which of these statements is most correct?
a) The annual payments would be larger if the interest rate were lower
b) If the loan were amortized over 10 years rather than 5 years, and if the interest rate were the same
in either case, the first payment would include more pesos of interest under the 5-year
amortization plan
c) The payment would have a higher proportion of interest than the first payment
d) The proportion of interest versus principal repayment would be the same for each of the 5
payments
e) The proportion of each payment that represents interest as opposed to repayment of principal
would be higher if the interest rate were higher
15. Which of the following statements is correct?
a) The first payment under a 3-year, annual payment, amortized loan for P1,000 will include a
smaller percentage (or fraction) of interest if the interest rate is 5 percent than if it is 10 percent
b) If you are lending money, then, based on effective interest rates, you should prefer to lend at a
10 Percent nominal, or quoted, rate but with semiannual payments, rather than at a 10.1 percent
nominal rate with annual payments. However, as a borrower you should prefer the annual
payment loan
c) The value of a perpetuity (say for P100 per year) will approach infinity as the interest rate used
to evaluate the perpetuity approaches zero
 d) Statements b and c are correct
e) All of the statements above are correct

16. Which of the following statements is most correct?

a) An investment that compounds interest semiannually, and has a nominal will have an effective
rate less than 10 percent. rate of 10 percent.
b) The present value of a 3-year P100 annuity due is less than the present value of a 3- year
ordinary annuity
c) The proportion of the payment of fully amortized loan that goes toward interest d time
d) Statements a and c are correct
e) None of the statements above is correct
17. Scherbatsky has a 30-year, a P100, 000 mortgage with a nominal interest rate of 10 percent and monthly
compounding. which of the following statements regarding his mortgage is most correct?
a) The monthly payments will decline over time
b) The proportion of the monthly payment that represents interest will be lower for the last
payment than for the first payment on the loan
c) The total peso amount of principal being paid off each month gets larger as the loan approaches
maturity
d) Statements a and c are correct
e) Statements b and c are correct

18. Your bank account pays an 8 percent nominal rate of interest. The interest is compounded quarterly.
Which of the following statements is most correct?
a) The periodic rate of interest is 2 percent and the effective rate of interest is 4 percent
b) The periodic rate of interest is 8 percent and the effective rate of interest is greater than 8
percent
c) The periodic rate of interest is 4 percent and the effective rate of interest is 8 percent
d) The periodic rate of interest is 8 percent and the effective rate of interest is 8 percent
e) The periodic rate of interest is 2 percent and the effective rate of interest is greater than 8
percent

19. Which of the following investments will have the highest future value at the end of 5 years? Assume that
the effective annual rate for all investments is the same.
a) V pays P50at the end of every 6-month period for the next 5 years (a total of 10 payments)
b) W pays P30 at the beginning of every 6-month period for the next 5 years (a total of payments)
c) X pays P500 at the end of 5 years (a total of one payment)
d) Y pays at the end of every year for the next 5 years (a total of 5 payments)
e) Z pays PICO at the beginning of every year for the next 5 years (a total of 5 payments)

20. You have determined the profitability of a planned project by finding the present value of all the cash
flows from the project. Which of the following would cause the project to look more appealing in terms
of the present value of those cash flows?
a) The discount rate decreases
b) The cash flows are extended over a longer period of time, but the total amount of the cash flows
remains the same
c) The discount rate increases
d) Statements b and c are correct
e) Statements a and b are correct

21. Consider the timing of the profits of the following certain investment projects:
Profit
D M
Year 1 P0 P3,000
Year2 P3000 P0
 a) –
b) Project M is still preferred to Project D project
c) D is still preferred to Project M
d) Project D and M are equally desirable
e) A goal of profit maximization would favor Project M only

22. If an investor had a choice of receiving P1,000 today, P1,000 in five years, which would the average
investor prefer?
a) P1,000 in five years because they are not good at saving money
b) P1, 000 today because it will be worth more than P1, 000 received in 5 years
c) P1, 000 in five years because it will be worth more than P1, 000 received today
d) Investors would be indifferent to when they would receive the P1, 000
e) None of the above
23. Why do investors prefer receiving cash sooner rather than later?
a) Incremental profits are greater than accounting profits
b) Money received earlier can be reinvested and returns can be increased
c) Tax considerations are important when investing
d) Diversification leads to increased value
24. Why do investors prefer receiving cash sooner rather than later?
a) Incremental profits are greater than accounting profits
b) Money received earlier can be reinvested and returns can be increased
c) Tax considerations are important when investing
d) Diversification leads to increased value
25. Tribianni prefer P1 today versus P1 in the future due to
a) Time value of money
b) Response to incentives
c) The need for immediate gratification
d) A and B
26. Which of the following best describes an annuity due?
a) A perpetuity
b) Unequal payments
c) Payment made at the beginning of the year
d) Payment made at the end of the year
27. What is a debtor willing to pay today for a single cash flow in the future?
a) The future value of the cash flow
b) The future value of the stream of cash flows
c) The present value of the cash flow
d) The present value of the annuity of cash flow
28. Which od the following statements are true?
a) In an annuity due, payments are made at the end of the period
b) In an ordinary annuity, payments are made at the end of the period
c) A perpetuity will mature at some point in the future
d) The present value of a perpetuity cannot be computed
29. The annual rate of return is variously referred to as the
a) Discount rate
b) Opportunity cost
c) Cost of capital
d) All of the above
30. In future value or present value problems, unless stated otherwise, cash flows are assumed to be
a) At the end of a time period
b) At the beginning of a time period
c) In the middle of a time period
d) Spread out evenly over a time period
31. If the interest rate is zero, the future value interest factor equals ________________.
 a) -1.0
b) 0.0
c) 1.0
d) 2.0

32.In future value or present

value problems, unless
stated otherwise, cash flows
are assumed to be
33.(a) at the end of a time
period.
34.(b) at the beginning of a
time period.
35.(c) in the middle of a
time period.
36.(d) spread out evenly
over a time period
37.In future value or present
value problems, unless
stated otherwise, cash flows
are assumed to be
 38.(a) at the end of a time
period.
39.(b) at the beginning of a
time period.
40.(c) in the middle of a
time period.
41.(d) spread out evenly
over a time period
42.
CHAPTER 9
TRUE OR FALSE STATEMENTS

1. Capital budgeting decisions usually involve large investments and often have a significant impact on the
company’s future profitability.
2. The capital budgeting committee ultimately approves the capital expenditure budget for the year.
3. For purposes of capital budgeting estimated cash inflows and outflows are preferred for inputs into the
capital budgeting decision tools.
4. The cash payback technique is a quick way to calculate a project's net present value.
5. The cash payback period is computed by dividing the cost of the capital investment by the annual cash
inflows.
6. The cash payback method is frequently used as a screening tool but it does not take into consideration the
profitability of the project.
7. The cost of capital is a weighted average of the rates paid on borrowed funds, as well as on funds
provided by investors in the company's stock.
8. Using the net present value method, a net present value of zero indicates that the project would not be
acceptable.
9. The net present value method can only be used in capital budgeting if the expected cash flows from a
project are an equal amount each year.
10. By ignoring intangible benefits, capital budgeting techniques might incorrectly eliminate projects that
could be financially beneficial to the company.
11. To avoid accepting projects that actually should be rejected, a company should ignore intangible benefits
in calculating net present value.
12. One way of incorporating intangible benefits into the capital budgeting decision is to project conservative
estimates of the value of the intangible benefits and include them in the NPV calculation.
13. The profitability index is calculated by dividing the total cash flows by the initial investment.
14. The profitability index allows comparison of the relative desirability of projects that require differing
initial investments.
15. A well-run organization should perform an evaluation, called a post-audit, of its investment projects
before their completion.
16. Post-audits create an incentive for managers to make accurate estimates, since managers know that their
results will be evaluated.
17. A post-audit is an evaluation of how well a project's actual performance matches the projections made
when the project was proposed.
18. The internal rate of return method is, like the NPV method, a discounted cash flow technique.
19. The interest yield of a project is a rate that will cause the present value of the proposed capital
expenditure to equal the present value of the expected annual cash inflows.
20. Using the internal rate of return method, a project is rejected when the rate of return is greater than or
equal to the required rate of return.
21. Using the annual rate of return method, a project is acceptable if its rate of return is greater than
management's minimum rate of return.
22. The annual rate of return method requires dividing a project's annual cash inflows by the economic life of
the project.
23. A major advantage of the annual rate of return method is that it considers the time value of money.
24. An advantage of the annual rate of return method is that it relies on accrual accounting numbers rather
than actual cash flows.
25. The commitment of funds by a business in inventory, equipment, and like assets is an investment, the
same as purchase of stocks or bonds by an individual.
26. The present value of a sum discounted over 5 years would be greater than the present value of the e sum
discounted over 10 years.
27. The process of computing present value of a future sum is called compounding.
28. Present value of and future value are just two of a ways of expressing a given sum.
29. Under the net present value method, the present value of all cash inflows associated with an investment
project are compared against the present all of all cash outflows, with the difference, or net present value,
determining whether or not the project is an acceptable investment.
30. If the net present value of an investment project is zero, then the project should be rejected since it is not
providing any return on the investment involved.
31. One key shortcoming of discounted cash flow methods is that they ignore the recovery of original
investment.
32. Although depreciation is an important element in the computation of accounting net income, it is not used
in capital budgeting computations, since it does not involve of a cash flow.
33. Although a cash outlay for a non-current asset such as a machine would be considered in a capital
budgeting analysis, a cash outlay for a working capital item such as inventory would not be considered.
34. Cost of capital is broad concept, involving a blending of the costs of all sources of capital, both debt and
equity.
35. In discounted cash flow analysis, cash flows are assumed to occur uniformly throughout a period.
36. The time-adjusted rate of return or IRR is that discount rate which will cause a project's net present value
to be zero.
37. If the cash flows of a project are uneven, then the project’s time-adjusted rate of return can't be computed.
38. To be acceptable, a project's time-adjusted rate of return can't be less than the company's cost of capital.
39. The time-adjusted rate of return method is simpler to use, makes it easier for the manager to adjust for
risk, and provides more usable information than the net present value method.
40. In a present value analysis, the higher the discount rate, the higher is the present value of a given sum.
41. In comparing two investment alternatives, the net present value obtained using the total-cost approach
would be the same as that obtained using the incremental-cost approach.
42. Long-term assets are important because they usually involve commitments of large amounts of money.
43. Investment is monetary value of the assets that the organization gives up acquiring a long-term asset.
44. Money has a time value mainly because if you do not have money you might miss out on a good
investment opportunity.
45. The future value of money that you plan to invest today depends on the amount of time that the money
will be invested.
46. Compounding refers to the process of making several different investments simultaneously to increase
return.
47. Present value refers to the value today of some amount that will be received in the future.
48. An annuity is an amount of money that you receive both periodically and forever.
49. The cost of capital is the interest rate that the organization must pay the bank to borrow money.
50. Capital budgeting refers to the process of reducing the amount to be invested to the lowest value.
51. The accounting rate of return method of project evaluation is an example of an approach to capital
budgeting.
52. Return on investment is the discount rate that makes the net present value of an investment equal to zero
CHAPTER 9
II. MULTIPLE CHOICE QUESTIONS
1. The discount rate is referred to by all of the following alternative names except the
a. cost of capital.
b. cutoff rate.
c. hurdle rate.
d. required rate of return.

2. The rate that a company must pay to obtain funds from creditors and stockholders is known as the
a. hurdle rate.
b. cost of capital.
c. cutoff rate.
d. all of these.

3. The higher the risk element in a project, the

a. more attractive the investment.
b. higher the net present value.
c. higher the cost of capital.
d. higher the discount rate.

4. If a company's required rate of return is 10% and, in using the net present value method, a project's net
present value is zero, this indicates that the
a. project's rate of return exceeds 10%.
b. project's rate of return is less than the minimum rate required.
c. project earns a rate of return of 10%.
d. project earns a rate of return of 0%.

5. Using the profitability index method, the present value of cash inflows for Project Flower is P88,000 and
the present value of cash inflows of Project Plant is P48,000. If Project Flower and Project Plant require
initial investments of P90,000 and P40,000, respectively, and have the same useful life, the project that
should be accepted is
a. Project Flower.
b. Project Plant.
c. Either project may be accepted.
d. Neither project should be accepted.

6. The primary capital budgeting method that uses discounted cash flow techniques is
a. the net present value method.
b. cash payback technique.
c. annual rate of return method.
d. profitability index method.

7. When the annual cash flows from an investment are unequal, the appropriate table to use is the
a. future value of 1 table.
b. future value of annuity table.
c. present value of 1 table.
d. present value of annuity table.

8. A company's cost of capital refers to the

a. rate the company must pay to obtain funds from creditors and stockholders.
b. total cost of a capital project.
c. cost of printing and registering common stock shares.
d. rate of return earned on common stock.
9. Intangible benefits in capital budgeting would include all of the following except increased
a. product quality.
b. employee loyalty.
c. salvage value.
d. product safety.

10. Intangible benefits in capital budgeting

a. should be ignored because they are difficult to determine.
b. include increased quality or employee loyalty.
c. are not considered because they are usually not relevant to the decision.
d. have a rate of return in excess of the company's cost of capital.

11. To avoid rejecting projects that actually should be accepted,

1) intangible benefits should be ignored.
2) conservative estimates of the intangible benefits' value should be incorporated into the NPV
calculation.
3) calculate net present value ignoring intangible benefits and then, if the NPV is negative, estimate
whether the intangible benefits are worth at least the amount of the negative NPV.
a. 1
b. 2
c. 3
d. both 2 and 3 are correct.

12. All Of the following statements about intangible benefits in capital budgeting are correct except that they
a. include increased quality and employee loyalty.
b. are difficult to quantify.
c. are often ignored in capital budgeting decisions.
d. cannot be incorporated into the NPV calculation.

13. In evaluating high-tech projects,

a. only tangible benefits should be considered.
b. only intangible benefits should be considered.
c. both tangible and intangible benefits should be considered.
d. neither tangible nor intangible benefits should be considered.

14. Using a number of outcome estimates to get a sense of the variability among potential return is
a. financial analysis.
b. post-audit analysis.
c. sensitivity analysis.
d. outcome analysis.

15. If a company's required rate of return is 9%, and in using the profitability index method, a project’s index
is greater than 1, this indicates that the project's rate of return is
a. equal to 9%.
b. greater than 9%.
c. less than 9%.
d. unacceptable for investment purposes.

16. The profitability index is computed by dividing the

a. total cash flows by the initial investment.
b. present value of cash flows by the initial investment.
c. initial investment by the total cash flows.
d. initial investment by the present value of cash flows.
17. The capital budgeting method that takes into account both the size of the original investment and the
discounted cash flows is the
a. cash payback method.
b. internal rate of return method.
c. net present value method.
d. profitability index.

18. The profitability index

a. does not take into account the discounted cash flows.
b. is calculated by dividing total cash flows by the initial investment.
c. allows comparison of the relative desirability of projects that require differing initial investments.
d. will never be greater than 1.

19. The capital budgeting method that allows comparison of the relative desirability of projects that require
differing initial investments is the
a. cash payback method.
b. internal rate of return method.
c. net present value method.
d. profitability index.

20. An approach that uses a number of outcome estimates to get a sense of the variability among potential
returns is the
a. discounted cash flow technique.
b. the net present value method.
c. risk analysis.
d. sensitivity analysis.

21. A post-audit should be performed using

a. a different evaluation technique than that used in making the original decision.
b. the same evaluation technique used in making the original decision.
c. estimated amounts instead of actual figures.
d. an independent CPA.

22. Performing a post-audit will is be important more likely because

a. Managers will be more likely to submit reasonable data when they make investment proposals if
they know their estimates will be compared to actual results.
b. it provides a formal mechanism by which the company can determine whether existing projects
should be terminated.
c. it improves the development of future investment proposals because managers improve their
estimation techniques by evaluating their past successes and failures.
d. all of these.

23. A capital budgeting method that takes into consideration the time value of money is the
a. annual rate of return method.
b. return on stockholders' equity method.
c. cash payback technique.
d. internal rate of return method.

24. The internal rate of return is the interest rate that results in a
a. positive NPV.
b. negative NPV.
c. zero NPV.
d. positive or negative NPV.
25. The capital budgeting technique that finds the interest yield of the potential investment is the
a. annual rate of return method.
b. internal rate of return method.
c. net present value method.
d. profitability index method.

26. All Of the following statements about the internal rate of return method are correct, except that it
a. recognizes the time value of money.
b. is widely used in practice.
c. is easy to interpret.
d. can be used only when the cash inflows are equal.

27. The capital budgeting technique that indicates the profitability of a capital expenditure is the
a. profitability index method.
b. net present value method.
c. internal rate of return method.
d. annual rate of return method.

28. The annual rate of return method is based on

a. accounting data.
b. the time value of money data.
c. market values.
d. cash flow data.

29. Disadvantages of the annual rate of return method include all of the following except that
a. it relies on accrual accounting numbers instead of actual cash flows.
b. it does not consider the time value of money.
c. no consideration is given as to when the cash inflows occur.
d. management is unfamiliar with the information used in the computation.

30. The annual rate of return is computed by dividing expected annual

a. cash inflows by average investment.
b. net income by average investment.
c. cash inflows by original investment.
d. net income by original investment.

31. All of the following statements about the annual rate of return method are correct except that it
a. indicates the profitability of a capital expenditure.
b. ignores the salvage value of an investment.
c. does not consider the time value of money.
d. compares the annual rate of return to management's minimum rate of return.

32. The payback period for an investment project is defined as:

a. the number of years required for cumulative project profits to equal the initial investment.
b. the number of years required for cumulative project cash flows to equal the average investment.
c. the number of years required for cumulative project cash flows to equal the initial investment.
d. a period of time sufficient to earn a return equal to the cost of capital.

33. Depreciation is incorporated explicitly in the discounted cash flow analysis of an investment proposal
because it:
a. is a cost of operations that cannot be avoided.
b. results in an annual cash outflow.
c. is a cash inflow.
 d. reduces the cash outlay for income taxes.

34. The rankings of mutually exclusive investments determined using the internal rate of return ORR)
method and the net present value (NPV) method may be different when:
a. the lives of the multiple projects are equal and the size of the required investments are equal.
b. the required rate of return equals the IRR of each project.
c. the required rate of return is higher than the IRR of each project.
d. multiple projects have unequal lives and the size of the investment for each project is different.

35. Returns provided by depreciable assets must be sufficient to:

a. provide adequate return on the original investment;
b. provide a return at least as great as the cost of the investment multiplied by the cost of capital;
c. provide a return on the original investment, plus return the total amount of the original investment
itself;
d. provide a return equal to the charge for depreciation.

36. All of the following are limiting assumptions when dealing with discounted cash flows, except:
a. Cash flows are assumed to occur at the end of the period;
b. Cash flows are assumed to be reinvested immediately in another investment project;
c. Cash flows are assumed to occur evenly during a period;
d. Reinvested cash flows are assumed to earn a rate of return at least as great as the current discount
rate;

37. Long-term assets are important because they

a. usually create substantial risk for organization
b. appear on the financial statements
c. are usually made by junior managers who are concerned about their reputation
d. create sensitive public relations issues

38. Which of the following is not one of the risks that are associated with long-term assets?
a. The extended period of time associated with the investment in long-term assets.
b. The amount of the investment is large
c. The technological risk of the investment.
d. They are made by senior managers who are visible and exposed to criticisms.

39. Investment is
a. The amount of money that an organization invests at the start of a project
b. The present value of all the money that the organization makes in a project.
c. The interest rate that the organization must pay on the funds that it invests in a project.
d. The amount of time that organizations invest in implementing a project.

40. Return is
a. The increased cash flows resulting from an investment.
b. The profitability of an investment
c. The satisfaction that an organization gets from making an investment
d. None of the above

41. The time value of money means that

a. the value of money increases over time
b. the value of money depends on when it is received
c. time is money
d. money must be received in a timely fashion in order to be valuable.
42. Compounding refers to the phenomenon of
a. interest earning interest
b. creating risky investments
c. the risk caused by the lengthy periods that investments are made
d. none of the above

43. The relationship between present value and future value is

a. there is none
b. present value is more widely used than future value
c. future value is more widely used than present value
d. present value and future value are reciprocal terms

44. Present value is used to

a. Identify the cost of a project
b. compute asset values for financial reporting purposes
c. convert future cash flows to a present amount
d. determine the payback period

45. The present value of an amount to be received in the future

a. Decreases at a constant rate as the time increases.
b. Decreases at an increasing rate as time increases.
c. Decreases at a decreasing rate as time increases
d. Is unchanged as time increases
Chapter 10
TRUE OR FALSE STATEMENTS

1. Financial structure includes long-term and short-term sources of funds.

2. Financial structure design determines how permanent financing should be utilized.
3. The net income theory of capital structure holds that the price of a share is increased by moderate
increases in to a firm's use of debt capital.
4. According to the net operating income approach to valuation, the market value of the firm's common
stock is a residual of total market value.
5. An increase in financial leverage will increase earnings before income and taxes (EBIT).
6. Because preferred stock dividends are not tax-deductible, they are not a source of financial leverage.
7. The objective of capital structure management is to maximize the market value of the firm's equity.
8. Investors require a higher return on common stock investments if a firm uses less leverage.
9. Capital costs, like other costs, potentially reduce the size of cash dividend that can be paid.
10. According to the independence hypothesis, the cost of debt consists of an explicit return to the
bondholder and an implicit cost reflected in the increased return to equity.
11. Other things the same, the use of debt financing reduces the firm's total tax bill, resulting in a higher total
market value.
12. One benefit from using fixed cost securities is the reduced variability in the EPS stream.
13. The free cash flow theory of capital structure gives a theoretical solution as to how much financial
leverage a firm should have.
14. Because there are no fixed financing costs, a common stock plan line in an EBIT-EPS analysis chart will
have a steeper slope than will a bond-plan line.
15. One danger of EBIT-EPS analysis is that it ignores the implicit cost of debt financing.
16. The common equity ratios of large retail firms seem to differ statistically from those of major steel
producers.
17. Debt capacity is the maximum proportion of debt that the firm can include in its capital structure without
increasing its tax liability.
18. The tax shield on interest is calculated by multiplying the interest rate paid on debt by the principal
amount of the debt and the firm's marginal tax rate.
19. The EBIT-EPS indifference point, sometimes called the break-even point, identifies the optimal range of
financial leverage regardless of the financing plan chosen by the financial manager.
20. Debt capacity is the minimum proportion of debt the firm can include in its capital structure and still
maintain its lowest composite cost of capital.
21. Comparative leverage ratio analysis does not involve the use of industry norms.
22. The nature of a firm's assets has a major influence on the types of financial capital a firm uses.
23. The objective of capital-structure management can be viewed as the endeavor to find the financing mix
that will minimize the firm's composite cost of capital.
24. The free cash flow theory of capital structure indicates how debt can be used to control managerial
behavior.
25. When market conditions change abruptly, company financial policies and decisions must adapt to the new
conditions; otherwise, the firm will be faced with a lower level of cash flow generation and increased risk
of financial distress.
26. If the cost estimates used in a break-even analysis make allowances for non-cash expenses, a firm's
production and sales levels do not have to be as great to cover the cash costs of production.
27. Operating leverage is measured as the responsiveness of the firm's earnings before interest and taxes
(EBIT) relative to fluctuations in sales.
28. If a firm's production process has fixed costs, the degree of financing leverage wilt exceed the break-even
point.
29. If a firm utilizes debt financing and experiences a 10% drop in earnings before interest and the resulting
decrease in EPS share will be greater than 10 %.
30. Business risk refers to the relative dispersion of the firm's earnings available to common stockholders.
31. The break-even point on an accounting profit basis is equal to or less than the break-even point on a cash
basis.
32. When calculating the degree of financial leverage for a firm with preferred stock in its financial structure,
the preferred stock dividends must be adjusted to a before-tax basis.
33. The financial structure affects the level and variability of the firm's net operating Income (EDIT)
34. Financial leverage means financing a portion of the firm's assets with securities bearing a fixed rate of
return in hopes of increasing the stockholder's ultimate return.
35. The greater the degree of operating leverage, the greater is the sensitivity of EPS to change in EBIT.
36. If the degree of financial leverage is 1.25 times, expect an increase in EBIT of to result in a 5% increase
in EPS.
37. If the degree of operating leverage is 2 times and the degree of financial leverage is 1.5 times, then if
sales increase by 10%, EPS to increase by 30%.
38. The more fixed-charge securities the firm employs in its financial structure, the greater its degree of
financial leverage.
39. Financial risk is a direct result of the firm's financing decisions.
40. Business risk for multinational firms includes the degree of competition to which a firm is exposed.
CHAPTER 10
II. MULTIPLE CHOICE QUESTIONS

1. A firm's business risk is influenced by the

a. competitive position of the firm within the industry.
b. demand characteristics of the firm's products.
c. financing structure of the firm.
d. both a and b.

2. The break-even model enables the manager of the firm to

a. calculate the minimum price of common stock for certain situations.
b. set appropriate equilibrium thresholds.
c. determine the quantity of output that must be sold to cover all operating costs .
d. determine the optimal amount of debt financing to use.

3. Fixed costs include all of the following EXCEPT

a. administrative salaries.
b. property taxes.
c. sales commissions.
d. insurance.

4. Which of the following is a non-cash expense?

a. Depreciation expenses
b. Interest expense
c. Packaging costs
d. Administrative salaries

5. A firm that uses large amounts of debt financing in an industry characterized by a high degree of business
risk would have _______ earnings per share fluctuations resulting from changes in levels of sales.
a. no
b. constant
c. large
d. small

6. Financial leverage means financing some of a firm's assets with

a. commercial paper.
b. preferred stock.
c. corporate bonds.
d. all of the above.

7. Potential applications of the break-even model include

a. replacement for time-adjusted capital budgeting techniques.
b. pricing policy.
c. optimizing the cash-marketable securities position of a firm.
d. both a and c.

8. Break-even analysis can be useful in

a. capital expenditure analysis.
b. bond refunding decisions.
c. rights offering decisions.
d. all of the above.
9. Which costs should be included when calculating the degree of operating leverage?
a. Depreciation
b. Administrative expenses
c. Real estate taxes
d. Both b and c

10. Break-even analysis is limited to

a. linear cost-volume-profit relationships.
b. fixed production and sales mixes.
c. variable production and sales mixes.
d. both a and b.

11. The degree of operating leverage is defined as

a. % change in EBIT / % change in variable cost
b. % change in EBIT / % change in sales
c. % change in sales / % change in EBIT
d. % change in EBIT / % change in contribution margin

12. The degree of operating leverage applies to

a. sales.
b. net income.
c. earnings per share.
d. all of the above.

13. In general, as the level of sales rises above the break-even point, the degree of operating leverage
a. increases.
b. decreases.
c. remains constant.
d. none of the above.

14. Financing a portion of a firm's assets with securities bearing a fixed rate of return in hopes of increasing
the return to stockholders refers to
a. business risk.
b. financial leverage.
c. operating leverage.
d. all of the above.

15. As fixed costs increase, ________ increases.

a. degree of operating leverage
b. degree of financial leverage
c. earnings per share
d. leverage

16. Financial leverage measures the percentage change in ________ to the percentage change in _________.
a. EBIT; sales
b. sales; earnings per share
c. earnings per share; EBIT
d. sales; EBIT

17. Which of the following is a limitation of break-even analysis?

a. Cost-volume-profit relationship is assumed to be linear
b. Total revenue increases with changes in variable unit costs
c. Assumes a non-constant production and sales mix
d. Both a and b
18. When the impact of taxes is considered with the net operating income approach to valuation, the value of
the firm
a. increases at a debt-to-total value ratio of 40 percent.
b. decreases by interest expense paid out.
c. increases by the present value of the tax shield.
d. decreases by the future value of cash flows.

19. The inclusion of bankruptcy risk in firm valuation.

a. acknowledges o that a firm has an upper limit to debt financing.
b. provides a rationale for a linear cost of capital curve.
c. is ignored in both the net operating income and the net income of cost of capital.
d. both a and c.

20. The primary objective of capital structure management is to mix the sources of funds
a. obtained by a firm to minimize the cost of the company's short-term; common stock
b. permanent; common stock
c. short-term; debt
d. permanent; debt

21. Which of the following is inconsistent with an optimal capital structure policy?
a. Lower the blended cost of debt and equity.
b. Maximize a firm's common stock price.
c. Minimize the cost of capital.
d. Maximize EPS.

22. Which of the following is part of a firm's financial structure but not a component of its capital structure?
a. Retained earnings
b. Mortgage bonds
c. Accounts payable
d. Both a and c

23. Financial leverage is distinct from operating leverage since it accounts for the use of
a. debt.
b. fixed operating costs.
c. preferred stock.
d. both a and c.

24. Fluctuations in EBIT result in

a. fluctuations in EPS, which might be larger or smaller as financial leverage increases.
b. smaller fluctuations in EPS, the greater the degree of financial leverage.
c. greater fluctuations in EPS, the greater the degree of financial leverage.
d. equal fluctuations in EPS, the greater the degree of financial leverage.

25. When using an EPS-EBIT to evaluate a pure debt financing and pure equity financing plan, the debt
financing plan line chart will have
a. a steeper slope than the equity financing plan line.
b. a lower level of EBIT at EPS = 0.
c. a smaller slope when less leverage is used.
d. both a and c.
26. When deciding upon how much debt financing to employ, most practitioners would cite which of the
following as the most important influence on the level of the debt ratio?
a. Providing a borrowing reserve
b. Maintaining desired bond rating
c. Ability to adequately meet financing charges
d. Exploiting advantages of financial leverage

27. The single most important factor that should influence a firm's financing mix is their
a. cost of debt.
b. EPS.
c. temporary capital.
d. probability distribution of EBIT.

28. The level of EBIT that will equate EPS between two different financing plans is called the
a. indifference point.
b. optimal capital plan.
c. break-even point.
d. both a and c.

29. Which two ratios would be most helpful in managing a firm's capital structure?
a. Balance sheet leverage ratios and profitability ratios
b. Leverage ratios and coverage ratios
c. Coverage ratios and liquidity ratios
d. Coverage ratios and profitability ratios

30. Optimal capital structure is

a. the mix of permanent sources of funds used by the firm in a manner that will maximize the
company's common stock price.
b. the mix of all items that appear on the right-hand side of the company's balance sheet.
c. the mix of funds that will minimize the firm's beta.
d. the mix of securities that will maximize EPS.

31. Basic tools of capital structure management include:

a. EBIT-EPS analysis.
b. comparative profitability ratios.
c. capital budgeting techniques.
d. none of the above.

32. The EBIT-EPS indifference point:

a. identifies the EBIT level at which the EPS will be the same regardless of the financing plan.
b. identifies the point at which the analysis can use EBIT and EPS interchangeably.
c. identifies the level of earnings at which the management is indifferent about the payments of
dividends.
d. none of the above.

33. In equation form, the relationship between financial and capital structure can be expressed by: financial
equity structure – __________ = capital structure
a. equity
b. current liabilities
c. long-term debt
d. none of the above
34. If firm chose to increase its debt ratio from 20% to 40%, what is the potential risk?
a. The average cost of capital would most likely rise
b. The price of the firm's common stock would definitely decline.
c. If economic forces cause a reduction of sales, the firm's EPS might decline.
d. The firm's WACC might decline.

35. Monitoring costs to reduce that arise the conflict due to between capital structure stockholders
management and creditors.
a. Help to reduce the conflict between the stockholders and creditors.
b. are ultimately borne by the debt holders.
c. are borne by preferred stockholders.
d. none of the above.

36. An optimal capital structure is achieved

a. when a firm's expected profits are maximized.
b. when a firm's expected EPS are maximized.
c. when a firm's expected stock price is maximized.
d. when a firm's break-even point is achieved.

37. The inclusion of bankruptcy risk in firm valuation:

a. acknowledges that a firm is insulted from the impact of high debt financing.
b. provides a rationale for a saucer-shaped cost of capital curve.
c. is ignored in the Independence Hypothesis.
d. both b & c.

38. Which of the following is the most typical natural conflict that could lead to agency costs in managing a
firm's capital structure?
a. Potential stockholders versus existing stockholders
b. Stockholders versus bondholders
c. There are no potential conflicts that could lead to agency costs in managing a firm's capital structure
d. Existing shareholders and the IRS

39. How can bondholders reduce potential conflicts with stockholders as related to capital structure?
a. Pay out higher dividends.
b. Increase management stock options.
c. Require protective covenants in the bond indenture agreement.
d. Require the firm to increase capital spending for new investments.

40. As a general rule, the capital structure:

a. maximizes expected EPS and also maximizes the price per share of common stock.
b. minimizes the interest rate on debt and also maximizes the expected EPS.
c. minimizes the required rate on equity and also maximizes the stock price.
d. maximizes the price per share of common stock and also minimizes the weighted average cost of
capital.
Chapter 11
TRUE OR FALSE STATEMENTS

1. Most managers are risk-averse, since for a given increase in risk, they require an increase in return.
2. The return on an asset is the change in its value plus any cash distribution over a given period of time,
expressed as a percentage of its ending value.
3. For the risk-averse manager, the required return decreases for an increase in risk.
4. An investment that guarantees its holder P100 return and another investment that earns P0 or P200 with
equal chances (i.e., an average of P100) over the same period have equal risk.
5. The real utility of the coefficient of variation is in comparing assets that have equal expected returns.
6. The risk of an asset may be found by subtracting the worst outcome from the best outcome.
7. The larger the difference between an asse(s worst outcome from its best outcome, the higher the risk of
the asset.
8. For the risk-seeking manager, no change in return would be required for an increase in risk.
9. For the risk-averse manager, the required return decreases for an increase in risk.
10. For the risk-indifferent manager, no change in return would be required for an increase in risk
11. Coefficient of variation is a measure of relative dispersion used in comparing the expected returns of
assets with differing risks.
12. The more certain the return from an asset, the less variability and therefore the less risk.
13. The risk of an asset can be measured by its variance, which is found by subtracting the worst outcome
from the best outcome.
14. An efficient portfolio is a portfolio that maximizes return for a given level of risk or minimizes risk for a
given level of return.
15. A behavioral approach for assessing risk that uses a number of possible return estimates to obtain a sense
of the variability among outcomes is called sensitivity analysis.
16. The financial manager's goal for the firm is to create a portfolio that maximizes return in order to
maximize the value of the firm.
17. New investments must be considered in light of their impact on the risk and return of the portfolio of
assets because the risk of any single proposed asset investment is not independent of other assets.
18. Two assets whose return move in the opposite directions and have a correlation coefficient of (-1) are
either risk-free assets or low-risk assets.
19. Two assets whose returns move in the same direction and have a correlation coefficient of +1 are both
very risky assets.
20. Combining negatively correlated assets can reduce the overall variability of returns.
21. In general, the lower the correlation between asset returns, the greater the potential diversification of risk.
22. Foreign exchange risk is the risk that arises from the danger that a host government might take actions
that are harmful to foreign investors or from the possibility that political turmoil in a country might
endanger investment made in that country by foreign nationals.
23. Combining uncorrelated assets can reduce risk—not as effectively as combining negatively correlated
assets, but more effectively than combining positively correlated assets.
24. The required return on an asset is an increasing function of its nondiversifiable risk.
25. The beta coefficient is an index of the degree of movement of an asset's return in response to a change in
the market return.
26. The beta coefficient is an index of the degree of movement of an asset's return in response to a change in
the risk-free asset return.
27. In general, widely accepted expectations of hard times ahead tend to cause investors to become less risk-
adverse.
28. A normal probability distribution is a symmetrical distribution whose shape resembles a bell
29. The lower the coefficient of variation, the greater the risk and therefore the higher the expected
30. Investors should recognize that betas are calculated using historical data and that past performance
relative to the market average may not accurately predict future performance.
CHAPTER 11
II. MULTIPLE CHOICE QUESTIONS Encircle the letter that corresponds to the best answer.

1. A portfolio is?
a. A group of assets, such as stocks and bonds, held as a collective unit by an investor.
b. The expected return on a risky asset.
c. The expected return on a collection of risky assets.
d. The variance of returns for a risky asset.

2. The percentage of a portfolio's total value invested in a particular asset is called that asset's:
a. Portfolio return.
b. Portfolio weight
c. Portfolio risk.
d. Rate of return.

3. Risk that affects at most a small number of assets is called:

a. Portfolio risk.
b. Un-diversifiable risk.
c. Market risk.
d. Unsystematic risk.

4. Which of the following statements is CORRECT?

a. If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you
would by definition have a riskless portfolio.
b. The beta coefficient of a stock is normally found by regressing past returns on a stock against past
market returns. One could also construct a scatter diagram of returns on the stock versus those on the
market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may
differ from the beta that exists in the future.
c. The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks.
d. It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at
least in theory, its required rate of return would be equal to the risk-free (default-free) rate of return,
RRF. e. The beta of a portfolio of stocks is always smaller than the betas of any of the individual
stocks.

5. In the capital asset pricing model (CAPM), a security market line (SML):
a. Shows the effect of portfolio diversification on market risk.
b. Represents the weighted average of the expected returns of all the investments composing
c. Provides a benchmark for evaluating the relative merits of different stocks or portfolios,
d. Indicates the degree to which two stock returns move together in a portfolio.

6. An underlying premise when using the capital asset pricing model (CAPM) to estimate a firm's cost of
equity capital is:
a. Investor attitudes toward risk will not change.
b. The required rate of return rate equals the riskless rate of interest plus a premium for risk.
c. Individual capital components must be weighted based on their contributions to the firm's capital
structure.
d. Dividends are expected to grow at a constant compound rate.

7. According to the capital asset pricing model (CAPM), the expected risk premium of a portfolio varies:
a. Based on investor attitudes toward risk.
b. Based on the number of securities in the portfolio.
c. In direct proportion to beta in a competitive environment.
d. In direct proportion to the prime interest rate.
8. A primary benefit of portfolio diversification is to:
a. Eliminate systematic risk.
b. Provide a more favorable borrowing position.
c. Reduce unsystematic risk.
d. Reduce exposure to foreign exchange rates.

9. The systematic risk of an individual security is measured by the:

a. Standard deviation of the security's returns and other similar securities.
b. Standard deviation of the security's rate of return.
c. Covariance between the security's returns and the general market.
d. Security's contribution to the portfolio risk.

10. When purchasing temporary investments, which one of the following best describes the risk associated
with the ability to sell the investment in a short period of time without significant price concessions?
a. Financial risk.
b. Interest rate risk.
c. Liquidity risk.
d. Investment risk

11. Which one of the following provides the best measure of interest rate risk for a Corporate Bond?
a. Duration.
b. Maturity.
c. Bond rating.
d. Yield to maturity.

12. All of the following statements accurately describe investment except:

a. Stocks with a beta greater than 1.0 are unusually sensitive beta to market movements.
b. The average beta of all stocks is 1.0
c. US Treasury bills have a beta of 0.
d. Betas for individual stocks tend to be stable over time.

13. Which of the following statements is incorrect.

a. The slope of the security market line is measured by beta.
b. Two securities with the same stand-alone risk can have different betas.
c. Company-specific risk can be diversified away.
d. The market risk premium is affected by attitudes about risk.
e. Higher beta stocks have a higher required return.

14. Inflation, recession, and high interest rates are economic events which are characterized as:
a. Company-specific risk that can be diversified away.
b. Market risk.
c. Systematic risk that can be diversified away.
d. Diversifiable risk.
e. Unsystematic risk that can be diversified away.

15. Which of the following is not a difficulty concerning beta and its estimation?
a. Sometimes a security or project does not have a past history which can be used as a basis for
calculating beta.
b. Sometimes, during a period when the company is undergoing a change such as toward more
leverage or riskier assets, the calculated beta will be drastically different than the "true" or "expected
future" beta.
c. The beta of an "average stock," or "the market," can change over time, sometimes drastically.
d. Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future
 because conditions have changed.

16. Which of the following statements is most correct?

a. An increase in expected inflation could be expected to increase the required return on a riskless
asset and on an average stock by the same amount, other things held constant.
b. A graph of the SML would show required rates of return on the vertical axis and standard deviations
of returns on the horizontal axis.
c. If two "normal" or "typical" stocks were combined to form a 2-stock portfolio, the portfolio's
expected return would be a weighted average of the stocks' expected returns, but the portfolio's
standard deviation would probably be greater than the average of the stocks' standard deviations.
d. If investors became more averse to risk, then (1) the slope of the SML would increase and (2) the
required rate of return on low-beta stocks would increase by more than the required return on high-
beta stocks.

17. Which of the following is a source of unsystematic risk?

a. Interest rates
b. Business cycle
c. Energy Prices
d. Introduction of a bad product

18. In the context of capital market theory, unsystematic risk:

a. Is described as unique risk.
b. Refers to non-diversifiable risk.
c. Remains in the market portfolio
d. Refers to the variability in all risky assets caused by macroeconomic and other aggregate market-
related variables.

19. Consistent with capital market theory, systematic risk:

I. Refers to the variability in all risky assets caused by macroeconomic and other aggregate market_
related variables.
II. Is measured by the coefficient of variation of returns on the market portfolio. Ill. Refers to non-
diversifiable risk.
a. I only
b. II only
c. I and III only
d. II and III only

20. The security market line depicts:

a. A security's expected return as a function of its systematic risk.
b. The market portfolio as the optimal portfolio of risky securities.
c. The relationship between a security's return and the return of the index.
d. The complete portfolio as a combination of the market portfolio and the risk-free asset.

21. Which of the following statements about the security market line (SML) is false?
a. Properly valued assets plot exactly on the SML
b. The SML leads all investors to invest in the same portfolio of risk assets.
c. The SML provides a benchmark for evaluating expected investment performance.
d. The SML is a graphic representation of the relationship between expected return and beta.

22. The slope of the Security Market Line will increase if?
a. The risk free rate increases
b. The required return from the market portfolio increases
c. The average beta increases
d. If the risk premium decreases.
23. What is the expected return of a zero-beta security?
a. Market rate of return.
b. Zero rate of return.
c. Negative rate of return.
d. Risk-free rate of return.

24. Capital asset pricing theory asserts that expected returns are best explained by:
a. Economic factors
b. Specific risk
c. Systematic risk
d. Diversification

25. A stock with a beta of 2 is

a. Twice as risky as the average stock in the market.
b. Will have twice the expected return as the average stock in the market.
c. Will have twice the standard deviation as the average stock in the market.
d. Will have twice the return as the risk-free rate.

26. Efficient frontier comprises of

a. Portfolios that have negatively correlated securities
b. Portfolios that have positively correlated securities
c. Inefficient portfolios
d. Efficient portfolios

27. Efficient portfolios can be defined as those portfolios which for a given level of risk provides
a. Maximum return
b. Average return
c. Minimum return
d. None of the above

28. Capital market line is:

a. Capital allocation line of a market portfolio
b. Capital allocation line of a risk free asset
c. Both a and b
d. None of the above

29. CAPM accounts for:

a. Unsystematic risk
b. Systematic risk
c. Both a and b
d. None of the above

30. The point of tangency between risk return indifferences curves and efficient frontier highlights:
a. Optimal portfolio
b. Efficient portfolio
c. Sub-optimal portfolio
d. None of the above