# Quiz 15: Investment,time and Capital Markets

Business

111

All Questions

81

Multiple Choice

0

True False

30

Essay

0

Short Answer

0

Not Answered

Q 1

The marginal revenue product of capital inputs does not provide complete information about optimal use because capital is:
A)money.
B)not an input.
C)an output as well as an input.
D)durable.
E)all of the above

Free

Multiple Choice

D

Q 2

Which of the following questions is addressed when hiring capital,but not addressed when hiring labor?
A)How much are future profits worth today?
B)How much are today's profits worth in the future?
C)How much are the future's profits worth in the future?
D)How much are today's profits worth today?
E)All questions present when capital is purchased are present when labor is purchased.

Free

Multiple Choice

A

Q 3

Which is a stock variable?
A)Labor
B)Profit
C)Income
D)Capital
E)Price

Free

Multiple Choice

D

Q 4

If a firm can earn a profit stream of $50,000 per year for 10 years,that profit stream is worth
A)more than $500,000 today.
B)$500,000 today.
C)less than $500,000 today,but a positive amount.
D)nothing today
E)some amount,but whether it is more,less or the same as $500,000 cannot be determined.

Multiple Choice

Q 5

To avoid the stock versus flow issue in production,some economists discuss capital usage in terms of rented capital.For example,your firm may not directly own some of the capital inputs to your production operation,and these capital inputs are employed on an hourly or daily basis.Which of the following inputs is a good example of a capital input that acts like a flow?
A)Land and buildings that are owned by the firm
B)A long-term licensing agreements that allow you to use a patented idea owned by another firm
C)A forklift that is rented on an hourly basis
D)all of the above

Multiple Choice

Q 6

The present value formula makes it apparent that:
A)a decline in the interest rate will cause a decision maker to weigh recent period returns relatively more heavily than before the decline.
B)an increase in the interest rate will cause a decision maker to weigh distant (or future)returns relatively more heavily than before the increase.
C)the present value of a fixed sum decreases as the time until it is to be paid increases.
D)all of the above
E)both A and C.

Multiple Choice

Q 7

If the interest rate is 5%,in one period the value of $1 today is
A)$1.20.
B)$1.05.
C)95 cents.
D)20 cents.
E)5 cents.

Multiple Choice

Q 8

If the interest rate is 10%,the present value of $1 next year is
A)$1.20.
B)$1.10
C)91 cents.
D)10 cents.
E)9 cents.

Multiple Choice

Q 9

You have won a contest and are allowed to choose between two prizes.One option is to receive $200 today and another $200 one year from now.The second option is $100 today and an additional $325 one year from now.At what interest rate (if any)is the present value of the two prizes identical?
A)0 percent
B)5 percent
C)10 percent
D)25 percent
E)none of the above

Multiple Choice

Q 10

When the interest rate is R,the formula for finding the value of a current amount $M one year from now is
A)M (1 + R/100).
B)M (1 + R).
C)M / (1 + R).
D)M / R.
E)M / (100R).

Multiple Choice

Q 11

The formula for finding the present value of an amount M that will be received one year from now,when the interest rate is R,is
A)M × (1 + R/100).
B)M × (1 + R).
C)M / (1 + R).
D)M / R.
E)M / (100R).

Multiple Choice

Q 12

When the interest rate is R,the formula for finding the value of $M two years from now is
A)M (1 + R)

^{2}. B)M (1 + R^{2}). C)M / (1 + R)^{2}. D)M / (1 + R^{2}). Multiple Choice

Q 13

A certain magazine offers its subscribers the opportunity to "Buy Now and Save." If at the time their subscription renewal is due they agree to pay for 2 years rather than 1,the renewal price will be $50 per year rather than the usual $60 per year.At what interest rate will the consumer,who is certain she will subscribe to the magazine for the next 2 years,decide to "Buy Now and Save"?
A)any interest rate under 50 percent
B)any interest rate over 1.5 percent
C)any interest rate over 150 percent
D)any interest rate under 5 percent
E)She will always take this offer if she is absolutely certain to buy the magazine for another 2 years.

Multiple Choice

Q 14

Your uncle wants to help you with your college expenses,and he promised to pay you $10,000 next year and $15,000 in two years.The current interest rate is 6%,and you expect that this interest rate will be the same for the next year and will increase to 8% in the year after.What is the formula that you should use to compute the present discounted value of your uncle's contribution to your education expenses?
A)0 + 10,000 + 15,000
B)10,000/(1.06)+ 15,000/((1.06)*(1.06))
C)10,000/(1.06)+ 15,000/((1.06)(1.08))
D)10,000/(1.06)+ 15,000/((1.08)(1.08))

Multiple Choice

Q 15

Two bonds of equal risk are for sale on the secondary bond market.The two bonds have the same face value,and both mature in 10 years.Bond A pays $10 per year and bond B pay $15 per year.Which bond will sell for a higher price?
A)Bond A
B)Bond B
C)They will sell for the same price.
D)The relative prices will depend on the expected interest rate over the next 10 years.

Multiple Choice

Q 16

A bond has a current market value of $800.The holder of the bond will receive a single payment of $1,000 one year from now.The interest rate is 10 percent.The effective yield on the bond is:
A)$200.
B)10 percent.
C)25 percent.
D)negative.
E)The yield cannot be determined with the information provided.

Multiple Choice

Q 17

As interest rates fall,
A)the values of bonds rise.
B)the values of bonds fall.
C)the values of bonds are unchanged.
D)the value of perpetuities are unchanged,but the value of other bonds change in value.
E)the value of all bonds except perpetuities change.

Multiple Choice

Q 18

The PDV of a perpetuity with a yearly payment of $500 at an interest rate of 5% is
A)$100.
B)$5,000.
C)$25,000.
D)$10,000.
E)$100,000.

Multiple Choice

Q 19

A perpetuity for sale at $100,000 that promises a yearly payment of $5000 has an effective yield of
A)2%.
B)5%.
C)20%.
D)50%.
E)2000%.

Multiple Choice

Q 20

A perpetual payment of $10,000,offered for sale at $125,000,is being offered at an effective yield of
A)8%.
B)9)2%
C)12.5%.
D)80%.
E)92%.

Multiple Choice

Q 21

If the payment stream of a bond remains the same and the price of the bond goes down,the
A)effective yield is unchanged.
B)effective yield rises.
C)effective yield decreases.
D)bond is reissued to reflect the higher interest rate.
E)bond is reissued to reflect the lower interest rate.

Multiple Choice

Q 22

If a coupon bond has a "face value" of $1000,it means that
A)the original purchaser paid $1000 for it.
B)each purchaser must pay $1000 for it.
C)it was purchased for at least $1000 and perhaps more.
D)the holder will be paid $1000 when the bond matures.
E)the holder will be paid $1000 plus accumulated interest when the bond matures.

Multiple Choice

Q 23

Use the following statements to answer this question: I.The effective yield is generally easier to compute for a perpetuity than for a 10-year bond.
II)Two perpetuities that have the same annual payment must have the same price,even if the issuers of the bonds are different companies.
A)I and II are true.
B)I is true and II is false.
C)II is true and I is false.
D)I and II is false.

Multiple Choice

Q 24

Two corporations (TruBlu and FlyByNight)issue perpetuities that both pay $1,000 per year,but the market price of the FlyByNight bonds are much lower.The difference in the bond prices may reflect the belief that the bonds issued by FlyByNight are __________ risky when compared to the TruBlu bonds.
A)less
B)more
C)equally
D)none of the above

Multiple Choice

Q 25

The "NPV Criterion" is that a firm should invest in a new capital project if
A)the present value of the expected future cash flows is larger than the present value of the cost of the investment.
B)the future value of the expected future cash flows is larger than the cost of the investment.
C)financing can be secured on the basis of new bonds.
D)financing can be secured on the basis of new stocks.
E)financing is not necessary because there are enough liquid assets in the company's portfolio to afford the investment.

Multiple Choice

Q 26

The first term in an NPV calculation is usually
A)positive,because firms consider only positive returns.
B)positive,because interest charges do not accrue until the second period.
C)zero,because interest charges do not accrue until the second period.
D)negative,because funds for the project have to be borrowed up front before it is begun.
E)negative,because the cost of the project is immediate,but revenue streams from the project come later.

Multiple Choice

Q 27

The interest rate R in an NPV calculation should always
A)be the return that the firm could earn on a similar investment.
B)be the riskless interest rate (e.g.,U.S.Treasury bills).
C)be the rate on corporate bonds.
D)be the rate of return available in the stock market.
E)be the interest rate at which the firm has to borrow.

Multiple Choice

Q 28

The real interest rate is
A)the nominal rate plus the rate of inflation.
B)the nominal rate minus the rate of inflation.
C)the nominal rate divided by the rate of inflation.
D)the nominal rate multiplied by the rate of inflation.
E)the nominal rate.

Multiple Choice

Q 29

If an individual has $10,000 in a savings account paying 3% and the inflation rate is 2%,the nominal interest rate is
A)3% and the real rate is 5%.
B)5% and the real rate is 7%.
C)5% and the real rate is 3%.
D)3% and the real rate is 1%.
E)5%.

Multiple Choice

Q 30

If the inflation rate falls and nominal interest rates are unchanged,
A)inflation will fall.
B)inflation will continue at the same rate.
C)real interest rates rise.
D)real interest rates are unaffected.
E)real interest rates fall.

Multiple Choice

Q 31

The real discount rate and the nominal discount rate differ in their treatment of
A)risk..
B)market return.
C)inflation.
D)expected risk.

Multiple Choice

Q 32

A $130,000 investment in new equipment this year will increase your firm's profits by $50,000 in each of the next 3 years.What is the net present value of this investment if your firm's opportunity cost of capital is 10 percent?
A)-5,657
B)5,657
C)124,343
D)128,850

Multiple Choice

Q 33

You manage a new product development team for an electronics manufacturer,and your firm's policy is that all new projects must pay for themselves in the first five years.Your team has projected that the first year of the project requires an initial investment of $2 million with no revenue,the second year loss is $500,000,the net revenue for year 3 is zero,and you earn $1.8 million in both year 4 and year 5.If the opportunity cost of capital for your firm is 8%,should you go ahead with this project?
A)No,the expected NPV is negative
B)Yes,the expected NPV is roughly $290,000
C)Yes,the expected NPV is $1.1 million
D)We do not have enough information to answer this question.

Multiple Choice

Q 34

For net present value calculations,the rate of return that one could earn by investing in another project with similar risk is known as the:
A)real interest rate.
B)nominal interest rate.
C)prime interest rate.
D)opportunity cost of capital.

Multiple Choice

Q 35

Which kind of risk affects the opportunity cost of capital?
A)Nondiversifiable risk
B)Diversifiable risk
C)Both nondiversifiable and diversifiable risk
D)The risk inherent in "riskless" assets such as U.S.Treasury bills
E)The risk inherent in "riskless" portfolios such as broad stock market holdings

Multiple Choice

Q 36

A "risky" asset will earn a rate of return close to that of "riskless" assets if its risk is
A)nondiversifiable.
B)diversifiable.
C)nominal,as opposed to real.
D)related to the rate of inflation.
E)no greater than the risk of similar assets.

Multiple Choice

Q 37

Another name for diversifiable risk is
A)systematic risk.
B)nonsystematic risk.
C)nominal risk.
D)portfolio risk.
E)meta-portfolio risk.

Multiple Choice

Q 38

Which is the best example of a nondiversifiable risk for Stalwart Shoes?
A)A project to open a new store in Texas
B)A project to open a new factory in Texas
C)A project to move into the sock market
D)The state of the economy in Texas
E)The state of the U.S.economy

Multiple Choice

Q 39

Of the following endeavors of Happy Home Insurance Company of California,which involves the most nondiversifiable risk?
A)Fire insurance
B)Home burglary insurance
C)Earthquake insurance
D)Personal accident insurance
E)Home office insurance

Multiple Choice

Q 40

If a project's only risk is diversifiable,
A)only half the risk premium should be added to the discount rate.
B)only half the risk premium should be subtracted from the discount rate.
C)the risk premium should be added to the discount rate.
D)the risk premium should be subtracted from the discount rate.
E)no risk premium should be attached to the discount rate.

Multiple Choice

Q 41

The "Capital Asset Pricing Model" measures the risk premium for a capital investment by comparing the expected return on that investment with the
A)average return on other investments of similar risk.
B)average return on the past several years' investments made by the firm.
C)expected return on the entire stock market.
D)expected return on the government bond market.
E)expected return on the corporate bond market.

Multiple Choice

Q 42

If the rate of return on the stock market is r

_{m}and the rate of return on a risk-free asset is r_{f},then A)r_{m}- r_{f}measures the risk,all of it nondiversifiable,one has to accept in the stock market. B)r_{m}- r_{f}measures the risk,all of it diversifiable,one has to accept in the stock market. C)r_{m}+ r_{f}measures the risk,all of it nondiversifiable,one has to accept in the stock market. D)r_{m}+ r_{f}measures the risk,all of it diversifiable,one has to accept in the stock market. E)r_{m}r_{f}measures the stock market's total risk. Multiple Choice

Q 43

If an asset's beta is high,its
A)diversifiable risk and expected return are high.
B)nondiversifiable risk and expected return are high.
C)diversifiable risk is high; its expected return is low.
D)nondiversifiable risk is high; its expected return is low.
E)total risk is high; its return could be any amount.

Multiple Choice

Q 44

An asset's beta can be used to compute its discount rate for an NPV calculation because the discount rate is equal to
A)r

_{f}+ b(r_{m}+ r_{f}). B)r_{f}- b(r_{m}+ r_{f}). C)r_{f}- b(r_{m}- r_{f}). D)r_{f}+ b(r_{m}- r_{f}). E)beta itself. Multiple Choice

Q 45

The asset beta in the Capital Asset Pricing Model is a moderate number that measures
A)how sensitive the asset's return is to market movements.
B)how sensitive the asset's discount rate is to changes in inflation.
C)the risk premium on the stock market.
D)the risk premium on an individual stock.

Multiple Choice

Q 46

The higher the beta,
A)the smaller the diversifiable risk.
B)the smaller the nondiversifiable risk.
C)the larger the diversifiable risk.
D)the larger the nondiversifiable risk.

Multiple Choice

Q 47

Some universities now offer "tuition bonds." Parents can purchase a bond at the time their child is born.The bond is redeemable in 18 years for an amount of money equal to the cost of the university's tuition at that time.Which of the following would reduce the market price of these bonds?
A)An increase in the rate of interest
B)A decrease in the rate of interest
C)The passage of legislation limiting increases in college tuition to the rate of inflation
D)both A and C
E)both B and C

Multiple Choice

Q 48

The beta for General Motors (GM)is 0.5,the risk-free rate is 4%,and the market return is 9%.What is GM's risk-adjusted discount rate?
A)4%
B)4)5%
C)6)5%
D)9%

Multiple Choice

Q 49

Use the following statements to answer this question: I.The company cost of capital is identical to the risk-adjusted rate of return.
II)The company cost of capital does not depend on beta but does depend on the firm's interest rate on debt obligations.
A)I and II are true.
B)I is true and II is false.
C)II is true and I is false.
D)I and II are false.

Multiple Choice

Q 50

The decision firms make about new capital projects is most like the decision consumers make when they decide
A)whether to take a new job.
B)which of two new jobs to take.
C)what brand of coffee to buy.
D)whether to buy a new house.
E)whether to go on vacation.

Multiple Choice

Q 51

In the consumer's NPV decision,the correct value for the interest rate R is
A)the interest rate that could be earned in a savings account when the consumer must borrow to finance the purchase.
B)the interest rate that would have to be paid on a loan when the consumer could pay for the purchase with funds in a savings account.
C)the interest rate charged for the loan when the consumer must borrow to finance the purchase.
D)the prime rate,irrespective of whether when the consumer must borrow to finance the purchase.
E)the prime rate plus the rate of inflation as measured by the CPI,irrespective of whether when the consumer must borrow to finance the purchase.

Multiple Choice

Q 52

Len is putting in a new swimming pool.He can either heat his pool with natural gas or with solar power.If he chooses solar power it will cost him more today,but he will recover these costs over the next 7 years in savings on his natural gas bill.The solar heater is expected to last 12 years.Len:
A)will put in the solar heater regardless of the discount rate because the savings in natural gas outweigh the initial cost of the solar heater.
B)is more likely to install the solar heater as the discount rate increases.
C)is more likely to install the solar heater as the discount rate declines.
D)will not put in the solar heater unless he is an environmentalist.

Multiple Choice

Q 53

When purchasing autos and other durable goods,consumers tend to use discount rates that are inversely proportional to their income,so the discount rates are lower for consumers with higher income.The key reason for this behavior is that:
A)lower income consumers face very strict cash constraints,and they expect these problems to get worse in the future.
B)high income consumers tend to have lower opportunity costs for money.
C)high income consumers tend to make long-term investments (e.g.,30-year bonds),which always pay lower interest rates than short-term investments.
D)none of the above

Multiple Choice

Q 54

For an investment in a hybrid auto like the Toyota Prius,the car owner typically pays a higher initial price for the car but enjoys lower fuel costs for the life of the vehicle.The authors note that consumers tend to use discount rates that are too high when computing the net present value of these investment decisions.If this is true,consumers would tend to place too __________ emphasis on the initial purchase price and too __________ emphasis on the future fuel savings when computing the net present value of the investment.
A)much,much
B)little,much
C)much,little
D)little,little

Multiple Choice

Q 55

Knowledge,skills,and experience that make an individual more productive and able to earn a higher income are known as:
A)mental capital.
B)human capital.
C)sweat equity.
D)intangible capital.

Multiple Choice

Q 56

Suppose you plan to retire in eight years,but your boss would like you to earn an online MBA in order to take on a new managerial position.The firm will continue to pay your salary while you are working through the online courses,and the new position pays an additional $15,000 per year.The online MBA tuition is $35,000 per year,and your discount rate is 5%.Should you complete the degree?
A)No,the net present value of the degree is negative.
B)Yes,the net present value of the degree is about $4,300
C)Yes,the net present value of the degree is about $20,000
D)We do not have enough information to answer this question.

Multiple Choice

Q 57

The authors note that an appropriate discount rate for most U.S.households is near 5%.However,suppose you are considering the decision to attend graduate school,and you already have large credit card balances from your undergraduate years.If you decide to use a higher discount rate (e.g.,10%)to reflect your higher opportunity cost of money,what impact does this change in the discount rate have on the net present value of a graduate degree?
A)Increases NPV
B)Decreases NPV
C)NPV would not change as long as we use nominal costs and returns.
D)NPV may increase or decrease,and we cannot determine the direction of change without more information.

Multiple Choice

Q 58

The authors cite a recent study of MBA programs that compares pre-MBA salaries with post-MBA salaries.For some of the highest ranked schools,the salary difference was roughly $100,000 per year,and the difference was roughly $60,000 for some schools ranked near the bottom of the top 20.Is it possible that the financial returns from an MBA earned at a lower ranked school may actually exceed the returns from a top ranked school?
A)Yes,the lower ranked schools may provide a higher net present value for the degree if their tuition is low enough.
B)Yes,but the potential gains depend on the discount rate and not the tuition.
C)No,the salary advantages of the top ranked schools always payoff in the long run.
D)We do not have enough information to answer the question.

Multiple Choice

Q 59

Suppose that many consumers tend to over-state the discount rate that should be used for computing the net present value of education,just as they do when making investments in durable goods like cars and appliances.What would happen if consumers (as a group)started to use lower discount rates when making decisions about their education?
A)NPV of a degree declines,demand for eduction declines
B)NPV of a degree declines,demand for education increases
C)NPV of a degree increases,demand for education declines
D)NPV of a degree increases,demand for education increases

Multiple Choice

Q 60

Over the long term,the ultimate determinant of the price of a depletable resource is the
A)extraction cost.
B)user cost.
C)demand.
D)availability of substitutes.
E)cost of finding new reserves.

Multiple Choice

Q 61

You are the owner of a rare bottle of wine valued at $332.There are no costs associated with storing or selling the wine.Next year you expect the wine to increase in value to $350.If the interest rate is 10 percent
A)you should sell the wine today.
B)you should keep the wine for at least one more year.
C)you are indifferent between selling the wine today and holding it for one more year.
D)more information is needed to answer this question.

Multiple Choice

Q 62

According to the economics of exhaustible resources,if the interest rate increases,
A)an exhaustible resource will be used up sooner.
B)an exhaustible resource will be used up over a longer period of time.
C)the period of time until an exhaustible resource is used up will not change.
D)none of the above

Multiple Choice

Q 63

Suppose new oil reserves are discovered that were not previously known.What happens to the user cost of oil?
A)Decreases
B)Increases
C)Remains the same
D)May increase or decrease,depending on the discount rate

Multiple Choice

Q 64

Relative to a perfectly competitive market for an exhaustible resource,the monopolist charges a __________ price and uses the resource more __________.
A)lower,slowly
B)lower,quickly
C)higher,slowly
D)higher,quickly

Multiple Choice

Q 65

Interest rates are determined by the supply and demand for
A)money.
B)capital goods.
C)loanable funds.
D)foreign currencies.
E)stocks.

Multiple Choice

Q 66

The demand for loanable funds slopes
A)downward because NPV falls as interest rates fall.
B)downward because NPV falls as interest rates rise.
C)downward because NPV falls as money enters the economy.
D)upward because at higher interest rates people are more willing to save.
E)upward because at higher interest rates the stock market is a less attractive investment.

Multiple Choice

Q 67

As firms' expected profit from new capital projects falls,
A)the supply of loanable funds will shift rightward.
B)the supply of loanable funds will shift leftward.
C)the demand for loanable funds will shift rightward.
D)the demand for loanable funds will shift leftward.
E)projects must become more profitable

Multiple Choice

Q 68

When the government runs a large deficit,
A)the supply of loanable funds will shift rightward.
B)the supply of loanable funds will shift leftward.
C)the demand for loanable funds will shift rightward.
D)the demand for loanable funds will shift leftward.
E)taxes must rise.

Multiple Choice

Q 69

If individuals decide to save more for retirement,
A)the supply of loanable funds will shift rightward.
B)the supply of loanable funds will shift leftward.
C)the demand for loanable funds will shift rightward.
D)the demand for loanable funds will shift leftward.
E)an excess supply of loanable funds emerges and persists.

Multiple Choice

Q 70

If individuals start paying off the large amount of credit card debt they now hold,
A)the supply of loanable funds will shift rightward.
B)the supply of loanable funds will shift leftward.
C)the demand for loanable funds will shift rightward.
D)the demand for loanable funds will shift leftward.
E)an excess demand for loanable funds emerges and persists.

Multiple Choice

Q 71

If technological breakthroughs in the computer and software industries cause large numbers of firms to consider investment projects they hadn't previously thought of,
A)the supply of loanable funds will shift rightward.
B)the supply of loanable funds will shift leftward.
C)the demand for loanable funds will shift rightward.
D)the demand for loanable funds will shift leftward.
E)an excess demand for loanable funds emerges and persists.

Multiple Choice

Q 72

If individuals are convinced that the government will take care of all their medical needs after they retire,then
A)the supply of loanable funds will shift rightward.
B)the supply of loanable funds will shift leftward.
C)the demand for loanable funds will shift rightward.
D)the demand for loanable funds will shift leftward.

Multiple Choice

Q 73

If the U.S.government retires the national debt,then
A)a shift in the demand of loanable funds will cause interest rates to rise.
B)a shift in the demand of loanable funds will cause interest rates to fall.
C)a shift in the supply for loanable funds will cause interest rates to rise.
D)a shift in the supply for loanable funds will cause interest rates to fall.
E)there will be an excess supply for loanable funds.

Multiple Choice

Q 74

If average Americans start to pay off the huge credit card debt they now hold,then
A)a shift in the supply of loanable funds will cause interest rates to rise.
B)a shift in the supply of loanable funds will cause interest rates to fall.
C)a shift in the demand for loanable funds will cause interest rates to rise.
D)a shift in the demand for loanable funds will cause interest rates to fall.
E)there will be an excess demand for loanable funds.

Multiple Choice

Q 75

If technological breakthroughs in the internet cause large numbers of firms to consider investment projects they hadn't previously thought of,then
A)a shift in the supply of loanable funds will cause interest rates to rise.
B)a shift in the supply of loanable funds will cause interest rates to fall.
C)a shift in the demand for loanable funds will cause interest rates to rise.
D)a shift in the demand for loanable funds will cause interest rates to fall.
E)there will be an excess supply of loanable funds.

Multiple Choice

Q 76

If we start to think that Medicare will pay for all of our medical needs as we age,then our likely actions will lead to:
A)a shift in the supply of loanable funds will cause interest rates to rise.
B)a shift in the supply of loanable funds will cause interest rates to fall.
C)a shift in the demand for loanable funds will cause interest rates to rise.
D)a shift in the demand for loanable funds will cause interest rates to fall.
E)there will be an excess supply of loanable funds.

Multiple Choice

Q 77

The difference between a Treasury bill and a Treasury bond is that the bill
A)can be purchased by anyone,and the bond can be purchased by U.S.citizens only.
B)is insured,and the bond is not.
C)pays more than the bond.
D)pays no interest.
E)is short-term,and the bond is long-term.

Multiple Choice

Q 78

Which of the following is NOT true about commercial paper?
A)It is a short-term (six months or less)debt.
B)It is riskier than a Treasury bill.
C)It is issued by a "high-quality" corporate borrower.
D)It pays at a rate about double the Treasury bill.
E)It can be resold.

Multiple Choice

Q 79

The prime rate
A)is charged by high quality corporations to each other.
B)is charged by banks to each other.
C)is charged by the Federal Reserve to member banks.
D)is charged by banks to high quality corporations.
E)fluctuates on a day-to-day basis as do other rates.

Multiple Choice

Q 80

Use the following statements to answer this question: I.Corporate paper rates are typically less than one percent higher than Treasury bill rates.
II)Treasury bill rates may be viewed a short-term,risk-free rates.
A)I and II are true.
B)I is true and II is false
C)II is true and I is false
D)I and II are false

Multiple Choice

Q 81

What is the difference between the corporate paper rate and the corporate bond rate?
A)The corporate paper rate refers to interest rates paid on high-quality corporate bonds of relatively short duration (up to 6 months).
B)The corporate paper rate refers to interest rates paid on high-quality corporate bonds of relatively long duration (typically 20 years).
C)The corporate bond rate refers to interest rates paid on long-term (typically 20 year)corporate bonds that may represent varying quality or risk.
D)A and B are correct.
E)A and C are correct.

Multiple Choice

Q 82

Your 65-year-old father is going to retire next year.He would like to have an income of $20,000 per year for the remainder of his life.If he is expected to live for ten more years,write an algebraic expression to indicate the amount of money he needs today to pay him this sum of money if the interest rate is 10 percent.

Essay

Q 83

You have won a contest and are allowed to choose between two prizes.One prize is $200 today and another $200 one year from now.The other prize is $100 today and an additional $325 one year from now.At what interest rate (if any)would you be indifferent between the two prizes?

Essay

Q 84

What is the relationship between interest rates and bond prices? Explain.

Essay

Q 85

You have been hired by an attorney to perform an economic analysis of lost wages in a wrongful death suit.The case involves an insurance agent,John Doe,who was killed in an auto accident a few days after his 59th birthday.Mr.Doe could have expected to earn $75,000 this year.Data suggest that the income of insurance agents has risen an average of 6% over the past 20 years.Mr.Doe's expected retirement age was 65,i.e.,on his 65th birthday.Available data provide the mortality rates given below for individuals of Mr.Doe's sex and occupation at various ages.Ten percent appears to be the appropriate discount rate. a.Calculate the present discounted value of Mr.Doe's expected earnings stream.(For simplicity,assume he receives all of his earnings for the preceding year on his birthday.)
b.The attorney has asked your advice regarding a minimum figure that should be accepted as an out-of-court settlement.What guidance can you give the attorney? Would additional information allow you to give the attorney a more precise estimate of the figure that should be accepted? Give an example of how more information would help.
c.You must be prepared for cross-examination by the defendant's attorney.Where would you expect the opposing attorney to attack your testimony?

Essay

Q 86

The Clemson Manufacturing Corp.engineers have estimated that a new factory can be constructed for the manufacture of hydraulic valves and fittings.Two different technologies,A and B,have been considered in the manufacturing process.The costs of the factory and annual earnings are given below for both technologies.
Capital Costs Earnings
(in $millions)(in $millions)
End of the Year A B A B
0 $10 $15 $0 $0
1 10 10 -1 0
2 10 0 1 2
3 0 0 5 10
4 0 0 10 10
5 0 0 20 10
At the end of five years,technology A will have a scrap value of one million dollars,and technology B will have a scrap value of 5 million dollars.Assume that these two projects are equally risky and the appropriate discount rate is 10 percent per year.Calculate the net present value of each of these factories.Determine if either or both would be feasible.Does it matter whether or not real or nominal terms are used for capital costs,cash flows,and discount rate? Explain.

Essay

Q 87

You have been offered the opportunity to purchase a bond that will pay $100 in interest at the end of each of the next three years,and a $1000 repayment of principal at the end of the third year.The current interest rate is 12%.
a.Calculate the selling price of the bond.(You may assume that 12% accurately reflects the risk of the bond.)
b.What would happen to the selling price of the bond if interest rates should fall?

Essay

Q 88

The Vortex Corp.has an opportunity to invest $1,500,000 in investment A or in investment B.Investment A promises to pay $500,000 profit at the end of the first year,$550,000 at the end of two years,$600,000 at the end of three years,and $625,000 at the end of four years.Investment B promises to pay $25,000 profit at the end of the first year,$100,000 at the end of two years,$600,000 at the end of the third year,and $1,000,000 at the end of four years.Assume that nine percent per year is an appropriate discount rate for each investment.Also,assume a zero scrap value for each investment at the end of four years.Determine which investment promises to be the better of the two for the company.

Essay

Q 89

Thompson Industries produces packaging materials.Thompson is considering undertaking one or both of two investment projects.The first investment involves a new automated warehouse for the firm's foam and plastic inventory.The warehouse can be expected to have a useful life of ten years,after which it will be obsolete with no scrap value.The warehouse involves $3,000,000 in capital cost that must be paid immediately.The warehouse will lower the firm's cost $400,000 for each of the first five years,and $500,000 per year thereafter.The second project involves the acquisition of a computerized order system that would allow the firm's salespeople to link directly with the computer to place orders.The computerized network will require an initial capital cost of $1,000,000,but will save the firm $300,000 per year in support staff costs.Thompson's managers believe that the order system will be obsolete after five years.Cash flows for each project will be at year end.Thompson uses a 10% discount rate in evaluating the investment projects.interest rates and future cash flows are in real terms,net of all tax effects.
a.Calculate the net present value of each investment project.Which project(s)should the firm accept?
b.Comment on the impact of a change in the discount rate on the NPV.(Analyze both an increase and a decrease in the NPV.)

Essay

Q 90

The Ampex Co.manufactures plastic fixtures for residential bathrooms.Currently,it has an opportunity to invest $1,000,000 in the equipment needed to produce other plastic fixtures for kitchen use.If the company decides to sell kitchen fixtures,it has reason to believe that it can generate the following profit stream during a six-year life cycle for kitchen fixtures.
End of Year Profit
1 $ 10,000
2 100,000
3 500,000
4 600,000
5 400,000
6 200,000
At the end of six years,the company can sell the capital used to make kitchen fixtures for $50,000.If the interest rate on money available to Ampex is 11% per year,should it invest in kitchen fixtures? Does it matter if the 11% per year is in nominal or real terms? Explain.

Essay

Q 91

The Ampex Corp.manufactures brass fittings for the plumbing industry.It has an opportunity to produce and sell brass components for residential electric fixtures.If it does produce components for electrical fixtures,it will have to spend $500,000 initially.It expects to get a nominal net cash flow of $200,000 in each of the five years life of the project.If the real interest rate is 8 percent per year and the inflation rate is 4 percent per year,what will the NPV of the project be?

Essay

Q 92

You have been given an opportunity to invest in a stock.Recent trends suggest that a one percent rise in the stock market leads to approximately a two and one-half percent rise in the price of this stock.The real risk-free rate currently stands at 6% and stocks on average have provided 12% returns.Using the capital asset pricing model,determine the appropriate discount rate for the stock in question.

Essay

Q 93

Assume that you own an exhaustible resource that is sold competitively.The price of the resource is:
P

_{t + 1}- C = 1.08(P_{t}- C), where t = 0 at the beginning of 2005,P = price in dollars per ton,and C = marginal cost of extraction (fixed over time).It is also known that the demand for the resource is: Q = 1,000,000 - 25,000 P, where Q represents output in tons per year.If the beginning of 2005 price is $30 per ton and the marginal cost of extraction is $10 per ton,what will the price be at the end of 2009? What is the user cost of production in 2009? Is it different from the user cost for 2005? Explain.How much of the resource will be extracted in 2009? What is the market rate of interest on money? Explain. Essay

Q 94

The demand for xenite ore is fixed over time and is given as:
q = 40 - P
where q is the number to tons of ore produced and P is the price per ton of xenite ore.The marginal extraction cost is $15 per ton and is also constant over time.The total quantity of the resource currently known to exist is 53.29 tons.The interest rate is 10 percent.Using the Hotelling rule for an exhaustible resource,complete the following table.
Time Period Price Marginal Cost q Cumulative
Production
Today 15
1 Year 15
2 Years 15
3 Years 15
4 Years 15
5 Years 15
6 Years 15
7 Years 40.00 15 0 53.29

Essay

Q 95

A U.S.manufacturer of particle board furniture is considering investing in a new stamping machine.The machine is expected to have a useful life of five years,after which the machine can be sold as scrap for an estimated $5000.The firm plans to issue bonds to pay for the machine and intends to treat the interest rate on the bonds as the relevant discount rate for evaluating the project.The machine will cost the firm $175,000,all of which must be paid at the beginning of the project.The new stamping machine will reduce costs $50,000 per year,for each year of the machine's life.The firm treats all of the cost savings as if they occur at year end.Should the firm plan to undertake the investment project,bonds will be issued in approximately three months.The firm has estimated the supply and demand for loanable funds given by these equations:
L

_{D}= 25,000,000 - 125,000,000 R L_{S}= 2,500,000 + 62,500,000 R a.Given the information above,should the firm undertake the investment in the stamping machine? Support your answer using numbers. b.Assume that the demand for loanable funds shifts the demand curve upward by 3,750,000 (i.e.,3,750,000 more demand at every interest rate).What impact will the increase in demand have on the interest rate and on the firm's stamping machine project? (Assume that the firm learns of this change in demand before accepting the project.) Essay

Q 96

David Adams purchased an art collection for $100,000 five years ago.He recently learned that art collections similar to his have been growing in value at an annual rate of 12% per year.
a.Determine the value of David's art collection during each of the past five years.
b.David has access to an economic consulting model that forecasts the supply and demand curves for loanable funds to be:
L

_{D}= 18,000,000 - 100,000,000R L_{S}= -4,000,000 + 120,000,000R. The consultant believes that the supply and demand curves will remain fixed over the next two years.Assuming that David's only objective is wealth maximization,should David sell his art collection? Explain your answer in detail.(Assume that the growth rate of the art collection remains constant.) Essay

Q 97

Your aunt owns a business that will provide cash flows of $10,000 each year for the next 3 years.If the appropriate discount rate is 10%,what is the present value of the business? What is the minimum price your aunt should accept for the business?

Essay

Q 98

Your aunt has offered to give you $1,000 annually for the next 2 years or $3,000 at the end of 2 years.What must be the appropriate discount rate if you are indifferent between the two payment schemes?

Essay

Q 99

Nancy is considering forming a 5 year business partnership with Claudia.Nancy believes her portion of the partnership will generate the following profits: Nancy's appropriate discount rate is 6%.To join the partnership,Nancy needs to invest $30,000.Does the partnership offer a rate of return in excess of 6%?

Essay

Q 100

Sam has just entered college,and he is considering two options.He can get a part-time job after classes and during breaks to pay his college expenses or he can take out student loans and keep an active social life.While in school,his school loans due not accrue interest.If he doesn't work,he must borrow $10,000 per year for four years.If he works,he just does pay all his college expenses.If his appropriate discount rate is 10%,what is the present value of his school loan debt after 4 years?

Essay

Q 101

XYZ corporation will pay the $1,000 face value on their outstanding bonds in 2 years.The bond makes payments of $100 each year.The current bond yield is 12%.What is the market price of XYZ bonds?

Essay

Q 102

ABC corporation has issued a series of bonds maturing in 3 years with face value of $1,000.The bonds make annual interest payments of $120.XYZ corporation has also issued a series of bonds maturing in 3 years with face value of $1,000.However,XYZ's bonds will make annual interest payments of $60.Currently,in the market,XYZ's bonds offer a yield of 20% while ABC corporation bonds offer a yield of 8%.Calculate the current market prices of each corporation's bonds.Is either corporate bond trading at below face value?

Essay

Q 103

Samantha feels that XYZ corporation is currently a high growth corporation.She expects dividend payments to rise by 30% each year for the next 2 years.After that,she expects dividends to remain constant for perpetuity.Next year,dividends will be $1.00.Samantha's appropriate discount rate is 12% for this investment option.Based on Samantha's expectations,what price is she willing to pay to receive the flow of dividends? If the stock is currently trading for $11,should she purchase the stock to capture the dividend stream?

Essay

Q 104

Joel has $20,000 he would like to invest.He would like to pursue the investment option that gives him the highest return in 3 years.His options are presented in the table below.Which investment option should he select to maximize his 3 year return?

Essay

Q 105

Sally's Fitness is considering installing new exercise equipment.If she does so,she expects the payment stream in the table below before the equipment must be replaced.To finance the equipment purchase,she must take out a loan at 9%.Does the equipment investment offer a positive net present value?

Essay

Q 106

Mitchell operates a diner in Pleasantville.Currently,the diner is not certified by the Pleasantville Restaurant Club.To get the diner certified,Mitchell would need to spend $20,000.Once certified,Mitchell expects to receive $5,000 in additional profits every year for perpetuity beginning 1 year from certification.What must Mitchell's discount rate be if he gets certified by the restaurant club?

Essay

Q 107

Ed's Electronic Devices has an asset beta of 1.2.The market rate of return is 12% and the risk-free rate of return is 2%.Ed is considering updating his production technology.If he does so,he expects the cash streams indicated in the table below.Given this information,should Ed update his production technology?

Essay

Q 108

Ed's Electronic Devices has an asset beta of 0.6.The market rate of return is 12% and the risk-free rate of return is 2%.Ed is considering updating his production technology.If he does so,he expects the cash streams indicated in the table below.Given this information,should Ed update his production technology?

Essay

Q 109

Robert is considering purchasing a new or used car.Based on his value of transportation,expected maintenance costs,auto loan payments and insurance rates of each car he has derived the table below.If he buys the new car,the loan rate is 6%.If he buys a used car,the loan rate will be 11%.Given this information,which car provides the highest net present value?

Essay

Q 110

Rita is considering purchasing a new or used car.Based on her value of transportation,expected maintenance costs,auto loan payments,and insurance rates of each car she has derived the table below.If she buys the new car,the loan rate is 6%.If she buys a used car,the loan rate will be 11%.Given this information,which car provides the highest net present value?

Essay

Q 111

Your aunt owns a gold mine.The marginal extraction cost of gold is $25 and remains constant over time.The current market price of a unit of gold is $200.Your aunt's appropriate discount rate is 12%.Next year,your aunt expects the price of a unit of gold to be $222.Should your aunt extract any gold from the mine this year?

Essay