Chapter 2 Quiz, Present Value and the Opportunity Cost of Capital




1. The present value of $115,000 expected to be received one year from today at an interest rate (discount rate) of 10% per year is:
A.$121,000
B.$100,500
C.$110,000
D.$104,545


2. A two-year discount factor at a discount rate of 10% per year is:
A.0.826
B.1.000
C.0.909
D.0.814


3. If the one year discount factor is 0.8333, what is the discount rate (interest rate) per year?
A.10%
B.20%
C.30%
D.None of the above


4. If the present value of $444 to be paid at the end of one year is $400, what is the one year discount factor?
A.0.909
B.1.11
C.0.11
D.None of the above


5. If you invest $100,000 today at 12% interest rate for one year, what is the amount you will have at the end of the year?
A.$90,909
B.$112,000
C.$100,000
D.None of the above


6. If the present value of a cash flow generated by an initial investment of $100,000 is $120,000, what is the NPV of the project?
A.$120,000
B.$20,000
C.$100,000
D.None of the above


7. The following statements regarding the NPV rule and the rate of return rule are true except:
A.Accept a project if its NPV > 0
B.Reject a project if its NPV < 0
C.Accept a project if its rate of return > 0
D.Accept a project if its rate of return > opportunity cost of capital


8.

Current price of Company X's stock is $100. The table below gives the data on end of the year prices and probabilities dependent on the state of the economy. Calculate the expected return for the stock.



A.10%
B.15%
C.20%
D.None of the above


9. The opportunity cost of capital for a risky project is
A.The expected rate of return on a government security having the same maturity as the project
B.The expected rate of return on a well diversified portfolio of common stocks
C.The expected rate of return on a portfolio of securities of similar risks as the project
D.None of the above


10. Mrs. Smith has $100 today and the market interest rate is 10% per year. Mr. DiCaprio also has an investment opportunity in which he can invest $50 today and receive $60 next year. Suppose Mrs. Smith consumes $50 this year and invests in the project. What is the maximum he amount he can consume next year?
A.$55
B.$60
C.$50
D.None of the above


11. Which of the following promotes the development of purely competitive financial markets?
A.High transaction costs
B.Taxes
C.A large number of traders
D.High cost of information


12. The financial goal of a corporation is to:
A.Maximize stockholder wealth
B.Maximize profit
C.Maximize value of the corporation to the stockholders
D.None of the above


13. The managers of a firm can maximize stockholder wealth by:
A.Taking all projects with positive NPVs
B.Taking all projects with NPVs greater than the cost of investment
C.Taking all projects with NPVs greater than present value of cash flow
D.All of the above


14. The discount rate is used for calculating the NPV.
A.True
B.False


15. The discount rate, hurdle rate or opportunity cost of capital all mean the same.
A.True
B.False



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