FINC 600 Week 5 Practice Quiz Corporate Finance Question 1 The concept of compound interest is most appropriately described as: A.Interest earned on an investment B.The total amount of interest earned over the life of an investment C.Interest earned on interest D.None of the above Question 2 Which of the following investment rules does not use the time value of the money concept? A.Net present value B.Internal rate of return C.The payback period D.All of the above use the time value concept Answer Key: C Question 3 The unique risk is also called the: A.Unsystematic risk B.Diversifiable risk C.Firm specific risk D.All of the above Question 4 What are some of the important points to remember while estimating the cash flows of a project? Question 5 A bond with duration of 10 years has yield to maturity of 10%. This bond’s volatility is: A.9.09% B.6.8% C.14.6% D.6.0% Question 6 Major disadvantages of the Sarbanes-Oxley Act of 2002 (SOX) are the following except: A.good investor protection B.increase in compliance costs C.that it constrains managers’ ability to run the firm D.that it may discourage development of human capital in the firm Question 7 According to the net present value rule, an investment in a project should be made if the: A.Net present value is greater than the cost of investment B.Net present value is greater than the present value of cash flows C.Net present value is positive D.Net present value is negative Question 8 If the Wall Street Journal Quotation for a company has the following values close: 55.14; Net chg: = + 1.04; then the closing price for the stock for the previous trading day was? A.$56.18 B.$54.10 C.$55.66 D.None of the above. Question 9 For example, in the case of an electric car project, which of the following cash flows should be treated as incremental flows when deciding whether to go ahead with the project? A.The cost of research and development undertaken for developing the electric car in the past three years B.The annual depreciation charge C.Tax savings resulting from the depreciation charges D.Dividend payments Question 10 The following are some of the actions shareholders can take if the corporation is not performing well: A.Replace the board of directors in an election. B.Force the board of directors to change the management team. C.Sell their shares of stock in the corporation. D.Any of the above Question 11 The mixture of debt and equity, used to finance a corporation is also known as: A.Capital budgeting B.Capital structure C.Investing D.Treasury Answer Key: B Question 12 Discuss the general principle in the valuation of a common stock. Question 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 Question 14 Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: – 5%,15%, 20%; MC: 8%, 8%, 20%. If FC and MC are combined in a portfolio with 50% of the funds invested in each, calculate the expected return on the portfolio. A.12% B.10% C.11% D.None of the above. Question 15 The market value of XYZ Corporation’s common stock is 40 million and the market value of the risk-free debt is 60 million. The beta of the company’s common stock is 0.8, and the expected market risk premium is 10%. If the Treasury bill rate is 6%, what is the firm’s cost of capital? (Assume no taxes.) A.9.2% B.14% C.8.1% D
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