D076 WGU Finance Skills for Managers
TEST
7
What is the term for the risk that changes in interest rates will impact the value of a bond?
1.Interest rate risk
2.Firm-specific risk
3.Default risk
4.Systematic risk - ✔✔✔Interest rate risk
A company called Bobby's Books is considering purchasing a new bookbinding machine. The company
calculates the hurdle rate of the project to be 9% and the IRR to be 11%. Should the company purchase
the bookbinding machine?
1.No, because the hurdle rate is lower than the IRR.
2.Yes, because the IRR exceeds the cost of capital.
3.Yes, because newer models of equipment are always profitable investments.
4.No, because the old bookbinding machine still works. - ✔✔✔Yes, because the IRR exceeds the cost of
capital.
,A company that produces soap, shampoo, lotion, and other personal care products has recently taken a
hit due to a competitor's new product line. The company decides to reduce wages for its labor force to
save money while the company focuses on building up its reputation again, but the company's labor
force goes on strike to protest the pay cuts. What type of risk does the strike represent?
1.Idiosyncratic risk
2.Non-diversifiable risk
3.Systematic risk
4.Market risk - ✔✔✔Idiosyncratic risk
A company's officers and board of directors are selling their stocks in the firm at higher prices due to
false accounting reports that made the stock seem more valuable than it truly was. Which ethical issue is
occurring in this situation?
1.Conflict between work and personal affairs
2.Agency problem due to conflicting interests
3.Pursuing individual interest over client interests
4.Maximizing shareholder value - ✔✔✔Agency problem due to conflicting interests
A large corporation is looking to merge with another large corporation. Which financial institution can
help them do this?
,1.Pension fund
2.Private equity institution
3.Investment bank
4.Central bank - ✔✔✔Investment bank
A potential project to expand the size of an apartment complex will cost $100,000. Its calculated net
present value is $5,000. Given this information, which statement is correct?
1.The project should be rejected because it has a negative IRR.
2.The project should be accepted because it has a positive NPV.
3.The project should be rejected because it has a negative NPV.
4.The project should be accepted because it has a positive IRR. - ✔✔✔The project should be accepted
because it has a positive NPV.
About a year ago, the short-term Treasury bill had 1.54% interest and the long-term Treasury note had
2.54% interest. This week, the 1-year Treasury bill has an interest rate of 3.13%, while the 10-year
Treasury note has an interest rate of 2.28%. What does this information indicate about the future
economy?
1.It may indicate that the economy is in a steady state.
, 2.It may indicate a decreasing unemployment rate along with higher wages.
3.It may reflect an expectation that the economy will grow in the future along with higher inflation.
4.It may indicate an economic downturn. - ✔✔✔It may indicate an economic downturn.
An investor just purchased a bond for $973 that has a par value of $1,000. What type of bond is this?
1.A preferred bond
2.A premium bond
3.A par bond
4.A discount bond - ✔✔✔A discount bond
Beckingham Sports is an American sporting goods company. Based on a $400,000 market study and a
$600,000 fee for consulting spent prior to the project, the firm can increase its annual operating cash
flow by $3,000,000 by selling overseas. Because the firm was considering the expansion, it spent
$2,000,000 to purchase a land for new factory and equipment. However, someone is making an offer to
pay the company $3,000,000 for the land it purchased for the new factory. What is relevant to include in
the company's capital budgeting decision?
1.$2,000,000 spent to purchase the land
2.$600,000 for the consulting
TEST
7
What is the term for the risk that changes in interest rates will impact the value of a bond?
1.Interest rate risk
2.Firm-specific risk
3.Default risk
4.Systematic risk - ✔✔✔Interest rate risk
A company called Bobby's Books is considering purchasing a new bookbinding machine. The company
calculates the hurdle rate of the project to be 9% and the IRR to be 11%. Should the company purchase
the bookbinding machine?
1.No, because the hurdle rate is lower than the IRR.
2.Yes, because the IRR exceeds the cost of capital.
3.Yes, because newer models of equipment are always profitable investments.
4.No, because the old bookbinding machine still works. - ✔✔✔Yes, because the IRR exceeds the cost of
capital.
,A company that produces soap, shampoo, lotion, and other personal care products has recently taken a
hit due to a competitor's new product line. The company decides to reduce wages for its labor force to
save money while the company focuses on building up its reputation again, but the company's labor
force goes on strike to protest the pay cuts. What type of risk does the strike represent?
1.Idiosyncratic risk
2.Non-diversifiable risk
3.Systematic risk
4.Market risk - ✔✔✔Idiosyncratic risk
A company's officers and board of directors are selling their stocks in the firm at higher prices due to
false accounting reports that made the stock seem more valuable than it truly was. Which ethical issue is
occurring in this situation?
1.Conflict between work and personal affairs
2.Agency problem due to conflicting interests
3.Pursuing individual interest over client interests
4.Maximizing shareholder value - ✔✔✔Agency problem due to conflicting interests
A large corporation is looking to merge with another large corporation. Which financial institution can
help them do this?
,1.Pension fund
2.Private equity institution
3.Investment bank
4.Central bank - ✔✔✔Investment bank
A potential project to expand the size of an apartment complex will cost $100,000. Its calculated net
present value is $5,000. Given this information, which statement is correct?
1.The project should be rejected because it has a negative IRR.
2.The project should be accepted because it has a positive NPV.
3.The project should be rejected because it has a negative NPV.
4.The project should be accepted because it has a positive IRR. - ✔✔✔The project should be accepted
because it has a positive NPV.
About a year ago, the short-term Treasury bill had 1.54% interest and the long-term Treasury note had
2.54% interest. This week, the 1-year Treasury bill has an interest rate of 3.13%, while the 10-year
Treasury note has an interest rate of 2.28%. What does this information indicate about the future
economy?
1.It may indicate that the economy is in a steady state.
, 2.It may indicate a decreasing unemployment rate along with higher wages.
3.It may reflect an expectation that the economy will grow in the future along with higher inflation.
4.It may indicate an economic downturn. - ✔✔✔It may indicate an economic downturn.
An investor just purchased a bond for $973 that has a par value of $1,000. What type of bond is this?
1.A preferred bond
2.A premium bond
3.A par bond
4.A discount bond - ✔✔✔A discount bond
Beckingham Sports is an American sporting goods company. Based on a $400,000 market study and a
$600,000 fee for consulting spent prior to the project, the firm can increase its annual operating cash
flow by $3,000,000 by selling overseas. Because the firm was considering the expansion, it spent
$2,000,000 to purchase a land for new factory and equipment. However, someone is making an offer to
pay the company $3,000,000 for the land it purchased for the new factory. What is relevant to include in
the company's capital budgeting decision?
1.$2,000,000 spent to purchase the land
2.$600,000 for the consulting
