Finance Final Exam Questions Fully
Solved.
The cost of preferred stock is computed the same as the __________
A. pre-tax cost of debt.
B. rate of return on an annuity.
C. after-tax cost of debt.
D. rate of return on a perpetuity.
E. cost of an irregular growth common stock. - Answer Rate of return on a perpetuity
Which one of the following statements concerning net present value (NPV) is most CORRECT?
A. An investment should be accepted if, and only if, the NPV is exactly equal to zero.
B. An investment should be accepted only if the NPV is equal to the initial cash flow.
C. An investment should be accepted if the NPV is positive and rejected if it is negative.
D. An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur,
will always have a positive NPV and therefore should always be accepted.
E. Any project that has positive cash flows for every time period after the initial investment should be
accepted. - Answer An investment should be accepted if the NPV is positive and rejected if it is
negative
The internal rate of return is defined as them:
A. Maximum rate of return a firm expects to earn on a project.
B. Rate of return a project will generate if the project is financed solely with internal funds. C. Discount
rate that equates the net cash inflows of a project to zero.
D. Discount rate which causes the net present value of a project to equal zero.
E. Discount rate that causes the profitability index for a project to equal zero. - Answer Discount rate
which causes the net present value of a project to equal zero
The length of time a firm must wait to recoup, in present value terms, the money it has in invested in a
project is referred to as the ______
,A. net present value period.
B. internal return period.
C. payback period.
D. discounted profitability period. E. discounted payback period. - Answer Discounted payback period
You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied
to the project's cash flows. What is the name given to this graph?
A. Breakeven analysis graph
B. project risk profile
C. NPV profile
D. NPV route
E. present value sequence - Answer NPV profile
A project has a net present value (NPV) of zero. Which one of the following best describes this project?
A. The project has a zero percent rate of return.
B. The project requires no initial cash investment.
C. The project has no cash flows.
D. The project's cash inflows equal its cash outflows in present dollar terms. E. The total project cash
flows equals zero. - Answer The project's cash inflows equal its cash outflows in present dollar terms
Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of
5 percent. Which one of the following terms refers to the difference between these two rates of return?
A. Risk premium
B. Geometric return
C. Arithmetic
D. Standard deviation
E. V ariance - Answer Risk premium
Which of the following statement is most CORRECT?
, A. One must know the discount rate to compute the NPV of a project but one can compute the IRR
without referring to the discount rate.
B. One must know the discount rate to compute the IRR of a project but one can compute the NPV
without referring to the discount rate.
C. Payback method accounts for time value of money.
D. There will always be one IRR regardless of the patterns and signs of cash flows.
E. Average accounting return is the ratio of total assets to total net income. - Answer One must know
the discount rate to compute the NPV of a project but one can compute the IRR without referring to the
discount rate
You are considering an investment with the following cash flows. If the required rate of return for this
investment is 13.5%, should you accept it based solely on the internal rate of return rule? Why or why
not?
Year
Cash Flow
0
-$10,000
1
$1,000
2
$11,000
3
-$2,000
A. Yes; because the IRR exceeds the required return
B. Yes; because the IRR is a positive rate of return
C. No; because the IRR is less than the required return
D. No; because the IRR is a negative rate of return
E. You should not apply the IRR rule in this case because there are multiple IRRs. - Answer You should
not apply the IRR rule in this case because there are multiple IRRs
Solved.
The cost of preferred stock is computed the same as the __________
A. pre-tax cost of debt.
B. rate of return on an annuity.
C. after-tax cost of debt.
D. rate of return on a perpetuity.
E. cost of an irregular growth common stock. - Answer Rate of return on a perpetuity
Which one of the following statements concerning net present value (NPV) is most CORRECT?
A. An investment should be accepted if, and only if, the NPV is exactly equal to zero.
B. An investment should be accepted only if the NPV is equal to the initial cash flow.
C. An investment should be accepted if the NPV is positive and rejected if it is negative.
D. An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur,
will always have a positive NPV and therefore should always be accepted.
E. Any project that has positive cash flows for every time period after the initial investment should be
accepted. - Answer An investment should be accepted if the NPV is positive and rejected if it is
negative
The internal rate of return is defined as them:
A. Maximum rate of return a firm expects to earn on a project.
B. Rate of return a project will generate if the project is financed solely with internal funds. C. Discount
rate that equates the net cash inflows of a project to zero.
D. Discount rate which causes the net present value of a project to equal zero.
E. Discount rate that causes the profitability index for a project to equal zero. - Answer Discount rate
which causes the net present value of a project to equal zero
The length of time a firm must wait to recoup, in present value terms, the money it has in invested in a
project is referred to as the ______
,A. net present value period.
B. internal return period.
C. payback period.
D. discounted profitability period. E. discounted payback period. - Answer Discounted payback period
You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied
to the project's cash flows. What is the name given to this graph?
A. Breakeven analysis graph
B. project risk profile
C. NPV profile
D. NPV route
E. present value sequence - Answer NPV profile
A project has a net present value (NPV) of zero. Which one of the following best describes this project?
A. The project has a zero percent rate of return.
B. The project requires no initial cash investment.
C. The project has no cash flows.
D. The project's cash inflows equal its cash outflows in present dollar terms. E. The total project cash
flows equals zero. - Answer The project's cash inflows equal its cash outflows in present dollar terms
Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of
5 percent. Which one of the following terms refers to the difference between these two rates of return?
A. Risk premium
B. Geometric return
C. Arithmetic
D. Standard deviation
E. V ariance - Answer Risk premium
Which of the following statement is most CORRECT?
, A. One must know the discount rate to compute the NPV of a project but one can compute the IRR
without referring to the discount rate.
B. One must know the discount rate to compute the IRR of a project but one can compute the NPV
without referring to the discount rate.
C. Payback method accounts for time value of money.
D. There will always be one IRR regardless of the patterns and signs of cash flows.
E. Average accounting return is the ratio of total assets to total net income. - Answer One must know
the discount rate to compute the NPV of a project but one can compute the IRR without referring to the
discount rate
You are considering an investment with the following cash flows. If the required rate of return for this
investment is 13.5%, should you accept it based solely on the internal rate of return rule? Why or why
not?
Year
Cash Flow
0
-$10,000
1
$1,000
2
$11,000
3
-$2,000
A. Yes; because the IRR exceeds the required return
B. Yes; because the IRR is a positive rate of return
C. No; because the IRR is less than the required return
D. No; because the IRR is a negative rate of return
E. You should not apply the IRR rule in this case because there are multiple IRRs. - Answer You should
not apply the IRR rule in this case because there are multiple IRRs
