Deck 19: Investment and the Employment of Capital

Question 1

The marginal efficiency of capital can also be defined as the

A) compound interest rate.
B) rate of discount.
C) internal rate of return.
D) NPV of an investment.

Answer 1

internal rate of return.

Question 2

The price of capital services will be higher, the lower the

A) opportunity costs of supplying the capital services.
B) price of the goods produced with the capital equipment.
C) demand for the goods produced with the capital equipment.
D) marginal physical productivity of capital.
E) price of complementary factors.

Answer 2

price of complementary factors.

Question 3

Assume that a tool hire company already has a stock of tools. Which of the following are opportunity costs of hiring out the tools?
(i) Maintenance costs of the equipment
(ii) The cost of replacing the equipment
(iii) The depreciation of the equipment due to ageing
(iv) The depreciation of the equipment due to wear and tear
(v) Handling costs associated with hiring out the equipment

A) (ii), (iii) and (v)
B) (i), (ii) and (iii)
C) (iii) and (v)
D) (i), (iv) and (v)
E) (i), (ii), (iii) and (v)

Answer 3

(i), (ii) and (iii)

Question 4

Profits from the employment of capital are maximised if the marginal revenue product equals the

A) marginal efficiency of capital.
B) internal rate of return.
C) rate of discount.
D) marginal cost of capital.

Question 5

By the 'normal rate of return' on investments we mean the

A) internal rate of return.
B) NPV at current long- term interest rates.
C) normal profit.
D) risk- free rate of return on other investments.
E) discount rate.

Question 6

Which of the following changes would cause the rate of interest to rise?

A) People become less thrifty.
B) The demand for goods falls.
C) People become more thrifty.
D) The productivity of investments generally falls.

Question 7

If the market for capital services is perfectly competitive, which of the following is true?

A) The marginal cost of capital is constant.
B) The marginal revenue product of capital is constant.
C) The marginal cost of capital increases as more is demanded.
D) The marginal revenue product of capital increases as more is demanded.

Question 8

If we express a company's debt as a percentage of its total capital, this is called the

A) debt/equity ratio.
B) risk premium.
C) leverage.
D) gearing ratio.

Question 9

The extent to which a company relies on debt as opposed to equity finance is called

A) the gearing ratio.
B) the debt/equity ratio.
C) leverage.
D) the risk premium.

Question 10

Which of the following is an advantage of using the stock market for raising new capital?

A) It enables savings to be mobilised to generate output.
B) It can encourage short- termism.
C) The cost to a business of getting listed can be huge.
D) Decisions are likely to be driven by how the market is likely to react rather than by what the directors/managers perceive to be in the business's best interests.

Question 11

The largest single source of investment funds for UK firms in the 1990s was

A) banks.
B) issues of shares.
C) overseas sources.
D) profits.

Question 12

In the UK long- term finance for industry has, for many years, come mainly from

A) merchant banks.
B) the issue of shares and bonds.
C) venture capitalists.
D) commercial banks.

Question 13

If we look at the supply of loanable funds that are available for firms to borrow to finance investment, we can see several factors which influence this supply. A factor which does not influence the supply of loanable funds is

A) the marginal efficiency of capital.
B) people's desire to save.
C) the level of incomes.
D) the rate of interest.

Question 14

If we look at the market for loanable funds we can see several factors which influence this market. A factor which influences the loanable funds market is

A) the level of incomes.
B) the marginal efficiency of capital.
C) people's desire to save.
D) all of the above

Question 15

The supply of capital curve for an individual firm is

A) more elastic than the market supply.
B) derived from the marginal revenue product of capital.
C) vertical.
D) less elastic than the market supply.

Question 16

Which of the following will not shift an individual firm's demand for capital curve to the right?

A) A fall in the market price of capital products
B) A decline in taxation on profits (i.e. corporation tax)
C) An improvement in technology embodied in new capital
D) A rise in the real price of the firm's final good

Question 17

Which of the following is not a suitable rule for deciding which investment projects to undertake? Invest if the

A) marginal revenue product of capital is greater than the marginal cost of capital (both expressed as an interest rate).
B) internal rate of return is above the interest rate.
C) money generated by the investment exceeds the costs of the investment.
D) net present value is positive.

Question 18

Which of the following will lower a firm's cost of capital?

A) Increased leverage
B) Decreased debt to equity ratio
C) Increased volatility in product markets
D) Increased gearing

Question 19

Which of the following refers to a wholesale bank?

A) Loans made by high street banks at published rates of interest
B) Large- scale deposits made by firms at negotiated rates of interest
C) Deposits in savings accounts in building societies
D) Deposits in savings accounts in high street banks

Question 20

A retail bank

A) specialises in granting loans for house purchases.
B) acts as brokers, arranging loans for companies from a number of different sources.
C) provides branch banking facilities, current accounts and overdraft facilities.
D) specialises in providing hire- purchase finance for consumer durables.

Question 21

Bank lending for investment purposes may decline during a recession because

A) the demand for funds declines.
B) there is a surplus of funds.
C) banks become more cautious.
D) A and C

Question 22

Maturity transformation can be defined as

A) the process whereby banks can spread the risks of lending.
B) the transformation of deposits into loans of a longer maturity.
C) the transformation of deposits into loans of a shorter maturity.
D) the transfer of money from one generation to another.

Question 23

Which of the following is not a role played by the financial sector?

A) Exchange rate management/manipulation
B) Risk transformation
C) Intermediary between borrowers and lenders
D) Offering expertise in channelling funds

Question 24

What is the primary capital market?

A) The capital markets for agriculture, forestry and fishing
B) The market for new share issues
C) The market for start- up finance
D) Main stock exchanges such as the London Stock Exchange

Question 25

Which of the following could cause the market interest rate for loanable funds to fall?

A) An increase in the demand for funds
B) A fall in household saving levels
C) An improvement in the expected future state of the economy
D) A rise in household saving levels

Question 26

If the stock market works in a way that prevents share prices moving in cycles, this is called

A) semi- strong efficiency.
B) weak efficiency.
C) short- termism.
D) strong efficiency.

Question 27

Which of the following explains a weak form of efficiency?

A) Where share prices adjust quickly, fully and accurately to all available information - both public and that only available to insiders
B) Where share prices adjust quickly, fully and accurately to publicly available information
C) Where share prices fail to adjust following new information
D) Where share dealing prevents cyclical movements in shares

Question 28

If stock markets are efficient, then

A) share prices will accurately reflect all information about current and future performance.
B) share price fluctuations away from predicted values will be random.
C) there are no returns to be made from shareholding.
D) A and B

Question 29

The marginal cost of capital is the cost of one additional unit of capital.

Question 30

A factor's price is the income from its use and a factor's service is the income from its sale.

Question 31

The process of using resources to produce new capital is called investment.

Question 32

As long as MEC > i, a firm should invest more.

Question 33

If we discount the future benefits of an investment, we have calculated their present value.

Question 34

If we divide a company's debt by its equity finance, this is called the gearing ratio.

Question 35

In the UK, long- term finance for industry has, for many years, come mainly from the issue of shares and bonds.

Question 36

As leverage rises the cost of equity also falls.

Question 37

Risk transformation involves increasing the risk of an investor's portfolio.

Question 38

The money market is the market for short- term loans and deposits.

Question 39

A secondary capital market is where shareholders sell their existing shares to others.

Question 40

If the stock market works in a way which results in share prices reflecting private and public information about a company, this is called strong efficiency.

Question 41

A primary market in capital is where shareholders sell shares to others.

Question 42

Why is the distinction between factor price and the price of factor services important?

Question 43

Explain the difference between a factor's price, its return and its rental.

Question 44

Using examples, explain the difference between stocks and flows.

Question 45

What is the profit- maximising rule for the employment of capital?

Question 46

Explain the present value approach to investment appraisal?

Question 47

What is the connection between present value of investment and the efficiency of the stock market?

Question 48

What are the risks of investment?

Question 49

What are the main sources of short- , medium- and long- term business finance?

Question 50

Why does the cost of equity rise as a firm increases it debt to equity ratio?

Question 51

What are the main roles of the financial sector?

Question 52

What are the main financial institutions in the UK?

Question 53

What are financial intermediaries?

Question 54

What does efficiency mean in the context of the stock market?

Question 55

What are the advantages and disadvantages of using the stock market for raising new capital?