Question 1

Which of the following is not true?

Accepted Answer

Corporate investment decisions are closely linked to financial markets, as companies often rely on these markets to raise capital through issuing stocks or bonds, and to make strategic financial decisions based on market conditions.

Question 2

An investment should be made in period 0 if:

Accepted Answer

An investment is typically made if the return on the investment exceeds the interest rate, as this indicates that the investment is expected to yield a higher return than what could be earned through a risk-free investment, such as a savings account or government bond, at the current interest rate.

Question 3

You have an investment opportunity available to you that requires $400,000. You have no funds available but you will have income of $120,000 this year. The investment will have a net payoff $33,000 at the end of the year. If the market rate is 7.5% will you make the investment?

Accepted Answer

The net present value of the investment is $33,000 - $400,000 * 0.075 = -$3,000. This means that the investment will not generate a return that is greater than the market rate of 7.5%, so it is not a good investment.

Question 4

Financial markets develop to accommodate _________ between individuals.

Accepted Answer

Financial markets primarily develop to accommodate borrowing and lending activities between individuals, facilitating the transfer of funds from savers to borrowers.

Question 5

A financial instrument, by its possession, that entitles the holder to receive the payments are called:

Accepted Answer

Bearer instruments are financial instruments that entitle the holder to receive payments simply by possessing them, without the need for registration or identification.

Question 6

The first or basic principle of finance dictates that an individual will invest in a project if:

Accepted Answer

The basic principle of finance suggests that an individual will invest in a project if it offers a return that is at least as desirable as the return they could receive by investing in the financial markets. This means the project's potential benefits must be competitive with or exceed what the individual could achieve through other available investment opportunities.

Question 7

The ray that connects the maximum one can consume in Year 0 with the maximum one can consume in Year 1 represents:

Accepted Answer

This ray represents the trade-off between consumption in Year 0 and Year 1, taking into account the interest rate. The slope of -(1 + r) indicates that for each unit of consumption forgone in Year 0, consumption in Year 1 increases by (1 + r) units, reflecting the interest earned on savings.

Question 8

The present value of future cash flows minus initial cost is called:

Accepted Answer

The net present value (NPV) of a project is calculated by subtracting the initial cost of the investment from the present value of future cash flows. This metric is used to assess the profitability of a project or investment.

Question 9

The following statement, that the value of an investment to an individual is not dependent on consumption preferences, is called the:

Accepted Answer

The separation theorem, also known as the Fisher separation theorem, posits that the investment decision is separate from the consumption preferences of the investors. This means that the value of an investment can be determined independently of the individual's consumption preferences.

Question 10

According to the net present value rule, an investment should be made if:

Accepted Answer

The net present value (NPV) rule states that an investment should be made if the NPV is positive. This indicates that the present value of future cash flows from the investment exceeds the initial cost, suggesting the investment will generate a profit.

Question 11

You have an investment opportunity available to you that requires $400,000. You have no funds available but you will have income of $120,000 this year. The investment will have a payoff $433,000 at the end of the year. If the market rate is 8.25% what is the net present value?

Accepted Answer

The answer of You have an investment opportunity available to...

Question 12

One of the functions of financial intermediaries is to make sure the market clears. This means:

Accepted Answer

The answer of One of the functions of financial intermediaries...

Question 13

If the amount of money to be lent is exactly equal to the amount desired to be borrowed then the market is cleared at:

Accepted Answer

The market is cleared at the equilibrium interest rate when the amount of money to be lent is exactly equal to the amount desired to be borrowed. This is because the equilibrium interest rate is the price at which the supply of loanable funds equals the demand for loanable funds.

Question 14

The consumption opportunity set moves further out when an investment is available because:

Accepted Answer

The answer of The consumption opportunity set moves further out...

Question 15

Which of the following statements is true?

Accepted Answer

Stockholders prefer corporations to make investments when the net present value (NPV) is positive because it indicates that the investment is expected to generate more cash than it costs, thereby increasing shareholder value.

Question 16

The separation theorem says that:

Accepted Answer

The answer of The separation theorem says that:
...

Question 17

A lender with no investment opportunities has equal income in period 0 and in period 1. Which of the following correctly describes the consequence of an increase in the interest rate?

Accepted Answer

The answer of A lender with no investment opportunities has...

Question 18

An individual with no investment opportunities has income of $15,000 in period 0 and income of $10,000 in period 1. If the interest rate is 7%, which of the following points is on the individual's consumption possibility line?

Accepted Answer

The consumption possibility line is determined by the present value of income in both periods. The individual can consume $10,000 in period 0 and save $5,000, which will grow to $5,350 in period 1 at 7% interest, allowing for $15,350 in period 1.

Question 19

Components of a loan which is fully paid back are:

Accepted Answer

The components of a loan that is fully paid back include the interest payment and principal repayment. The principal repayment refers to paying back the original amount borrowed, while the interest payment covers the cost of borrowing that money.

Question 20

Which of the following conditions do not characterize perfect capital markets?

Accepted Answer

In perfect capital markets, all participants are price takers with no single entity able to control or manipulate the market. Thus, the condition where a few influential firms can control the financial market does not characterize perfect capital markets.

Quiz 4: Financial Markets and Net Present Value: First Principles of Finance