Question 1

Which of the following statements is(are) true?

Accepted Answer

Stockholders prefer corporations to make investments when the net present value (NPV) is positive because it indicates that the investment will generate higher returns than the cost of capital, resulting in an increase in the value of the firm and, consequently, the value of the stockholders' investments. B is incorrect as there is always a degree of risk associated with investments, and it is unlikely that risk can be completely eliminated. C is incorrect as not all investments require a stockholder vote, and the decision to require a vote is usually outlined in the company's bylaws. D is incorrect as an investment with a positive net income does not necessarily guarantee higher returns than the cost of capital.

Question 2

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

Accepted Answer

The statement is referring to the Separation Theorem, which states that an individual's portfolio of investments should be separated from their consumption preferences because the value of the portfolio is independent of their preferences. The other answer choices are not relevant to the statement.

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

B

Question 4

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 5

Financial markets develop to accommodate _________ between individuals.

Accepted Answer

Financial markets are developed to facilitate the borrowing and lending activities between individuals. These markets involve financial intermediaries such as banks and other financial institutions that bring together those who have surplus money (lenders) with those who need it (borrowers). Through financial markets, individuals can access funds for various purposes such as investment, consumption, and production. Trade and barter, as well as lending and trade, are not directly related to financial markets. Barter and lending can be part of financial transactions, but they are not the main purpose of financial markets.

Question 6

When lenders and borrowers are satisfied the financial markets will clear at

Accepted Answer

The equilibrium rate of interest represents the point at which lenders and borrowers are satisfied, and thus the financial market will clear at this rate. It is the rate at which the demand for funds (borrowers) equals the supply of funds (lenders). The other options may be relevant in certain contexts, but do not necessarily represent the clearing of the financial market.

Question 7

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 8

An individual has $60,000 income in period 0 and $30,000 income in period 1. If the individual desires to consume $19,000 in period 1 and the market interest rate is 8%, what is the maximum amount of consumption in period 0?

Accepted Answer

We need to use the concept of present value and future value to solve this question. Let's start by calculating the maximum amount of consumption in period 1, given that the individual desires to consume $19,000:

PV = FV / (1 + r)^n

PV1 = $19,000 / (1 + 0.08)^1 = $17,593.46

Now, let's calculate the amount of money the individual would need in period 0 to be able to consume $17,593.46 in period 1:

FV = PV x (1 + r)^n

FV0 = $17,593.46 x (1 + 0.08)^1 = $18,993.46

So, the maximum amount of consumption in period 0 would be:

$60,000 - $18,993.46 = $41,006.54

However, we also need to take into account the fact that the individual will have $30,000 of income in period 1. This means that the maximum amount of consumption in period 0 could actually be higher than $41,006.54.

Let's calculate the future value of the individual's income in period 1:

FV1 = $30,000 x (1 + 0.08)^1 = $32,400

Now, we can calculate the maximum amount of consumption in period 0 taking into account the individual's income in period 1:

$60,000 + $32,400 - $18,993.46 = $73,406.54

This means that the correct answer is (B) $70,185, which is the closest option to $73,406.54.

Question 9

An investment should be made in period 0 if:

Accepted Answer

An investment should be made in period 0 if the return on the investment is greater than the interest rate. This indicates that the investment will generate more money in the future than if the money were simply saved in a bank account.

Question 10

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 answer of An individual with no investment opportunities has...

Question 11

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

Accepted Answer

The answer of According to the net present value rule,...

Question 12

Which of the following is not true?

Accepted Answer

Corporate investment decisions are strongly influenced by financial markets as they provide companies with access to capital through borrowing and issuing stocks. Therefore, statement B is not true.

Question 13

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 14

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 15

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

When the amount of money to be lent is exactly equal to the amount desired to be borrowed, it means that the demand for borrowing has met the supply of lending, and therefore the market is in equilibrium. At this point, the interest rate that clears the market is known as the equilibrium interest rate. So, option A is the best choice.

Question 16

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

Accepted Answer

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

Question 17

Components of a loan which is fully paid back are:

Accepted Answer

When a loan is fully paid back, the borrower typically makes payments that consist of both principal (the amount borrowed) and interest (the cost of borrowing the money). Therefore, the correct choice is C, which includes both the interest payment and principal repayment. Choices A, B, and D either do not include both components or include additional components that are not relevant to a loan that has been fully paid back.

Question 18

The separation theorem says that

Accepted Answer

The answer of The separation theorem says that
...

Question 19

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

Accepted Answer

Bearer instruments refer to financial instruments where physical possession of the instrument is necessary in order to receive payment, as opposed to registered instruments where payment is made to a designated registered owner. This includes things like stocks, bonds, and dividend checks.

Question 20

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

Accepted Answer

The first principle of finance suggests that an individual will only invest in a project if it is at least as desirable as what is available in the financial markets. This means that the potential return on investment from the project should be equal or greater than the potential return from other available investment opportunities. Therefore, choice C is the correct answer.

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