Multiple Choice Answers

1. The “efficient frontier” indicates alternatives with:
a. neutral combinations of risk and return
b. the highest returns
c. the best combination of risk and return
d. no risk
2.The term “risk averse” means that:
a. an individual refuses to take risks
b. most investors and businessmen seek risk
c. an individual will seek to avoid risk or be compensated with a higher return
d. only investment proposals with no risk should be accepted
3.If one project has a higher standard deviation than another, it:
a. has a greater risk
b. has a higher expected value
c. has more possible outcomes
d. may be riskier, but this can only be determined by the coefficient of variation
4.A project has the following projected outcomes in dollars: $250,$350,and $500. The probabilities of their outcomes are 25%, 50%, and 25% respectively. What is the expected value of these outcomes?
a. $362.50
b. $89.40
c. $94.50
d. $178.30
5. Risk may be integrated into capital budgeting decision by:
a. adjusting the standard deviation of possible outcomes
b. determining the expected value
c. adjusting the discount rate
d. adjusting the time horizon
6. Using the risk-adjusted discount rate approach, the cost of capital is applied to projects with______ risk.
a. normal
b. high
c. no
d. low
7. A Monte Carlo simulation model uses:
a. random variables as inputs
b. a point estimate
c. the cost of capital
d. portfolio risk
8. In order to reduce risk in a firm, the firm would seek to enter a business that has:
a. high positive correlation with its present business
b. zero correlation with its present business
c. high negative correlation with its present business
d. high negative variation with its present business
9. What is the cost of not taking the discount on trade credit of 2/20, net 60?
a. 18.36%
b. 16.32%
c. 18.00%
d. 17
10.A project that carries a normal amount of risk does NOT affect the risk exposure of the firm should be discounted back at the:
a. coefficient of variation
b. beta
c. risk-free rate
d. weighted average cost of capital
11. In a replacement decision, if an old asset sells below book value, form a tax standpoint there is:
a. a decrease in cash flow
b. an increase in cash flow
c. no effect on cash flow
d. a decrease in net present value
12.Working capital management is primarily concerned with the management and financing of:
a. cash and inventory
b. current assets and current liabilities
c. current assets
d. receivables and payables
13.Frisch Fish Corp. expects net income next year to be $600,000. Inventory and accounts receivable will have to be increased by $300,000 to accommodate this sales level. Frisch will pay dividends of $400,000. How much external financing will Frisch Fish need, assuming no organically generated increase in liabilities?
a. No external financing is required
b. $100,000
c. $200,000
d. $300,000
14. Retail companys like Target and Limited Brand are more likely to have:
a. stable sales and earnings per share
b. cyclical sales but less volatile earnings per share
c. cyclical sales and more volatile earnings per share
d. cylical sales but stable accounts receivable and inventory
15.The term structure of interest rates:
a. changes daily to reflect current competitive conditions in money and capital markets.
b. plots returns for securities of different risk
c.shows the relative interest spread between bonds with different risk ratings such as AAA,AA,A,BBB,etc.
d.depicts interest rates for T-bills over the last year
16. A “normal” term structure of interest rates would depict:
a. short-term rates higher than long-term rates
b.long-term rates higher than short-term rates general relationship between short-and long-term rates
d. medium rates (1-5yrs) lower than both short-term and long-term rates.
17.Which of the following combinations of asset structures and financing patterns is likely to create the most volatile earnings?
a. illiquid assets and heavy short-term borrowing
b. illiquid assets and heavy long-term borrowing
c. liquid assets and heavy long-term borrowing
d. liquid assets and heavy short-term borrowing
18. Genetech has $2,000,000 in assets, has decided to finance 30% with long-term financing (13%rate) and 70% with short-term financing (9%) rate. What will be their annual interest costs?
b. $126,000
19.What is generally the largest source of short-term credit for small firms?
a. bank loans
b. Commercial paper
c. installment loans
d. trade credit
20. A correlation coefficient of ______provides the greatest risk reduction:
a. 0
b. -1
c. +1
d. +5