Question 1

If someone's utility function exhibits diminishing marginal utility of wealth, this person is risk averse.

Accepted Answer

A) True 
 B)False

Question 2

The amount today that would be needed, at prevailing interest rates, to produce a particular sum in the future is known as

Accepted Answer

A)  future value.
B)  fair value.
C)  present value.
D)  compound value.
E)  beginning value.F) B) and C)
G) All of the above

Question 3

Dividends are the cash payments that a company makes to its

Accepted Answer

A)  customers.
B)  employees.
C)  stakeholders.
D)  shareholders.E) A) and C)
F) B) and D)

Question 4

There is a __________ between risk and return which is at the heart of understanding financial decisions

Accepted Answer

A)  rule
B)  difference
C)  zero sum game
D)  trade-offE) C) and D)
F) B) and D)

Question 5

JCB (which makes agricultural and construction equipment)  has the opportunity to purchase a new factory today that will provide them with a R50 million return four years from now.If prevailing interest rates are 6 percent, what is the maximum that the project can cost for JCB to be willing to undertake the project?

Accepted Answer

A)  R43 456 838
B)  R53 406 002
C)  R34 583 902
D)  R39 604 682
E)  R50 000 000F) A) and B)
G) A) and C)

Question 6

A snow plough will generate a net income of R20 000 per year for its owner.After 8 years, the plough will be worn out and have zero value.The owner has worked out the present value of the net income the snow plough will generate using an interest rate of 10%.Which of the following statements is NOT true?

Accepted Answer

A)  The present value of the final year's net income is less than R11 000.
B)  The owner would sell the snow plough if she received an offer of R13 000 for it.
C)  The owner would sell the snow plough if she received an offer of R3 500.
D)  The present value of the income of the net income the snow plough will generate over the 8 year period is more than R100 000.E) A) and D)
F) B) and C) C

Question 7

In the 1990s, several stocks had very, very high price to earnings ratios.These stocks appeared overvalued to many observers.What might the people who bought them have been thinking?

Accepted Answer

There are several possibilities.The firs...

Question 8

List three different ways that a risk averse person can reduce financial risk.

Accepted Answer

A risk averse person can reduce risk by ...

Question 9

Which of the following is an example of moral hazard?

Accepted Answer

A)  After Karabo buys fire insurance, he begins to smoke cigarettes in bed.
B)  None of these answers demonstrate moral hazard.
C)  Martin has been feeling poorly lately so he seeks health insurance.
D)  Both of Susan's parents lost their teeth due to gum disease, so Susan buys dental insurance.
E)  All of these answers demonstrate moral hazard.F) All of the above
G) A) and B)

Question 10

If the price of shares is greater than what you believe to be the true value of the business then the stock is

Accepted Answer

A)  undervalued.
B)  overvalued.
C)  fairly valued.
D)  no longer going to be traded.E) None of the above
F) A) and B)

Question 11

Which of the following factors would a fundamental analyst consider when predicting a firm's share price?

Accepted Answer

A)  Recent changes in the share's price.
B)  The knowledge and skills of the firm's current management.
C)  The marketing strategies of the firm's competitors.
D)  Both b and c are correct.E) B) and D)
F) A) and B) D

Question 12

If interest is compounded annually, R100 placed in a bank account earning 10 percent interest should generate R30 interest after three years.

Accepted Answer

A) True 
 B)False

Question 13

The fact that someone with a high risk of medical problems is more likely to buy a lot of health insurance is an example of

Accepted Answer

A)  adverse selection.
B)  monitoring.
C)  moral hazard.
D)  an optimal contract.E) A) and C)
F) B) and C)

Question 14

Government bonds are preferred to shares by individual investors who

Accepted Answer

A)  need to have immediate access to their money.
B)  wish to diversify their investments.
C)  prefer a less risky lower return to a more risky higher return.
D)  prefer a more risky higher return to a less risky lower return.E) A) and B)
F) B) and C) C

Question 15

Demonstrate that whether you would prefer to have R225 today or wait five years for R300 depends on the interest rate.Show your calculations.

Accepted Answer

For example at 3 per cent the ...

Question 16

Diversification is the reduction of risk achieved by replacing a single risk with a large number of

Accepted Answer

A)  greater risks.
B)  smaller unrelated risks.
C)  risk-free investments.
D)  risk-free purchases.E) B) and C)
F) A) and D)

Question 17

Risk is the probability of something happening which results in a(n)  ___________________.

Accepted Answer

A)  overvalued share.
B)  loss or some degree of hazard or damage.
C)  optimal level.
D)  returns from investing in shares.
E)  a poor investment.F) B) and E)
G) B) and C)

Question 18

Diversification cannot eliminate idiosyncratic risk, which is the uncertainty associated with the specific companies.

Accepted Answer

A) True 
 B)False

Question 19

As a person allocates more of his savings to shares and less to government bonds, he will earn a higher rate of return, but he must accept additional risk.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following does not help reduce the risk that people face?

Accepted Answer

A)  Increasing the rate of return within their portfolio.
B)  Diversifying their portfolio.
C)  All of these answers help reduce risk.
D)  Buying insurance.E) A) and B)
F) A) and C)

Exam 8: The Basic Tools of Finance

If someone's utility function exhibits diminishing marginal utility of wealth, this person is risk averse.

Correct Answer
verified

The amount today that would be needed, at prevailing interest rates, to produce a particular sum in the future is known as

Correct Answer
verified

Dividends are the cash payments that a company makes to its

Correct Answer
verified

There is a __________ between risk and return which is at the heart of understanding financial decisions

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
C

In the 1990s, several stocks had very, very high price to earnings ratios.These stocks appeared overvalued to many observers.What might the people who bought them have been thinking?

Correct Answer
verified
There are several possibilities.The firs...
View Answer

List three different ways that a risk averse person can reduce financial risk.

Correct Answer
verified
A risk averse person can reduce risk by ...
View Answer

Which of the following is an example of moral hazard?

Correct Answer
verified

If the price of shares is greater than what you believe to be the true value of the business then the stock is

Correct Answer
verified

Which of the following factors would a fundamental analyst consider when predicting a firm's share price?

Correct Answer
verified
D

If interest is compounded annually, R100 placed in a bank account earning 10 percent interest should generate R30 interest after three years.

Correct Answer
verified

The fact that someone with a high risk of medical problems is more likely to buy a lot of health insurance is an example of

Correct Answer
verified

Government bonds are preferred to shares by individual investors who

Correct Answer
verified
C

Demonstrate that whether you would prefer to have R225 today or wait five years for R300 depends on the interest rate.Show your calculations.

Correct Answer
verified
For example at 3 per cent the ...
View Answer

Diversification is the reduction of risk achieved by replacing a single risk with a large number of

Correct Answer
verified

Risk is the probability of something happening which results in a(n) ___________________.

Correct Answer
verified

Diversification cannot eliminate idiosyncratic risk, which is the uncertainty associated with the specific companies.

Correct Answer
verified

As a person allocates more of his savings to shares and less to government bonds, he will earn a higher rate of return, but he must accept additional risk.

Correct Answer
verified

Which of the following does not help reduce the risk that people face?

Correct Answer
verified

Exam 8: The Basic Tools of Finance

If someone's utility function exhibits diminishing marginal utility of wealth, this person is risk averse.

Correct AnswerverifiedShow Answer

The amount today that would be needed, at prevailing interest rates, to produce a particular sum in the future is known as

Correct AnswerverifiedShow Answer

Dividends are the cash payments that a company makes to its

Correct AnswerverifiedShow Answer

There is a __________ between risk and return which is at the heart of understanding financial decisions

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedC

In the 1990s, several stocks had very, very high price to earnings ratios.These stocks appeared overvalued to many observers.What might the people who bought them have been thinking?

Correct AnswerverifiedThere are several possibilities.The firs...View AnswerShow Answer

List three different ways that a risk averse person can reduce financial risk.

Correct AnswerverifiedA risk averse person can reduce risk by ...View AnswerShow Answer

Which of the following is an example of moral hazard?

Correct AnswerverifiedShow Answer

If the price of shares is greater than what you believe to be the true value of the business then the stock is

Correct AnswerverifiedShow Answer

Which of the following factors would a fundamental analyst consider when predicting a firm's share price?

Correct AnswerverifiedD

If interest is compounded annually, R100 placed in a bank account earning 10 percent interest should generate R30 interest after three years.

Correct AnswerverifiedShow Answer

The fact that someone with a high risk of medical problems is more likely to buy a lot of health insurance is an example of

Correct AnswerverifiedShow Answer

Government bonds are preferred to shares by individual investors who

Correct AnswerverifiedC

Demonstrate that whether you would prefer to have R225 today or wait five years for R300 depends on the interest rate.Show your calculations.

Correct AnswerverifiedFor example at 3 per cent the ...View AnswerShow Answer

Diversification is the reduction of risk achieved by replacing a single risk with a large number of

Correct AnswerverifiedShow Answer

Risk is the probability of something happening which results in a(n) ___________________.

Correct AnswerverifiedShow Answer

Diversification cannot eliminate idiosyncratic risk, which is the uncertainty associated with the specific companies.

Correct AnswerverifiedShow Answer

As a person allocates more of his savings to shares and less to government bonds, he will earn a higher rate of return, but he must accept additional risk.

Correct AnswerverifiedShow Answer

Which of the following does not help reduce the risk that people face?

Correct AnswerverifiedShow Answer

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Correct Answer
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C

Correct Answer
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There are several possibilities.The firs...
View Answer

Correct Answer
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A risk averse person can reduce risk by ...
View Answer

Correct Answer
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Correct Answer
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D

Correct Answer
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C

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For example at 3 per cent the ...
View Answer

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Correct Answer
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Correct Answer
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