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Exam 27: The Basic Tools of Finance

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Question 221

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According to the efficient markets hypothesis, which of the following would decrease the price of stock in Veblen's Leisure Company?

A) Veblen announces, just as everyone had expected, that it has fired its CEO who has been accused of ethics violations.
B) Veblen announces, as the market had expected, that its profits were low.
C) Fundamental analysis published by KM Financial shows that Veblen's stock is undervalued.
D) A highly anticipated book is published by a Veblen insider which details Veblen's innovative technology in plain English, information that was previously unavailable to the public and which will now be used by Veblen's competitors.

E) A) and D)
F) A) and C)

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Question 222

Multiple Choice

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You could borrow $2,000 today from Bank A and repay the loan, with interest, by paying Bank A $2,125 one year from today. Or, you could borrow X dollars today from Bank B and repay the loan, with interest, by paying Bank B $2,200 two years from today. In order for the same interest rate to apply to the two loans, X =

A) $1,853.55.
B) $1,898.70.
C) $1,948.79.
D) $2,012.22.

E) B) and D)
F) C) and D)

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Question 223

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The fact that we observe a trade-off between risk and return is puzzling to economists, because that observation conflicts with the notion that most people are risk averse.

Some people argue that there are two advantages to holding mutual funds. The first is that mutual funds provide an inexpensive way to hold a diversified portfolio. The second is that because of their expertise mutual fund managers should be able to consistently beat the market. Which of the following does the evidence show?

At which interest rate is the present value of $260.10 two years from today equal to $250 today?

At which interest rate is the present value of $35.00 two years from today equal to about $30.00 today?

Black Oil Company considered building a service station in a new location. The owners and their accountants decided that this was the profitable thing to do. However, soon after they made this decision, both the interest rate and the cost of building the station changed. In which case do these changes both make it less likely that they will now build the station?

People who are risk averse dislike bad outcomes more than they like comparable good outcomes.

At an annual interest rate of 10 percent, about how many years will it take $100 to double in value?

According to the efficient markets hypothesis, stocks follow a random walk so that stocks that increase in price one year are more likely to increase than decrease in the next year.

What is the present value of a payment of $2,000 to be received two years from today if the interest rate is 5%?

Figure 27-6. On the graph, x represents risk and y represents return. -Refer to Figure 27-6. Which of the following statements is correct?

Cash payments that companies make to shareholders are called

Actively managed mutual funds usually fail to outperform index funds, and this fact provides evidence in favor of the efficient markets hypothesis.

In the 15 years ending June 2010, most active portfolio managers failed to beat the market.

Greg's Tasty Ice Cream is considering building a new ice cream factory that costs $8.3 million. The company accountants believe that, not accounting for interest costs, building the factory will increase profits by $5 million the first year, $4 million the second year and have no value thereafter. Greg's Tasty Ice Cream should build the factory if the interest rate is

Historically, stocks have offered higher rates of return than bonds.

Suppose you place $500 into a savings account that will pay you 6% interest per year. What will be the future value of the savings account in 15 years?

Assuming the interest rate is 6 percent, which of the following has the greatest present value?

Twenty years ago, Dr. Montgomery borrowed money from her parents to pay her tuition at graduate school. Now she wants to pay them back. She gives them double what they gave her. According to the rule of 70, what interest rate would have given her parents the same amount of money if they had put it in the bank rather than lending it to their daughter?