Page 500 - Introduction to Business
P. 500
474 PART 5 Finance
Test Prepper
You’ve read the chapter, studied the key terms, and the exam is any day now. Think you are ready to ace it? Take
this sample test to gauge your comprehension of chapter material. You can check your answers at the back of
the book.
True/False Questions 2. If the real rate of interest is 2 percent, and
Please indicate if the following statements are true or the expected inflation rate is 5 percent,
false: then the nominal interest rate is
1. The highest-ranking financial manager is a. 2 percent.
the chief executive officer. b. 3 percent.
c. 5 percent.
2. Only if accounting profit leads to higher
d. 7 percent.
share values is economic profit earned.
e. 10 percent.
3. The time preference for consumption does
3. The chance that a firm will go bankrupt
not change much over time and is related
and be unable to pay back a loan from a
to the real rate of interest.
bank is known as the
4. If there were no default risk, the nominal
a. nominal interest rate.
interest rate would equal the risky rate of
b. inflation rate.
interest.
c. default risk.
5. To figure out the economic profit of a new
d. market risk.
product, we must compare cash flows in
e. loan risk.
present value terms at time 0 (now).
4. Assume a firm invests $100 at an annual
6. If the minimum rate of return on an invest- rate of return of 20 percent (0.20). The
ment project is 15 percent, then this is the future value of this $100 in one year is
interest rate that should be used in finding
a. $20.
present values of the project’s future cash
b. $80.
flows.
c. $100.
7. Bonds are a short-term source of funds for d. $110.
firms. e. $120.
8. Lower-rated debt securities are known as 5. The nominal interest rate contains the
junk bonds.
a. stated interest rate and the real interest
9. Factoring is when customers make pay- rate.
ments to post office boxes in local postal b. required rate of return, the stated inter-
facilities. est rate, and the inflation rate.
10. Firm-specific risk encompasses any risk c. real interest rate, the expected inflation
that faces the individual firm that is not rate, and the default risk premium.
related to market, liquidity, and tax risks. d. riskless rate of interest and the real inter-
est rate.
Multiple-Choice Questions e. compound interest and the discount
Choose the best answer. rate.
1. You are a manager of a firm that owns stock 6. In evaluating investment projects using
options on 1000 shares at a price of $20 per capital budgeting principles, projects that
share. If the market price of the shares rises are acceptable investments have
to $30, assuming that you sell the shares, a. only positive net present values (NPVs).
you will earn a profit of b. only negative NPVs.
a. $1,000. c. only zero NPVs.
b. $10,000. d. positive and zero NPVs.
c. $20,000. e. negative and zero NPVs.
d. $30,000. 7. Assume a firm has a 30 percent tax rate.
e. $100,000. Also assume that the same firm has $100 of
Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
