Financial Proficiency Deck Flashcards
(27 cards)
How much money should you invest at a rate of 10% per year if you want $600 in three years?
$450.79
Suppose that you invest $300 in a savings account that pays 5% per year. How much money will you have in five years?
$382.88
What is the present value of an investment that offers an annual cash flow of $600 for three years if the interest rate is 5.5%?
$1,617.67
What is the present value of an investment that offers a perpetual annual cash flow of $300 if the interest rate is 7%?
$4,285.71
Suppose you have an asset that generates an annual cash flow of $200, but depreciates 2% per year. What is the value of the asset if the discount rate is 8%?
$2,000
MULTIPLE CHOICE. Which of the following statements regarding time value of money is false?
A. Present value is the amount of money that would have to be invested today at a given interest rate over a specified period of time to equal a future amount.
B. Future value is the value at a given future date of a present amount placed on deposit today and earning interest at a specified rate.
C. An annuity is a stream of equal periodic cash flows over a specified period.
D. A perpetuity is an annuity with a finite life.
D
Suppose that the correlation between two variables, x and y, is Corr(x,y) = -0.72. What does this number suggest?
A. A strong positive linear relationship between the variables.
B. A strong negative linear relationship between the variables.
C. A weak positive linear relationship between the variables.
D. That as the value of x increases, the value of y increases.
B
Suppose that the covariance between two variables, x and y, is negative. What does this information tell you? A. That as the value of x increases, the value of y decreases. B. That as the value of x decreases, the value of y decreases. C. That as the value of x increases, the value of y increases. D. That as the value of x increases, the value of y remains unchanged.
B
Which of the following statement about measures of dispersion is false? A. The smallest possible value for the variance is zero. B. The units of the variance are squared units of the original data. C. The units of the standard deviation are squared units of the original data. D. Large standard deviation indicates large data dispersion
C
If you toss a die, what is the probability that 3 is not the number that appears on the die?
5/6
Which statement regarding risk is true?
A. We can measure risk quantitatively by computing the expected value of a variable’s distribution.
B. High standard deviation means that the possible values of a variable are close to the mean.
C. The standard deviation can be negative.
D. High standard deviation indicates high dispersion of the possible values of a variable around the mean.
D
Which statement regarding business risk is false?
A. Fixed operating costs offset the effect of sales volatility on operating income volatility.
B. A way to measure a firm’s business risk is by calculating the firm’s standard deviation of the operating income forecast.
C. There is an inverse relationship between fixed operating expenses and business risk.
D. The more volatile a firm’s sales are, the more business risk the firm has.
A
Which of these is an example of a firm with no financial risk?
A. A firm that borrows only from financial institutions abroad.
B. A firm that has only equity financing.
C. A firm that incurs only in short-term loans.
D. A firm that incurs only in long-term loans.
B
How do we call the risk that can be diversified away?
A. Unsystematic risk.
B. Systematic risk.
C. Business risk.
D. Financial risk.
A
A rating of BBB refers to what type of risk?
A. Financial risk.
B. Systematic risk.
C. Business risk.
D. Credit risk.
D
Which of the following statements regarding portfolio risk is false?
A. Factors such as inflation or political events account for nondiversifiable risk.
B. Factors such a strike or a lawsuit in a firm account for diversifiable risk.
C. Extensive diversification can eliminate unsystematic risk.
D. Any investor or firm must be concerned solely with diversifiable risk.
D
Which of the following statements regarding market multiples is true? A. The P/E ratio of a firm with no growth opportunities will be equal zero. B. As growth opportunities become a more important component of the total value of the firm, the P/E ratio will increase. C. As growth opportunities become a more important component of the total value of the firm, the P/E ratio will decrease. D. The P/E ratio is unrelated to the growth rate opportunities of a firm.
B
Which of the following statements regarding market multiples is false? A. A price-to-book ratio greater than one indicates that a firm’s future prospects are being viewed favorably by investors.
B. Firms expected to earn high returns relative to risk typically have low price-to-book ratios.
C. A P/E ratio of 5 indicates that investors are paying $5 for each $1 of earnings.
D. The P/E ratio is commonly used to assess the investor’s appraisal of share value.
B
Which of the following statements regarding the CAPM is true?
A. Investors should be compensated for bearing idiosyncratic risk.
B. Two assets with the same beta may have different expected rates of return.
C. The appropriate discount rate for a stock with a beta of 1 (β = 1) is the risk-free rate.
D. The appropriate discount rate for a stock with a beta of 1 is the market rate of return. 4. Table 10.2 provides other relevant information about an investment opportunity. What is the
D
Which of the following factors is not required to calculate the price of an option according to the Black Scholes model?
A. Investor’s level of risk aversion.
B. Risk-free interest rate.
C. Maturity date.
D. Strike price.
A
Which of the following statements regarding EVA is true?
A. It measures the spread between ROE and the opportunity cost of capital.
B. It measures the spread between the P/E ratio and the opportunity cost of capital.
C. It measures the spread between ROS and the opportunity cost of capital.
D. It measures the spread between ROA and the opportunity cost of capital.
D
Which of the following statements regarding the cost of internal common equity is false?
A. It is the rate of return investors require on funds supplied by existing common stockholders.
B. It is the rate of return investors require on funds supplied by existing common stockholders, plus flotation costs.
C. It can be calculated using the CAPM model.
D. It is slightly lower than the cost of equity from new common stock.
B
If a firm has a cost of debt of 10% and an after-tax cost of debt of 6%, what is the firm’s marginal tax rate?
40%
Which of the following statements regarding the cost of equity is true? A. Just like bondholders, stockholders have a contractual agreement with the firm that stipulates the required return on their investment. B. The cost of preferred stock is the cost of issuing new preferred stock. C. The cost of preferred stock represents the minimum return that a firm must earn when using the money supplied by preferred stockholders D. The cost of preferred stock is equal to the expected dividend that a firm must paid preferred stockholders.
D
