Multiple Choice: R.S Flashcards by Abdul Kawa

What does HPR stand for?

Holding Period Return

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What does APR stand for?

Annual Percentage Rate

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What does EAR stand for?

Effective Annual Rate

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What does the Holding Period (n) represent?

Duration of the investment

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What is the primary issue with APR when the holding period is short?

It may appear unrealistically high

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What is the relationship between APR and EAR?

EAR accounts for compounding, making it higher than APR

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What is ‘expected return’ in an investment context?

The weighted average of possible returns based on probabilities

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How is expected return calculated?

By summing the probability-weighted returns for each outcome

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What must the sum of all probabilities in an expected return calculation equal?

100%

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What is the key principle of diversification?

To spread investments across assets to reduce risk

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What is unsystematic risk?

Risk specific to a company or industry

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What is systematic risk also known as?

Market risk

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What type of risk remains in a fully diversified portfolio?

Systematic risk

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How is beta used to measure risk?

It measures an asset’s volatility relative to the market

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What does a portfolio beta of 1 indicate?

Portfolio has the same risk as the market

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What does a beta of 0 indicate about an asset?

The asset is uncorrelated with the market

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How is portfolio expected return calculated?

Weighting each asset’s expected return by its proportion in the portfolio

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What is the relationship between risk and return?

Higher risk is typically associated with higher potential returns.

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What does the term “market risk premium” represent?

Return over the risk-free rate that compensates for systematic risk

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What does CAPM stand for?

Capital Asset Pricing Model

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What is capital budgeting primarily concerned with?

Short-term financing decisions

Long-term investment decisions

Daily operational expenses

Working capital management

Long-term investment decisions

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Which of the following is a characteristic of long-term capital budgeting decisions?

Short time horizons

Involvement of small sums of money

Requirement of extensive information

Minimal impact on a company’s operations

Requirement of extensive information

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What does the payback period measure?

The time it takes for an investment to generate profit

The overall profitability of a project

The return on investment over the project’s life

The time it takes to recover the initial investment

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Which of the following is a limitation of the payback period method?

It ignores the time value of money

It is too complex to calculate

It focuses only on profits

It is not applicable to long-term projects

It ignores the time value of money

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What does the discounted payback period account for that the regular payback period does not? Risk of the investment Time value of money Net present value Internal rate of return

Time value of money

In capital budgeting, what is the net present value (NPV) used to determine? The total cash inflows from a project The period of time to recover the initial investment The profitability of a project after accounting for the time value of money The interest rate at which the project breaks even

The profitability of a project after accounting for the time value of money

Which of the following would make a project more attractive when using the NPV method? Higher initial investment Higher discount rate Longer payback period Higher projected cash inflows

Higher projected cash inflows

What does a positive NPV indicate about a project? The project should be rejected The project is expected to add value to the firm The project has a high risk of failure The project is likely to decrease the firm's value

The project is expected to add value to the firm

What does the term "mutually exclusive projects" mean? Projects that can be undertaken simultaneously Projects that do not require an initial investment Projects where only one can be selected Projects that have the same cash flows

Projects where only one can be selected

What does the equivalent annual annuity (EAA) approach help to compare? Projects with different useful lives Projects with different initial investments Projects with the same NPV Projects with equal risk levels

Projects with different useful lives

What does the payback period measure? The time it takes for an investment to generate profit The overall profitability of a project The return on investment over the project's life The time it takes to recover the initial investment

The time it takes to recover the initial investment

Which of the following is a limitation of the payback period method? It ignores the time value of money It is too complex to calculate It focuses only on profits It is not applicable to long-term projects

It ignores the time value of money

What does the discounted payback period account for that the regular payback period does not? Risk of the investment Time value of money Net present value Internal rate of return

Time value of money

The profitability of a project after accounting for the time value of money

The project is expected to add value to the firm

Projects where only one can be selected

What is the internal rate of return (IRR)? The discount rate that makes the NPV of a project zero The rate of return required by investors The annual return on a project The difference between the NPV and the initial investment

The discount rate that makes the NPV of a project zero

How is the IRR decision rule typically applied? Accept the project if IRR is less than the discount rate Accept the project if IRR is greater than the discount rate Reject the project if IRR is greater than NPV Reject the project if IRR is equal to the cost of capital

Accept the project if IRR is greater than the discount rate

What is the profitability index (PI)? The time it takes to recover the initial investment The rate at which the project’s NPV is zero The difference between the present value of inflows and outflows The ratio of the present value of inflows to the present value of outflows

The ratio of the present value of inflows to the present value of outflows

When comparing two mutually exclusive projects, which one should be chosen according to the NPV method? The project with the higher IRR The project with the higher NPV The project with the longer payback period The project with the lower initial investment

The project with the higher NPV

What is the significance of the hurdle rate in capital budgeting? It is the minimum acceptable rate of return on a project It is the average rate of return for the industry It is the highest rate of return possible It is the maximum time allowed for the payback period

It is the minimum acceptable rate of return on a project

What does the term "time value of money" imply? A dollar today is worth less than a dollar tomorrow Cash flows should be valued equally regardless of timing A dollar today is worth more than a dollar tomorrow The future value of money does not depend on the interest rate

A dollar today is worth more than a dollar tomorrow

Which method is often preferred when comparing projects of different sizes? IRR NPV Payback period Discounted payback period

NPV

In the context of capital budgeting, what does MIRR stand for? Modified Internal Rate of Return Modified Investment Return Rate Maximum Interest Rate Requirement Marginal Incremental Return Rate

Modified Internal Rate of Return

What is a common feature of all capital budgeting models? They all ignore cash flows after the payback period They all consider the time value of money They all use the IRR as a decision criterion They all involve forecasting future cash flows

They all involve forecasting future cash flows

Which of the following best describes the purpose of capital budgeting? To decide on short-term financing options To evaluate long-term investment opportunities To manage a company's daily cash flow To determine the optimal mix of debt and equity financing

To evaluate long-term investment opportunities

What is cultural risk in the context of international financial management? The risk of currency fluctuations The risk arising from differences in customs, social norms, and expectations in a host country The risk of changes in international trade laws The risk of economic downturns in foreign markets

The risk arising from differences in customs, social norms, and expectations in a host country

What is business risk in international financial management? The risk arising from economic factors like inflation and exchange rate fluctuations The risk of political changes in a host country The risk of cultural misunderstandings in international transactions The risk of a company failing to enter a new market

The risk arising from economic factors like inflation and exchange rate fluctuations

How can multinational corporations manage political risk? By standardizing their operations across all countries By avoiding investment in politically unstable regions By financing operations and assets with local money By ignoring the political climate in the host country

By financing operations and assets with local money

What is the significance of purchasing power parity (PPP) in international finance? It suggests that the price of similar goods should be the same regardless of the currency used It indicates the level of government intervention in the economy It measures the economic stability of a country It reflects the interest rate differentials between countries

It suggests that the price of similar goods should be the same regardless of the currency used

What does the Big Mac Index illustrate? Currency exchange rates in relation to gold prices The impact of tariffs on international trade The balance of trade between two countries Purchasing power parity by comparing the price of a Big Mac in different countries

Purchasing power parity by comparing the price of a Big Mac in different countries

What is a direct exchange rate? The amount of domestic currency required to buy one unit of foreign currency The exchange rate set by the government The average exchange rate over a period The amount of foreign currency required to buy one unit of domestic currency

The amount of domestic currency required to buy one unit of foreign currency

What is an indirect exchange rate? The amount of domestic currency required to buy one unit of foreign currency The amount of foreign currency required to buy one unit of domestic currency The exchange rate quoted between two non-U.S. currencies The exchange rate adjusted for inflation

The amount of foreign currency required to buy one unit of domestic currency

What is a cross rate in currency exchange? The rate at which a currency can be exchanged for gold The exchange rate between a currency and the U.S. dollar The exchange rate between two non-U.S. currencies determined via the U.S. dollar The historical average of exchange rates between two currencies

The exchange rate between two non-U.S. currencies determined via the U.S. dollar

Which of the following is an example of cultural risk? Currency exchange rate fluctuations Differences in inflation rates between countries The requirement to hire relatives of government officials as a condition of doing business Changes in the political regime of a country

The requirement to hire relatives of government officials as a condition of doing business

What is the primary goal of international financial management? To maximize revenue from foreign operations To maximize shareholder wealth in a global context To minimize currency exchange costs To comply with all international regulations

To maximize shareholder wealth in a global context

What is arbitrage in the context of international finance? The simultaneous purchase and sale of an asset to profit from a difference in prices The long-term investment in foreign markets The conversion of currency at the official exchange rate

The simultaneous purchase and sale of an asset to profit from a difference in prices

What is triangular arbitrage? The process of converting currency back to its original form The process of exploiting differences in three currencies to make a profit The practice of trading between three different stock exchanges The investment in three different markets simultaneously

The process of exploiting differences in three currencies to make a profit

What are forward rates? Exchange rates agreed upon today for a transaction that will occur in the future The average exchange rates over a specified period The current market rates for currency exchange The rates set by the government for future exchange transactions

Exchange rates agreed upon today for a transaction that will occur in the future

What is transaction exposure in international finance? The risk of a change in the value of a company's foreign investments The risk of loss due to fluctuations in exchange rates affecting future foreign currency payments The risk of political changes affecting business operations The risk associated with cultural differences in business practices

The risk of loss due to fluctuations in exchange rates affecting future foreign currency payments

What is operating exposure? The risk of exchange rate changes affecting a company’s future operating cash flows The risk of political instability affecting business operations The risk of a company's assets being nationalized The risk of changes in tax laws in a foreign country

The risk of exchange rate changes affecting a company’s future operating cash flows

What is translation exposure? The risk of changes in foreign tax rates The risk of fluctuations in commodity prices The risk of miscommunication due to language barriers The risk that a company's financial statements will be affected by changes in exchange rates

The risk that a company's financial statements will be affected by changes in exchange rates

What is the International Fisher Effect? The theory that real interest rates will equalize across countries The relationship between exchange rates and inflation rates The concept that nominal interest rates in different countries reflect expected inflation The effect of tariffs on international trade

The concept that nominal interest rates in different countries reflect expected inflation

What is the purpose of using net present value (NPV) in foreign investment decisions? To estimate the future exchange rate To determine the current value of future profits To calculate the expected inflation rate in a foreign country To assess the profitability of a foreign project

To assess the profitability of a foreign project

How does covered interest arbitrage work? By investing in high-yield bonds in foreign markets By exploiting differences in interest rates between countries while hedging exchange rate risk By borrowing in low-interest-rate currencies and investing in high-interest-rate currencies By predicting future changes in interest rates

By exploiting differences in interest rates between countries while hedging exchange rate risk

What is the effect of a country’s inflation rate on its currency value? Higher inflation strengthens the currency value Inflation has no effect on currency value Higher inflation weakens the currency value Inflation only affects interest rates

Higher inflation weakens the currency value

Multiple Choice: R.S Flashcards

(66 cards)