Question

Which of the following is(are) the advantage(s) of the discounted payback period method comparing to the normal form of payback period method? (There may be more than one correct answer. You will lose marks by choosing a wrong answer. The minimum mark for the question is zero.)

Select one or more:

a. The discounted payback period method does not bias against long-term projects.

b. The discounted payback period method considers all cash flows of a project.

c. The discounted payback period method considers time value of money.

d. It is easier to calculate the discounted payback period of a project.

e. The discounted payback period method avoids projects with negative net present value (NPV) to be chosen.

Which of the following is (are) the reasons for some people to choose interest only loan? (There may be more than one correct answer. You will lose marks by choosing a wrong answer. The minimum mark for the question is zero.)

Select one or more:

a. The interest only loan provides more tax deductions for investment properties.

b. The interest only loan is less expensive over the whole loan term.

c. The interest only loan requires lower periodic repayment during the interest-only term.

d. Banks usually apply lower interest rate for interest only loans.

e. Interest only loan requires lower periodic repayment over the whole term of the loan.

Which of the following statements is(are) true about capital market efficiency? (There may be more than one correct answer. You will lose marks by choosing a wrong answer. The minimum mark for the question is zero.)

Select one or more:

a. In a strong form efficient market, it is not possible for an investor to earn an abnormal high return by acting on private information.

b. In a weak form efficient market, it is not possible for an investor to earn an abnormal high return by acting on private information.

c. In a semi-strong form efficient market, it is not possible for an investor to earn an abnormal high return by acting on public information.

d. Informational efficiency focuses on bringing buyers and sellers together at the lowest possible cost.

e. In a weak form efficient market, it is possible for an investor to earn an abnormal high return by studying the past patterns in assets prices.

Which of the following can be used by venture capitalists to reduce the risk of their investments in emerging businesses? (There may be more than one correct answer. You will lose marks by choosing a wrong answer. The minimum mark for the question is zero.)

Select one or more:

a. To provide funds stage by stage.

b. To invite other venture capitalist to syndicate the venture capital investments.

c. To have in-depth knowledge of the industry and technology invested in.

d. To require a higher expected return for the investment.

e. To require the entrepreneur to make a substantial personal investment in the business.

Which of the following statements is(are) true about ordinary shares? (There may be more than one correct answer. You will lose marks by choosing a wrong answer. The minimum mark for the question is zero.)

Select one or more:

a. Ordinary shareholders have priority over creditors in the case of a company liquidation.

b. Ordinary shareholders are not guaranteed dividend payments from the company.

c. Ordinary shareholders enjoy limited liability in the case of a company liquidation.

d. Ordinary shareholders have unlimited liability in the case of a company liquidation.

e. Ordinary shareholders do not have voting rights on important matters affecting the company.

Answer 1

Correct answer are -

c. The discounted payback period method considers time value of money.

and

e. The discounted payback period method avoids projects with negative net present value (NPV) to be chosen.

Payback period is the time period required to cover the initial investment back. Discounted payback period takes in to account the time value of money of future cash inflows. All the future cash inflows are discounted to find out the present value first, after that the present value of inflows is used to find the discounted payback period.

As the present value of inflows is used to find the discounted payback period, this method avoids projects with negative NPV as their payback period will be not be there as the outflow will be more than the inflow and initial investment will not be covered.

--> It is difficult to calculate the discounted payback period of a project as present value of cash inflows needs  to be calculated first.

--> The discounted payback period method does not consider all cash flows of a project. It considers cashflows up to the payback period only.

--> Payback period method and discounted payback period method both are biased with the duration of the project.

Hope it helps!