Question

 1. Generally, the _______ the uncertainty about an asset's future benefits, the _______  the discount rate investors will apply when discounting those benefits to the present.

 a. greater; lower

 b. smaller; higher

 c. greater; more uncertain will be

 d. greater; higher

 2. When valuing asset adjustments for risk are made by adjusting:

 a. the asset's required return

 b. the asset's expected cash flows

 c. the number of time periods

 d. the asset's terminal value

 3. The internal rate of return (IRR) on a project:

 a. is the compound annual return on the project, given its up-front costs and subsequent cash

 flows

 b. is the discount rate that causes the NPV of the project to equal initial outlay

 c. is analogous to a bond's yield to maturity (YTM)

 d. all of the above

 4. The primary goal of a publicly-owned corporation should be to:

 a. maximize total corporate revenue

 b. maximize shareholder wealth

 c. minimize the chance of losses

 d. maximize earnings per share

 5. On December 31, 2005, XYZ had a stock price of $50. Calculate the return for XYZ Corp. over th

 previous year if the stock paid a dividend of $3 today (December 31, 2006), and the current stock

 $58.

 a. 22.00%

 b. 18.04%

 c. 21.78%

 d. 19.58%

 6.  _______ activities allow corporations to raise capital by selling stock to investors.

 a. NYSE

 b. Secondary market

 c. Primary market

 d. Money market

Answer 1

1.

Correct answer is "d. greater; higher"

A higher discount rate implies greater uncertainty, the lower the present value of our future cash flow.

2.

Correct answer is "b. the asset's expected cash flows"

The most common way of adjusting for risk to compute a value that is risk adjusted. The most common approach is discounted cash flow valuation, where we value an asset by discounting the expected cash flows on it at a discount rate. The risk adjustment here can take the form of a higher discount rate or as a reduction in expected cash flows for risky assets, with the adjustment based upon some measure of asset risk.

3.

Correct answer is "d. all of the above"

Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. Internal rate of return is used to evaluate the attractiveness of a project or investment.

4.

Correct answer is "b. maximize shareholder wealth"

The main goal of virtually every publicly-owned company has always been to maximize shareholder value by generating as much profit as possible.

5.

Stock return = ((Ending stock price - Initial stock price) + Dividend)/ (Initial stock price)

= ((58-50)+3)/ (50)

= 0.22 or 22%

Correct answer is "a. 22.00%"

6.

Correct answer is "c.Primary market"

The primary market is the financial market where new securities are issued and become available for trading by individuals and institutions.

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