Question

17. The ‘efficient market’ theory seems to be the reasonable because :

a. there are fewer financial analysts valuing securities

b. there are hundreds of investors trying to make money from improperly valued securities and the market forces which results in driving stock prices to a fair value

c. A and B

d. None of the above

18. Residue cash flows are estimated when:

a. the useful lives of alternatives are different

b. one asset has a shorter economics life than its alternatives

c. one asset has a longer economics life than its alternatives.

d. A and B

e A,B and C

19. Which of the following elements is needed to calculate present value payback?

a. Initial investment

.b. Present value of the annual cash flows

c. Both A and B

d. Neither A or B

20. In year four Ashworth LLC had EBIT of 500. Taxes were 40% and depreciation was 20. What was cash flow in year four?

a. 300

b. 320

c. 340

d. 360

21. Elvis LLC is investing in a new piece of equipment that cost $300,000. The new equipment will would generate a cash flow of $200,000 for each of the next three years.

What is the cost ration:

1

2

3

4

22. Which of the following methods results in a net present value of zero ?

a. IRR

b. Payback

c. Discounted payback

d. None of the above

23. If a bound is issued at a premium the coupon rate is:

a. Equal to the marker rate of interest

b. Greater than the market rate of interest

c. less than the market rate of interest

Answer 1

Answer : effective market theory means : The (now largely discredited) theory that all market participants receive and act on all of the relevant information as soon as it becomes available. If this were strictly true, no investment strategy would be better than a coin toss. Proponents of the efficient market theory believe that there is perfect information in the stock market. This means that whatever information is available about a stock to one investor is available to all investors 17) option is from the above "C"-both A&B.   Residual cash flow is calculated by taking the net adjusted cash flows for the accounting period, reported on acash flow statement, and subtracting the cost of capital. Cost of capital is determined by multiplying the total investment or equity by its financing cost, such as an adjusted interest rate. 18) option is "E"- A,B andC. present value payback period = initial investment/present value of annual cash flow. 19) option is 'C"- both A&B. 20) NET CASH FLOW= EBIT-TAX+DEPRECIATION. ={500-40%}+20=320. Option "B"