Question

The market price of a share of common stock is determined by

Select one:

a. the stock exchange on which the stock is listed

b. the president of the company

c. individuals buying and selling the stock

d. the board of directors of the firm

When ____ is greater than the cost of capital the project should be accepted

Select one:

a. profitability index

b. payback period

c. internal rate of return

d. net present value

____ is defined as the length of time required to recover the initial cash outlay.

Select one:

a. profitability index

b. inventory conversion period

c. budget period

d. payback period

____ varies inversely with profitability.

Select one:

a. capital budgeting

b. risk

c. financing

d. liquidity

Internal rate of return is the______

Select one:

a. rate at which discounted cash inflow is equal to the discounted cash outflow

b. rate at which discounted cash inflow is more than discounted cash outflow

c. rate at which discounted cash inflow is less than discounted cash outflow

d. rate at which NPV is positive

When using IRR, NPV, or PI in capital budgeting:

Select one:

a. the time value of money is taken into account

b. accounting measures of profit are considered

c. the method is simple and decisions are intuitive

d. mutually exclusive projects are always ranked the same

Which of the following is not a commonly used term for the interest rate employed in present value calculations?

Select one:

a. investment rate

b. discount rate

c. required return

d. hurdle rate

When valuing assets, adjustments for risk are made by adjusting:

Select one:

a. the asset's expected cash flows

b. the asset's terminal value

c. the number of time periods

d. the asset's required return

Answer 1

1. Option c is correct.

The shares movement is based on the buy and sell quantities that investors place with the brokerages. Hence, the price depends purely on the buy and sell of the individuals.

2. Option c is correct.

IRR is the rate at which your NPV=0. So, it is the miniumum rate you need to accept the project. If IRR is greater than the cost of capital, project can be accepted.

3. option d is correct

Payback period tells you the time it takes to recover the initial cost outlay. The lower, the better to accept the project

4.Option b is correct.

Its the risk that always go against the profitability. If profitability is high for any company, the risk is lower to invest in.

5. Option a is correct

As I already mention IRR is where your NPV=0

NPV=Present value of the discounted cashflows-present value of outflow

Hence, Present value of the discounted cashflows= Present value of outflow

6.Option a is correct

While considering these capital budgeting techniques, time value of will be taken into the account. We also Know that we discount the future cashinflows (time value of money) to today costs to make the decisions based on NPV,IRR, PI.

7. Option a is correct.

Investment rate is generally not a used terminalogy while interest employed to calculate the present values. Other three are commonly used rate of reurns.

8.Option d is correct

While adjusting the risk for valuing the assets, its assets required return. With this return we discount the future cashinflows. this interest rate is generally the cost associated with the equity and bond holders.