1. Many experts recommend a replacement rate of approximately _______ of preretirement income. a. 50% b....

1. Many experts recommend a replacement rate of approximately _______ of preretirement income.

a. 50%

b. 2/3

c. 75%

d. 80%

2. True/False. The cost of capital of a particular project of a firm should always be the same as the risk of the firm’s existing assets.

3. Sensitivity analysis tests whether a project:

a. Will still be worthwhile if some of the variables are changed

b. Will be economically feasible to begin with

c. Will have a rate of return above a certain level

d. None of the above

4. The most fundamental valuation principal in finance is:

a. Arbitrage

b. The Law of One Price

c. Risk Management

d. None of the above

5. If something appeared to violate the Law of One Price, what could possibly explain this?

a. Something is interfering with the normal operation of the competitive market

b. There is some unknown but economically relevant difference between the assets

c. Both a & b

d. Neither a nor b; The Law of One Price does not always apply.

Solutions

Expert Solution

.Answer 1.

C. 75 %
Explanation

Many experts recommend that when making a savings plan, you should aim for a replacement rate equal to 75% of your income.

Answer 2.
False
Explanation

The cost of capital of particular project of a firm should depends on the mode of financing used in that particular project of a firm. It not always same as risk of firm existing assets.

It refers to the cost of equity if the business is financed solely through equity, or to the cost of debt if it is financed solely through debt.

Answer 3

A Sensitivity analysis tests whether a project Will still be worthwhile if some of the variables are changed

Explanation
Sensitivity analysis is a technique for investigating the impact of changes in base case variables of project and is also known as a what-if analysis.

Answer 4

b. The Law of One Price

Explanation:
It is the most fundamental valuation principal in finance because it says that in identical markets, goods must have the same price and thus helps in valuation of assets.

Answer 5

C. Both a & b
Explanation:

In competitive market, If the observed prices violate the law, we should suspect that something is interfering in the operations of the competitive market. Another possible reason is that there may be some differences, even if subtle and understated, between the assets.

jeff jeffy answered 1 year ago

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