You are considering an investment for which you require a 14 percent rate of return.
The investment costs $61,900 and will produce cash inflows of $26,000 for three years.
Should you accept this project based on its internal rate of return? Why or why not?
A. Yes, because the IRR is 12.51 percent
B. Yes, because the IRR is 13.65 percent
C. Yes, because the IRR is 13.67 percent
D. No, because the IRR is 12.51 percent
E. No, because the IRR is 13.65 percent
Beverlys is a retail chain selling the latest fashions through its outlets located in various
neighborhood malls. Clothing Galore is a wholesaler that buys from textile mills and
sells to retail outlets. Beverlys has a cost of capital of 13.6 percent, while Clothing
Galores cost of capital is 17.8 percent. Both firms are considering opening a retail outlet
in a gigantic new mall. Both proposals are quite similar in design and have basically the
following financial features: an initial cash outlay of $2.7 million, a projected five-year
life with no salvage value, and cash inflows of $845,000 a year for the life of the
project. Which firm or firms, if either, should open a retail outlet in the new mall?
A. Beverlys only
B. Clothing Galore only
C. Both Beverlys and Clothing Galore
D. Neither Beverlys nor Clothing Galore
E. The answer cannot be determined based on the information provided.
Which one of the following states that the difference in interest rates between two
countries is equal to the percentage difference between the forward exchange rate and
the spot exchange rate?
A. Arbitrage equilibrium
B. Relative purchasing power parity
C. Absolute purchasing power parity
D. Interest rate parity
E. Cross-rate parity
Consider the following information on a portfolio of three stocks:
The portfolio is invested 35 percent in each Stock A and Stock B and 30 percent in
Stock C. If the expected T-bill rate is 3.90 percent, what is the expected risk premium
on the portfolio?
A. 6.19 percent
B. 6.90 percent
C. 7.38 percent
D. 7.72 percent
E. 8.68 percent
Which one of the following is a payment by a firm to its shareholders from any source
other than current or accumulated retained earnings?
A. Interest
B. Distribution
C. Retained earnings
D. Dividend
E. Stock repurchase
Which one of the following is a special post office mailbox that is used to speed up the
collection of accounts receivable payments?
A. Separation box
B. Cash box
C. Concentration account
D. Lockbox
E. Float box
Karl can afford car payments of $235 a month for 48 months. The bank will lend him
money to buy a car at 7.75 percent interest. How much money can he afford to borrow?
A. $9,672.48
B. $9,734.95
C. $9,899.60
D. $10,022.15
E. $10,422.09
Arts and Crafts Warehouse wants to issue 15-year, zero coupon bonds that yield 7.5
percent. What price should it charge for these bonds if the face value is $1,000?
(Assume semiannual compounding.)
A. $308.15
B. $331.40
C. $356.08
D. $362.14
E. $369.94
The present value of a lump sum future amount:
A. increases as the interest rate decreases.
B. decreases as the time period decreases.
C. is inversely related to the future value.
D. is directly related to the interest rate.
E. is directly related to the time period.
Cindy is taking out a loan today. The cash amount that she will receive today is equal to
the present value of the lump sum payment that she will be required to pay two years
from today. Which type of loan is this?
A. Principal-only
B. Amortized
C. Interest-only
D. Compound
E. Pure discount