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Question
The opportunity cost of capital:
A. is the interest rate that the firm pays on a loan from a financial institution.
B. is the maximum acceptable rate of return on a project.
C. is the minimum acceptable rate of return on a project.
D. is always less than 10%.
Answer
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Related questions
Q:
ABC Corp.'s balance sheet shows its long-term debt to be $20 million. The debt was issued with a 10% interest rate, and the current interest rate is 7%. Based on this information alone, the market value of this debt is most likely:
A. less than $20 million.
B. more than $20 million.
C. equal to $20 million.
D. unknown without knowing the maturity of the debt.
Q:
Which of the following is correct for a fully depreciated asset?
A. Market value is zero.
B. Market value is greater than book value.
C. Book value is greater than market value.
D. The relationship between market and book values is indeterminable.
Q:
Suppose Dee's just acquired the assets of Flo's Flowers. The book value of Flo's Flowers assets was $68,000 but Dee's paid a total of $75,000. The additional $7,000 paid by Dee's will be recorded on Dee's balance sheet as:
A. accounts payable.
B. goodwill.
C. other current assets.
D. property, plant, and equipment.
Q:
What is an exchange traded fund? What are some popular choices of exchange traded funds?
Q:
How was the role of many bankers in the Financial Crisis of 2007-2009 an example of an agency problem?
Q:
What are the key differences between a financial intermediary and a financial institution?
Q:
How can an individual save and invest in a corporation?
Q:
During the Financial Crisis of 2007-2009, the U.S. government bailed out all of the following firms except:
A. AIG.
B. Fannie Mae.
C. Lehman Brothers.
D. Freddie Mac.
Q:
Excess cash held by a firm should be:
A. reinvested by the firm in projects offering the highest rate of return.
B. reinvested by the firm in projects offering rates of return higher than the cost of capital.
C. reinvested by the firm in the financial markets.
D. distributed to bondholders in the form of extra coupon payments.
Q:
A capital investment that generates a 10% rate of return is worthwhile if:
A. corporate bonds of similar risk offer 8% rates of return.
B. corporate bonds of similar risk offer 11% rates of return.
C. top-quality corporate bonds offer 10% rates of return.
D. the expected rate of return on the stock market is 12%.
Q:
Which mutually exclusive project would you select, if both are priced at $1,000 and your required return is 15%: Project A with three annual cash flows of $1,000; or Project B, with 3 years of zero cash flow followed by 3 years of $1,500 annually?
A. Project A
B. Project B
C. You are indifferent since the NPVs are equal.
D. Neither project should be selected.
Q:
What is the NPV for the following project cash flows at a discount rate of 15%? C0 = ($1,000), C1 = $700, C2 = $700.
A. ($308.70)
B. ($138.00)
C. $138.00
D. $308.70
Q:
When a project's internal rate of return equals its opportunity cost of capital, then the:
A. project should be rejected.
B. project has no cash inflows.
C. net present value will be positive.
D. net present value will be zero.
Q:
The internal rate of return is most reliable when evaluating:
A. a single project with alternating cash inflows and outflows over several years.
B. mutually exclusive projects of differing sizes.
C. a single project with only cash inflows following the initial cash outflow.
D. a single project with cash outflows at time 0 and the final year and inflows in all other time periods.
Q:
The modified internal rate of return can be used to correct for:
A. negative NPV calculations.
B. multiple internal rates of return.
C. undefined payback periods.
D. borrowing projects.
Q:
What is the NPV of a project that costs $100,000 and returns $50,000 annually for 3 years if the opportunity cost of capital is 14%?
A. $13,397.57
B. $14,473.44
C. $16,081.60
D. $33,748.58
Q:
A risky dollar is worth more than a safe one.
Q:
Both the NPV and the internal rate of return methods recognize that the timing of cash flows affects project value.
Q:
When using a profitability index to select projects, a value of .63 is preferred over a value of 0.21.
Q:
When calculating IRR with a trial and error process, discount rates should be raised when NPV is positive.
Q:
What would be the approximate expected price of a stock when dividends are expected to grow at a 25% rate for 3 years, then grow at a constant rate of 5%, if the stock's required return is 13% and next year's dividend will be $4.00?
A. $67.60
B. $62.08
C. $68.64
D. $73.44
Q:
What price would you pay today for a stock if you require a rate of return of 13%, the dividend growth rate is 3.6%, and the firm recently paid an annual dividend of $2.50?
A. $27.55
B. $30.28
C. $26.60
D. $31.37
Q:
What should you pay for a stock if next year's annual dividend is forecast to be $5.25, the constant-growth rate is 2.85%, and you require a 15.5% rate of return?
A. $31.25
B. $38.87
C. $41.50
D. $42.68
Q:
What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%?
A. $22.86
B. $28.00
C. $42.00
D. $43.75
Q:
If the dividend yield for year 1 is expected to be 5% based on a stock price of $25, what will the year 4 dividend be if dividends grow annually at a constant rate of 6%?
A. $1.33
B. $1.49
C. $1.58
D. $1.67
Q:
It is possible to ignore cash dividends that occur far into the future when using a dividend discount model because those dividends:
A. will most likely be paid to a different investor.
B. will most likely not be paid.
C. have an insignificant present value.
D. have a minimal, if any, potential rate of growth.
Q:
A firm's liquidation value is the amount:
A. necessary to repurchase all outstanding shares of common stock.
B. realized from selling all assets and paying off all creditors.
C. a purchaser would pay to acquire all of the firm's assets.
D. shown on the balance sheet as total owners' equity.
Q:
With respect to the notion that stock prices follow a random walk, several researchers have concluded that:
A. stock prices reflect a majority of available information about the firm.
B. successive price changes are predictable.
C. past stock price changes provide little useful information about current stock prices.
D. stock prices always rise excessively in January.
Q:
If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year and the dividend payout ratio is 40%, what is the stock's current price?
A. $24.30
B. $18.00
C. $22.22
D. $40.50
Q:
According to the semistrong form of market efficiency, when new information becomes available in the market, the related stock prices will:
A. remain unchanged because they already reflect this information.
B. accurately and rapidly adjust to include this new information.
C. adjust to accurately reflect this new information over the course of the next few days.
D. most likely increase because all new information has a positive effect on stock prices.