Q&A Hero

Q: Generally, a firm is able to find positive NPV opportunities with: I) Financing decisions II) Capital investment decisions III) Short-term borrowing decisions A. I only B. I and III only C. III only D. II only

Q: Financing decisions differ from investment decisions because: I) it is easy to reverse a financing decision II) the market for financial assets is very competitive III) generally, financing decisions have zero NPV A. I only B. I and II only C. I, II, and III D. II and III only

Q: Financing decisions differ from investment decisions for which of the following reasons? I) You cannot use NPV to evaluate financing decisions II) The market for financial assets is more active III) It is easier to find financing decisions with positive NPV than to find investment decisions with positive NPV A. I only B. II only C. III only D. I and III only

Q: If the capital markets are efficient, then the sale or purchase of any security at the prevailing market price is: A. Always a positive NPV transaction B. Generally a zero NPV transaction C. Is always a negative NPV transaction D. None of the above

Q: __________________________ is the difference between interest-sensitive assets and interest-sensitive liabilities.

Q: A large firm is receiving a loan guarantee from the government. Because of the guarantee, the firm is able to borrow $50 million for five years at 8% interest rate per year instead of 10% per year. Calculate the value of the guarantee to the firm. (Ignore taxes.) A. +$53.79 million B. +$3.79 million C. -$3.79 million D. None of the above

Q: __________________________ are those assets which mature or must be repriced within the planning period.

Q: A small business is receiving a five-year $1,000,000 loan at a subsidized rate of 3% per year. The firm will pay 3% annual interest payment each year and the principal at the end of five years. If market interest rate on similar loans is 6% per year, what is the NPV of the loan? (Ignore taxes.) A. +$127,371 B. +$348,369 C. -$501,595 D. None of the above

Q: The __________________ risk premium on a bond reflects the differences in the ease and ability to sell the bond in the secondary market at a favorable price.

Q: Petroleum Inc. owns a lease to extract crude oil from sea. It is considering the construction of a deep-sea oil rig at a cost of $50 million (I0) and is expected to remain constant. The price of oil is $50/bbl and the extraction costs are $20/bbl. The quantity of oil Q = 200,000 bbl per year forever. The risk-free rate is 10% per year, which is also the cost of capital (Ignore taxes). Suppose the oil price is uncertain and can be $70/bbl or $40/bbl next year and then expected NPV of the project if postponed by one year is: A. +10,000,000 B. +25,000,000 C. +5,000,000 D. none of the above

Q: The __________________ shows the relationship between the time to maturity and the yield to maturity of a bond. It is usually constructed using treasury securities since they are assumed to have no default risk.

Q: Petroleum Inc. owns a lease to extract crude oil from sea. It is considering the construction of a deep-sea oil rig at a cost of $50 million (I0) and is expected to remain constant. The price of oil is $50/bbl and the extraction costs are $20/bbl. The quantity of oil Q = 200,000 bbl per year forever. The risk-free rate is 10% per year, which is also the cost of capital (Ignore taxes). Calculate the NPV to invest today. A. +10,000,000 B. +6,000,000 C. +4,000,000 D. none of the above

Q: The __________________ risk premium on a bond allows the investor to be compensated for their projected loss in purchasing power from the increase in the prices of goods and services in the future.

Q: Monte Carlo simulation is likely to be most useful: A. For very complex problems B. For problems of moderate complexity C. For very simple problems D. Regardless of the problem's complexity

Q: Generally, the simulation models for projects are developed using a: A. Pair of dice B. Roulette wheel C. Computer D. Pack of cards

Q: Recent decades have ushered in dramatic changes in banking. The goal of __________________ was simply to gain control of the bank's sources of funds.

Q: Which of the following simulation outputs is likely to be most useful and easy to interpret? The output shows the distribution(s) of the project: A. Earnings B. Internal rate of return C. Cash flows D. Profits

Q: The ___________________ view of assets and liabilities held that the amount and types of deposits was primarily determined by customers and hence the key decision a bank needed to make was with the assets.

Q: After the completion of project analysis, the final decision on the project would be from: A. Sensitivity analysis B. Break-even analysis C. Decision trees D. NPV

Q: The interest rate on one year Treasury Bonds is 5%. The interest rate on five year Treasury Bonds is 7.5%. The interest rate on ten year Treasury Bonds is 10%. What is true about the yield curve? A) It is upward sloping B) It is downward sloping C) It is a horizontal line D) Cannot be determined from the information given

Q: Monte Carlo simulation involves the following steps: I) Step 1: Modeling the project II) Step 2: Specifying probabilities III) Step 3: Simulate the cash flows IV) Step 4: Calculate present value A. I and II only B. I, II, and III only C. II, III, and IV only D. I, II, III, and IV

Q: The Raymond Burr National Bank has $1000 in assets with an average duration of 5 years. This bank has $800 in liabilities with an average duration of 6.25 years. Market interest rates start at 6% and fall by 1%. What is the change in net worth of this bank? A) $11.29 B) $-11.29 C) $0 D) -$22.22 E) $22.22

Q: Simulation models are useful: I) To understand the project better II) To forecast expected cash flows III) To assess the project risk A. I only B. II only C. III only D. I, II and III

Q: The Raymond Burr National Bank has $1000 in assets with an average duration of 5 years. This bank has $800 in liabilities with an average duration of 6.25 years. What is the duration gap of this bank? A) -1.25 years B) 0 years C) 1.25 years D) -2.25 years E) None of the above

Q: Project analysis, in addition to NPV analysis, includes the following procedures: I) Sensitivity analysis II) Break-even analysis III) Monte Carlo simulation IV) Scenario Analysis A. I only B. I and II only C. I, II, and III only D. I, II, III, and IV

Q: Maryellen Epplin notices that a particular T-Bill has a bankers discount rate of 9% in the Wall Street Journal. She knows that this T-Bill has 20 days to maturity and has a face value of $10,000. What is the yield to maturity on this T-Bill? A) 9% B) .5% C) 4.5% D) 9.17% E) None of the above

Q: Everything else remaining the same, an increase in fixed costs: I) increases the break-even point based on NPV II) increases the accounting break-even point III) decreases the break-even point based on NPV IV) decreases the accounting break-even point A. I and III only B. III and IV only C. II and III only D. I and II only

Q: Maryellen Epplin notices that a particular T-Bill has a bankers discount rate of 9% in the Wall Street Journal. She knows that this T-Bill has 20 days to maturity and has a face value of $10,000. What price is this T-Bill selling for in the market? A) $9100 B) $10,000 C) $9950 D) $1900 E) None of the above

Q: Hammer Company proposes to invest $6 million in a new type of hammer-making equipment. The fixed costs are $1.0 million per year. The equipment is expected to last for five years. The manufacturing cost per hammer is $1 and the selling price per hammer is $6. Calculate the break-even (i.e. NPV = 0) volume per year. (Ignore taxes.) A. 500,000 units B. 600,000 units C. 100,000 units D. None of the above

Q: The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its liabilities. If interest rates on both assets and liabilities fall by 2% in the next 90 days, what should happen to this banks net interest margin? A) It should rise B) It should fall C) It should stay the same D) Cannot be determined from the information given?

Q: The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its liabilities. If interest rates on both assets and liabilities fall by 2% in the next 90 days, what would be this banks net interest margin? A) 3.8% B) 5.4% C) 5.8% D) 6.3% E) 7.8%

Q: Hammer Company proposes to invest $6 million in a new type of hammer-making equipment. The fixed costs are $0.5 million per year. The equipment is expected to last for five years. The manufacturing cost per hammer is $1and the selling price per hammer is $6. Calculate the break-even (i.e. NPV = 0) volume per year. (Ignore taxes.) A. 500,000 units B. 600,000 units C. 100,000 units D. None of the above

Q: The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its liabilities. If interest rates on both assets and liabilities rise by 2% in the next 90 days, what should happen to this banks net interest margin? A) It should rise B) It should fall C) It should stay the same D) Cannot be determined from the information given

Q: Taj Mahal Tour Company proposes to invest $3 million in a new tour package project. Fixed costs are $1 million per year. The tour package costs $500 and can be sold at $1500 per package to tourists. This tour package is expected to be attractive for the next five years. If the cost of capital is 20%, what is the NPV break-even number of tourists per year? (Ignore taxes, give an approximate answer) A. 1000 B. 2000 C. 15000 D. None of the above

Q: The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its liabilities. If interest rates on both assets and liabilities rise by 2% in the next 90 days, what would be this banks net interest margin? A) 4.2% B) 5.3% C) 5.8% D) 6.2% E) 7.8%

Q: Calculator Company proposes to invest $5 million in a new calculator making plant. Fixed costs are $2 million a year. A calculator costs $5/unit to manufacture and can be sold for $20/unit. If the plant lasts for 3 years and the cost of capital is 12%, what is the approximate break-even level (accounting) of annual sales? (Assume no taxes.)(approximately) A. $133,334 units B. $272,117 units C. $244,444 units D. None of the above

Q: Financial Calculator Company proposes to invest $12 million in a new calculator making plant. Fixed costs are $3 million a year. A financial calculator costs $10 per unit to manufacture and can be sold for $30 per unit. If the plant lasts for 4 years and the cost of capital is 20%, what is the accounting break-even level? (Approximately)(Assume no taxes.) A. 300,000 units B. 150,000 units C. 381,777 units D. None of the above

Q: The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its liabilities. What is the dollar interest sensitive gap of this bank? A) $400 B) -$1100 C) -$500 D) $1000 E) None of the above

Q: The NPV break-even point occurs when: A. the present value of inflows line cuts the present value of outflows line B. the total revenue line cuts the fixed cost line C. the total revenue line cuts the total cost line D. none of the above

Q: The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its liabilities. If interest rates do not change in the next 90 days, what is this banks net interest margin? A) .5% B) .8% C) 1.8% D) 5.8% E) None of the above

Q: The Arnold National Bank has a bond portfolio that consists of bonds with 5 years to maturity and a 9% coupon rate. These bonds are selling in the market for $1126. Coupon payments are made annually on this bond. What is duration of these bonds? A) 3.77 years B) 4.29 years C) 5 years D) 9 years E) None of the above

Q: The accounting break-even point occurs when: A. the total revenue line cuts the fixed cost line B. the present value of inflows line cuts the present value of outflows line C. the total revenue line cuts the total cost line D. none of the above

Q: Firms often calculate a project's break-even sales using book earnings. Generally, break-even sales based on NPV is: A. Higher than the one calculated using book earnings B. Lower than the one calculated using book earnings C. Equal to the one calculated using book earnings D. None of the above

Q: The Arnold National Bank has a bond portfolio that consists of bonds with 5 years to maturity and a 9% coupon rate. These bonds are selling in the market for $1126. Coupon payments are made annually on this bond. What is the yield to maturity on these bonds? A) 3% B) 6% C) 9% D) 12% E) None of the above

Q: Calculator Company proposes to invest $5 million in a new calculator making plant. Fixed costs are $2 million a year. A calculator costs $5/unit to manufacture and can be sold for $20/unit. If the plant lasts for 3 years and the cost of capital is12%, what is the approximate break-even level (i.e. NPV = 0) of annual sales? (Assume no taxes.)(approximately) A. $133,333 units B. $272,117 units C. $227,533 units D. None of the above

Q: The Tidewater State Bank has $1000 in total assets (all of which are earning assets), $700 of which will be repriced with in the next 90 days. This bank also has $800 in total liabilities, $400 of which will be repriced within the next 90 days. Currently, the bank is earning 8% on its assets and is paying 5% on its liabilities. If interest rates on both assets and liabilities decrease by 2%, what should happen to this banks net interest margin? A) It should rise B) It should fall C) It should stay the same D) Cannot be determined from the above information

Q: Financial Calculator Company proposes to invest $12 million in a new calculator making plant. Fixed costs are $3 million a year. A financial calculator costs $10 per unit to manufacture and can be sold for $30 per unit. If the plant lasts for 4 years and the cost of capital is 20%, what is the break-even level (i.e. NPV = 0) of annual rates? (Approximately)(Assume no taxes.) A. 150,000 units B. 342,290 units C. 381,777 units D. None of the above

Q: The Tidewater State Bank has $1000 in total assets (all of which are earning assets), $700 of which will be repriced with in the next 90 days. This bank also has $800 in total liabilities, $400 of which will be repriced within the next 90 days. Currently, the bank is earning 8% on its assets and is paying 5% on its liabilities. If interest rates on both assets and liabilities decrease by 2% in the next 90 days, what would this banks net interest margin be? A) 3.4% B) 4% C) .4% D) 5.6% E) 2%

Q: Which of the following statements most appropriately describes "Scenario Analysis". A. it looks at the project by changing one variable at a time B. it provides the break-even level of sales for the project C. it looks at different but consistent combination of variables D. each of the above statements describes "Scenario Analysis" correctly

Q: The Tidewater State Bank has $1000 in total assets (all of which are earning assets), $700 of which will be repriced with in the next 90 days. This bank also has $800 in total liabilities, $400 of which will be repriced within the next 90 days. Currently, the bank is earning 8% on its assets and is paying 5% on its liabilities. If interest rates on both assets and liabilities rise by 2% in the next 90 days, what should happen to this banks net interest margin? A) It should rise B) It should fall C) It should stay the same D) Cannot be determined from the above information

Q: The following are drawbacks of sensitivity analysis except: A. it provides ambiguous results. B. underlying variables are likely to be interrelated. C. it provides additional information about the project that is useful. D. all of the above statements are drawbacks of sensitivity analysis.

Q: The Tidewater State Bank has $1000 in total assets (all of which are earning assets), $700 of which will be repriced with in the next 90 days. This bank also has $800 in total liabilities, $400 of which will be repriced within the next 90 days. Currently, the bank is earning 8% on its assets and is paying 5% on its liabilities. If interest rates on both assets and liabilities rise by 2% in the next 90 days, what would this banks net interest margin be? A) 4% B) 4.4% C) 4.6% D) 2.4% E) 6%

Q: The Tidewater State Bank has $1000 in total assets (all of which are earning assets), $700 of which will be repriced with in the next 90 days. This bank also has $800 in total liabilities, $400 of which will be repriced within the next 90 days. Currently, the bank is earning 8% on its assets and is paying 5% on its liabilities. What is the dollar interest-sensitive gap of this bank? A) -$200 B) -$100 C) $200 D) $300 E) $600

Q: A project requires an initial investment in equipment of $90,000 and then requires an investment in working capital of $10,000 at the beginning (t = 0). The project is expected to produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be 60% of the revenues. The assets are depreciated using straight-line depreciation. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and the cost of capital is 15%. What would the NPV if the discount rate were higher by 10%? A. $5648 B. $3840 C. -$2735 D. None of the above

Q: The Tidewater State Bank has $1000 in total assets (all of which are earning assets), $700 of which will be repriced with in the next 90 days. This bank also has $800 in total liabilities, $400 of which will be repriced within the next 90 days. Currently, the bank is earning 8% on its assets and is paying 5% on its liabilities. If interest rates do not change in the next ninety days, what is this banks net interest margin? A) 8% B) 5% C) 4% D) 1.4% E) Cannot tell from the information given

Q: A project requires an initial investment in equipment of $90,000 and then requires an investment in working capital of $10,000 at the beginning (t = 0). The project is expected to produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be 60% of the revenues. The assets are depreciated using straight-line depreciation. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and the cost of capital is 15%. What would the NPV of the project be if the revenues were higher by 10% and the costs were 65% of the revenues? A. $8443 B. $964 C. $5566 D. None of the above

Q: Which of the following would be an example of a nonrepriceable liability? A) Money the bank has borrowed from the money market B) Cash in the vault C) Demand deposits that do not pay an interest rate D) Short term securities issued by the government about to mature owned by the bank E) All of the above are examples of repriceable assets

Q: A project requires an initial investment in equipment of $90,000 and then requires an investment in working capital of $10,000 at the beginning (t = 0). The project is expected to produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be 60% of the revenues. The assets are depreciated using straight-line depreciation. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and the cost of capital is 12%. Calculate the NPV of the project: A. 14,418 B. 8443 C. -2735 D. None of the above

Q: Which of the following would be an example of a nonrepriceable asset? A) Money the bank has borrowed from the money market B) Cash in the vault C) Demand deposits that do not pay an interest rate D) Short term securities issued by the government about to mature owned by the bank E) All of the above are examples of repriceable assets

Q: A project requires an initial investment in equipment of $90,000 and then requires an investment in working capital of $10,000 at the beginning (t = 0). The project is expected to produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be 60% of the revenues. The assets are depreciated using straight-line depreciation. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and the cost of capital is 15%. Calculate the NPV of the project: A. 3840 B. 8443 C. -2735 D. None of the above

Q: Which of the following would be an example of a repriceable liability? A) Money the bank has borrowed from the money market B) Cash in the vault C) Demand deposits that do not pay an interest rate D) Short term securities issued by the government about to mature owned by the bank E) All of the above are examples of repriceable assets

Q: A project requires an initial investment in equipment of $90,000 and then requires an investment in working capital of $10,000 at the beginning (t = 0). The project is expected to produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be 60% of the revenues. The assets are depreciated using straight-line depreciation. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and the cost of capital is 15%. Cash flows from the project are: A. CF0: -90,000; CF1: 12,600; CF2: 12,600; CF3: 29,600 B. CF0: -100,000; CF1: 42,600; CF2: 42,600; CF3: 59,600 C. CF0: -100,000; CF1: 42,600; CF2: 42,600; CF3: 42,600 D. none of the above

Q: Which of the following would be an example of a repriceable asset? A) Money the bank has borrowed from the money market B) Cash in the vault C) Demand deposits that do not pay interest D) Short term securities issued by the government about to mature owned by the bank E) All of the above are examples of repriceable assets

Q: A project has an initial investment of $150. You have come up with the following estimates of revenues and costs. Calculate the NPV assuming that cash flow and perpetuities. (No taxes.) (Cost of capital = 10%) A. 50, -100, +400 B. -50, +300, +500 C. -100, +150, +350 D. None of the above

Q: A bank is liability sensitive if its: A) Deposits and nondeposit borrowings are affected by changes in interest rates B) Interest-sensitive assets exceed interest-sensitive liabilities C) Interest-sensitive liabilities exceed its interest-sensitive assets D) Loans and securities are affected by changes in interest rates E) None of the above

Q: You have come up with the following estimates of project cash flows: The cash flows are perpetuities and the cost of capital is 8%. What does a sensitivity analysis of NPV (without taxes) show? A. 25, +232.50, +440 B. -100, +500, +800 C. -90, -55, -20 D. None of the above

Q: The Jackson State Bank is worried because many of the loans it has made are home mortgages which can be paid off early by the homeowner. What type of risk would this be an example of? A) Default risk B) Inflation risk C) Liquidity risk D) Call risk E) Basis risk

Q: A project has the following cash flows: C0 = -100,000; C1 = 50,000; C2 = 150,000; C3 = 100,000. If the discount rate changes from 12% to 15%, what is the change in the NPV of the project (approximately)? A. 12,750 increase B. 12,750 decrease C. 122,650 increase D. 135,400 decrease

Q: The Carter National Bank is worried because it knows that the municipal bonds it has in its bond portfolio can be difficult to sell quickly. What type of risk would this be an example of? A) Default risk B) Inflation risk C) Liquidity risk D) Call risk E) Basis risk

Q: You are given the following data for year-1: Revenues = 100, Fixed costs = 30; Total variable costs = 50; Depreciation = $10; Tax rate = 30%. Calculate the after tax cash flow for the project for year-1. A. $17 B. $7 C. $10 D. None of the above

Q: Havoc State Bank has a loan that it fears will not be repaid because the company is going into bankruptcy. What type of risk would this be an example of? A) Default risk B) Inflation risk C) Liquidity risk D) Call risk E) Basis risk

Q: Carolina National Bank knows that the interest rate on its loans change faster and by a larger amount than the interest rate on its deposits. What type of risk is this an example of? A) Default risk B) Inflation risk C) Liquidity risk D) Call risk E) Basis risk

Q: A project has an initial investment of 100. You have come up with the following estimates of the projects with cash flows. If the cash flows are perpetuities and the cost of capital is 10%. What does a sensitivity analysis of NPV (no taxes) show? A. -50, 20, +100 B. -100, -50, +80 C. -50, +50, +70 D. None of the above

Q: You are given the following data for year-1. Revenue = $43; Total costs = $30; Depreciation = $3; Tax rate = 30%. Calculate the operating cash flow for the project for year-1. A. $7 B. $10 C. $13 D. None of the above

Q: U.S. banks tend to fare best when the yield curve is: A) Flat B) Downward-sloping C) Vertical D) Upward-sloping E) Kinked

Q: Generally, postaudits for projects are conducted: I) to identify problems that need fixing II) to check the accuracy of forecasts III) to come up with questions that should have been asked before the project was undertaken A. I only B. II only C. I and II only D. I, II, and III

Q: The fact that the rate of change in an asset's price varies with the level of interest rates is known as: A) Duration B) Convexity C) Maturity D) Yield E) None of the above

Q: Which of the following is a true statement? A) The longer the time to maturity of a security the smaller the duration B) The lower the coupon rate of a security the smaller the duration C) For a given duration and change in interest rates, the change in the price of the security will be larger for a lower starting level of interest rates D) The duration of a security remains constant no matter the level of market interest rates E) All of the above are true statements

Q: Generally, postaudits are conducted for large projects: A. shortly after the completion of the project B. after several years after the completion of the project C. shortly after the project has begun to operate D. well before the start of the project

Q: A firm's capital investment proposals should reflect: I) Capital budgeting process II) Strategic planning process III) Middle managers' ideas and views A. I only B. I and II only C. I, II, and III D. III only