FIN 510.01 EXAM I (081)
Version #3
Student: ___________________________________________________________________________
Multiple Choice Questions
1. As the discount rate is increased, the NPV of a specific project will:
A. increase.
B. remain constant.
C. decrease to zero, then remain constant.
D. decrease.
2. If the line measuring a stock's historic returns against the market's historic returns has a slope greater than
1.0, then the:
A. stock has a beta exceeding 1.0.
B. stock is currently underpriced.
C. stock has a significant amount of unique risk.
D. market risk premium is increasing.
3. What is the approximate maximum amount that a firm should consider paying for a project that will return
$15,000 annually for 5 years if the opportunity cost is 10%?
A. $56,860
B. $62,540
C. $33,520
D. $75,000
4. When the overall market is up by 10%, an investor with a portfolio of defensive stocks will probably have:
A. positive portfolio returns less than 10%.
B. negative portfolio returns less than 10%.
C. positive portfolio returns greater than 10%.
D. negative portfolio returns greater than 10%.
5. What is the NPV of a project that costs $100,000 and returns $50,000 annually for three years if the
opportunity cost of capital is 14%?
A. $35,000.00
B. $4,473.44
C. $16,085.00
D. $3,397.57
6. The beta of an investment in U.S. Treasury bills is:
A. 0.0
B. meaningless; only common stocks have betas.
C. 1.0
D. 0.5
7. Which of the following is incorrect for a borrowing project?
A. It's acceptable if IRR exceeds cost of capital.
B. Its cash flow at time zero is typically an inflow.
C. Its NPV graph rises as discount rates increase.
D. Its NPV is positive.
8. Which of the following changes will increase the NPV of a project?
A. A decrease in the size of the cash inflows
B. A decrease in the number of cash inflows
C. An increase in the initial cost of the project
D. A decrease in the discount rate
9. A stock with a beta greater than 1.0 would be termed:
A. a defensive stock, expected to decrease more than the market increases.
B. an aggressive stock, expected to decrease more than the market increases.
C. an aggressive stock, expected to increase more than the market increases.
D. a defensive stock, expected to increase more than the market decreases.
10. If the IRR for a project is 15%, then the project's NPV would be:
A. negative at a discount rate of 20%.
B. positive at a discount rate of 20%.
C. negative at a discount rate of 10%.
D. positive at a discount rate of 15%.
11. Which of the following investment criteria takes the time value of money into consideration?
A. Payback period
B. Internal rate of return for borrowing projects
C. All of the above
D. Profitability index
12. The line plotted to fit observations of a stock's returns versus the market's returns determines the:
A. security market line.
B. beta of the stock.
C. market risk premium.
D. capital asset pricing model.
13. Which of the following statements is correct for a project with a positive NPV?
A. The profitability index equals one.
B. IRR exceeds the cost of capital.
C. The discount rate exceeds the cost of capital.
D. Accepting the project has an indeterminate effect on shareholders.
14. The opportunity cost of capital is equal to:
A. the discount rate that makes project NPV equal zero.
B. the average rate of return for a firm's projects.
C. a project's internal rate of return.
D. the return offered by other projects of equal risk.
15. In practice, the market portfolio is often represented by:
A. an investor's mutual fund portfolio.
B. the historic record of stock market returns.
C. a diversified stock market index.
D. a portfolio of U.S. Treasury securities.
16. The average beta of individual stocks in the market portfolio is:
A. one.
B. Cannot be calculated without knowing the stocks in the portfolio.
C. 1/2 (midway between one and zero).
D. zero.
17. The ratio of net present value to initial investment is known as the:
A. internal rate of return.
B. profitability index.
C. payback period.
D. net present value.
18. If the opportunity cost of capital for a project exceeds the project's IRR, then the project has a(n):
A. positive NPV.
B. negative NPV.
C. acceptable payback period.
D. positive profitability index.
19. Macro events only are reflected in the performance of the market portfolio because:
A. firm-specific events would be too numerous to list.
B. unique risks have been diversified away.
C. the market portfolio has no individual firms.
D. only macro events are tracked by economists.
20. A project can have as many different internal rates of return as it has:
A. changes in the sign of the cash flows.
B. cash inflows.
C. cash outflows.
D. periods of cash flow.
21. If the net present value of a project which costs $20,000 is $5,000 when the discount rate is 10%, then the:
A. project's cash inflows total $25,000.
B. project's rate of return is greater than 10%.
C. project's IRR equals 10%.
D. net present value of the cash inflows is $4,500.
22. What is the beta of a three-stock portfolio including 25% of Stock A with a beta of .90, 40% Stock B with a
beta of 1.05, and 35% Stock C with a beta of 1.73?
A. 1.17
B. 1.05
C. 1.22
D. 1.25
23. A stock's beta measures the:
A. variability in the stock's returns compared to that of the market portfolio.
B. difference between the return on the stock and return on the market portfolio.
C. average return on the stock.
D. market risk premium on the stock.
24. When a project's internal rate of return equals its opportunity cost of capital, then:
A. the net present value will be positive.
B. the project has no cash inflows.
C. the project should be rejected.
D. the net present value will be zero.
25. The decision rule for net present value is to:
A. accept all projects with positive net present values.
B. reject all projects with rates of return exceeding the opportunity cost of capital.
C. accept all projects with cash inflows exceeding initial cost.
D. reject all projects lasting longer than 10 years.
FIN 510.01 EXAM I (081) Key
Version #3
Multiple Choice Questions
1. (p. 185) As the discount rate is increased, the NPV of a specific project will:
a. increase.
b. remain constant.
c. decrease to zero, then remain constant.
D. decrease.
Brealey - 007 Net... #34
Difficulty: Easy
2. (p. 317) If the line measuring a stock's historic returns against the market's historic returns has a slope greater
than 1.0, then the:
A. stock has a beta exceeding 1.0.
b. stock is currently underpriced.
c. stock has a significant amount of unique risk.
d. market risk premium is increasing.
Brealey - 011 Risk... #44
Difficulty: Easy
3. (p. 185) What is the approximate maximum amount that a firm should consider paying for a project that will
return $15,000 annually for 5 years if the opportunity cost is 10%?
A. $56,860
b. $62,540
c. $33,520
d. $75,000
Brealey - 007 Net... #32
Difficulty: Medium
4. (p. 316) When the overall market is up by 10%, an investor with a portfolio of defensive stocks will probably
have:
A. positive portfolio returns less than 10%.
b. negative portfolio returns less than 10%.
c. positive portfolio returns greater than 10%.
d. negative portfolio returns greater than 10%.
Brealey - 011 Risk... #37
Difficulty: Easy
5. (p. 185) What is the NPV of a project that costs $100,000 and returns $50,000 annually for three years if the
opportunity cost of capital is 14%?
a. $35,000.00
b. $4,473.44
C. $16,085.00
d. $3,397.57
Brealey - 007 Net... #26
Difficulty: Medium
6. (p. 317) The beta of an investment in U.S. Treasury bills is:
A. 0.0
b. meaningless; only common stocks have betas.
c. 1.0
d. 0.5
Brealey - 011 Risk... #57
Difficulty: Easy
7. (p. 192) Which of the following is incorrect for a borrowing project?
a. It's acceptable if IRR exceeds cost of capital.
b. Its cash flow at time zero is typically an inflow.
c. Its NPV graph rises as discount rates increase.
D. Its NPV is positive.
Brealey - 007 Net... #58
Difficulty: Hard
8. (p. 185) Which of the following changes will increase the NPV of a project?
a. A decrease in the size of the cash inflows
b. A decrease in the number of cash inflows
c. An increase in the initial cost of the project
D. A decrease in the discount rate
Brealey - 007 Net... #29
Difficulty: Easy
9. (p. 316) A stock with a beta greater than 1.0 would be termed:
a. a defensive stock, expected to decrease more than the market increases.
b. an aggressive stock, expected to decrease more than the market increases.
C. an aggressive stock, expected to increase more than the market increases.
d. a defensive stock, expected to increase more than the market decreases.
Brealey - 011 Risk... #39
Difficulty: Easy
10. (p. 190) If the IRR for a project is 15%, then the project's NPV would be:
A. negative at a discount rate of 20%.
b. positive at a discount rate of 20%.
c. negative at a discount rate of 10%.
d. positive at a discount rate of 15%.
Brealey - 007 Net... #45
Difficulty: Medium
11. (p. 202) Which of the following investment criteria takes the time value of money into consideration?
a. Payback period
b. Internal rate of return for borrowing projects
C. All of the above
d. Profitability index
Brealey - 007 Net... #68
Difficulty: Easy
12. (p. 317) The line plotted to fit observations of a stock's returns versus the market's returns determines the:
a. security market line.
B. beta of the stock.
c. market risk premium.
d. capital asset pricing model.
Brealey - 011 Risk... #41
Difficulty: Medium
13. (p. 190) Which of the following statements is correct for a project with a positive NPV?
a. The profitability index equals one.
B. IRR exceeds the cost of capital.
c. The discount rate exceeds the cost of capital.
d. Accepting the project has an indeterminate effect on shareholders.
Brealey - 007 Net... #24
Difficulty: Medium
14. (p. 185) The opportunity cost of capital is equal to:
a. the discount rate that makes project NPV equal zero.
b. the average rate of return for a firm's projects.
c. a project's internal rate of return.
D. the return offered by other projects of equal risk.
Brealey - 007 Net... #76
Difficulty: Easy
15. (p. 315) In practice, the market portfolio is often represented by:
a. an investor's mutual fund portfolio.
b. the historic record of stock market returns.
C. a diversified stock market index.
d. a portfolio of U.S. Treasury securities.
Brealey - 011 Risk... #34
Difficulty: Easy
16. (p. 312) The average beta of individual stocks in the market portfolio is:
A. one.
b. Cannot be calculated without knowing the stocks in the portfolio.
c. 1/2 (midway between one and zero).
d. zero.
Brealey - 011 Risk... #54
Difficulty: Easy
17. (p. 202) The ratio of net present value to initial investment is known as the:
a. internal rate of return.
B. profitability index.
c. payback period.
d. net present value.
Brealey - 007 Net... #74
Difficulty: Easy
18. (p. 190) If the opportunity cost of capital for a project exceeds the project's IRR, then the project has a(n):
a. positive NPV.
B. negative NPV.
c. acceptable payback period.
d. positive profitability index.
Brealey - 007 Net... #35
Difficulty: Easy
19. (p. 316) Macro events only are reflected in the performance of the market portfolio because:
a. firm-specific events would be too numerous to list.
B. unique risks have been diversified away.
c. the market portfolio has no individual firms.
d. only macro events are tracked by economists.
Brealey - 011 Risk... #33
Difficulty: Medium
20. (p. 193) A project can have as many different internal rates of return as it has:
A. changes in the sign of the cash flows.
b. cash inflows.
c. cash outflows.
d. periods of cash flow.
Brealey - 007 Net... #47
Difficulty: Medium
21. (p. 189) If the net present value of a project which costs $20,000 is $5,000 when the discount rate is 10%, then
the:
a. project's cash inflows total $25,000.
B. project's rate of return is greater than 10%.
c. project's IRR equals 10%.
d. net present value of the cash inflows is $4,500.
Brealey - 007 Net... #25
Difficulty: Medium
22. (p. 317) What is the beta of a three-stock portfolio including 25% of Stock A with a beta of .90, 40% Stock B
with a beta of 1.05, and 35% Stock C with a beta of 1.73?
a. 1.17
b. 1.05
c. 1.22
D. 1.25
Brealey - 011 Risk... #50
Difficulty: Medium
23. (p. 315) A stock's beta measures the:
A. variability in the stock's returns compared to that of the market portfolio.
b. difference between the return on the stock and return on the market portfolio.
c. average return on the stock.
d. market risk premium on the stock.
Brealey - 011 Risk... #35
Difficulty: Medium
24. (p. 190) When a project's internal rate of return equals its opportunity cost of capital, then:
a. the net present value will be positive.
b. the project has no cash inflows.
c. the project should be rejected.
D. the net present value will be zero.
Brealey - 007 Net... #38
Difficulty: Medium
25. (p. 185) The decision rule for net present value is to:
A. accept all projects with positive net present values.
b. reject all projects with rates of return exceeding the opportunity cost of capital.
c. accept all projects with cash inflows exceeding initial cost.
d. reject all projects lasting longer than 10 years.
Brealey - 007 Net... #27
Difficulty: Easy
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Brealey - 007 Net...
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13
Difficulty: Hard
1
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11