1

The essential role of financial markets is:

Provide a method of channeling funds between borrowers and savers. Provide a method of borrowing. Provide a way for the government to finance a budget deficit. Provide a method of saving.

1.

The difference between equities and debt securities is

Equities represent ownership in a company and debt represents a contractual liability of the company. Equities pay interest and debt securities pay dividends. Equities are short term and debt securities are long term. Holders of equity securities get paid before holders of debt securities in the event of a bankruptcy. 3.Which of these activities does not exclusively come within the scope of corporate financial decision-making? a) How much should be invested? b) How much is to be allocated to the marketing budget? c) Which type of finance should be chosen? d) How much finance should be raised? 4. Which of the following is not a fundamental concept in Corporate Finance? a) Net present value. b) The relationship between risk and return. c) The business cycle. d) Double-entry book-keeping. 5. Volatility risk of a single asset is usually measured by which of the following? a) Standard deviation. b) Variance.

c) Correlation. d) Covariance.

6. How many undiversified assets does it normally take to achieve maximum reduction of risk usually reached in a portfolio? a) 2 to 5 assets. b) 5 to 10 assets. c) 20 to 30 assets. d) 50 to 60 assets.

7. Which of these is an appropriate measure of individual share risk (i.e. the risk of a single share held aspart of a porfolio)? a) Variance. b) Beta. c) Standard deviation. d) Correlation.

8. The sum of squared deviations from the mean, multiplied by probability, describes which of the following? a) Standard deviation. b) Variance. c) Correlation. d) Covariance. 9. The standard deviation is calculated as the square root of variance because the variance calculation results in which of the following? a) Too many decimal places. b) Sample bias. c) Two roots. d) Squared units.

10. The calculation of covariance most closely resembles which other statistical measure? a) Variance.

b) Beta. c) Standard deviation. d) Correlation.

11. If an asset has zero beta, then it can be described in which of the following ways? a) It is very risky. b) It is risk free. c) It is riskier than the market portfolio. d) It has the same risk as the market portfolio. 12. If an asset has a beta of one, then it can be described in which of the following ways? a) It is very risky. b) It is risk free. c) It is riskier than the market portfolio. d) It has the same risk as the market portfolio. 13. A line that describes the relationship between an individual security's returns and returns on the market portfolio. Characteristic line Security market line Capital market line Beta 14. The risk-free security has a beta equal to equal to . one; more than one. one; less than one. zero; one. less than zero; more than zero. 15. The greater the beta, the of the security involved. greater the unavoidable risk greater the avoidable risk , while the market portfolio's beta is

less the unavoidable risk less the avoidable risk 16. An "aggressive" common stock would have a "beta" equal to zero. greater than one. equal to one. less than one. 17. If a share return is higher than is justified by the share's beta, then which of the following will restore market equilibrium? a) Fall in the share's price, rise in share return. b) Rise in the share's price, fall in share return. c) Fall in the share's price, fall in share return. d) Rise in the share's price, rise in share return. 18. The concept of equilibrium in the Capital Asset Pricing Model (CAPM) model is highly influenced by which of the following concepts from economics? a) Perfect competition. b) Monopolistic competition. c) Oligopoly. d) Monopoly.

19. Which of the following is not one of the three fundamental methods of firm valuation? a) Discounted cash flow. b) Income or earnings - where the firm is valued on some multiple of accounting income or earnings. c) Balance sheet - where the firm is valued in terms of its assets. d) Market share.

20. Which of the following represents the correct formula for valuing a share with a growing dividend?

a) Pt = d0 (1 - g)/(r - g) b) Pt = d0 (1 + g)/(r + g) c) Pt = d0 (1 + g)/(r - g) d) Pt = d1 (1 + g)/(r - g)

21. What is the value of the firm usually based on? a) The value of debt and equity. b) The value of equity. c) The value of debt. d) The value of assets plus liabilities.

22. Which of the following would not be counted as part of incremental cash flow? a) Opportunity cost. b) Sunk cost. c) External cost such as brand cannibalism. d) External benefit such as acquisition of new technology which can be applied to other projects.

23. Which of the following should be included at the start of the project? a) Research costs. b) Historical costs. c) Investment in fixed and working capital. d) Continuation value.

24. Which of the following defines free cash flow? a) After-tax operating income + depreciation + interest - capital expenditures - change in net working capital. b) Gross profit + depreciation + interest - capital expenditures - change in net working capital. c) Net profit + depreciation + interest - capital expenditures - change in net working capital. d) After-tax operating income + tax shield + depreciation + interest - capital expenditures - change in net working capital.

25. If C0 stands for the initial cash flow, r - for the rate of interest (annual), and n - for the number of periods (years), then future value (FV) is given by the following formula:

a)

b) c) d) 26. If Cn stands for the value of the cash flow after n periods (years), r - for the rate of interest (annual), and n - for the number of periods (years), then present value (PV) is given by the following formula:

a) b) c) d) 27. If I0 stands for the initial investment at time 0, C1 - for cash flow after one year, and r - for the rate of interest, then the net present value (NPV) for 1 period is given by the following formula: a) b) c) d) 28. Which of the following is not a criticism of payback? a) b) c) d) It ignores potentially valuable cash flow after the cut-off point. The cut-off point for recovery of investment outlay is arbitrary. The technique cannot be adapted to discounted cash flow It may help to resolve large amounts of uncertainty.

29. Using the NPV criteria, a project should be selected when: a) b) c) d) Its NPV is positive or zero. Its NPV is equal to zero. Its NPV is negative. Its outflows are greater than its inflows.