CHAPTER 13—CAPITAL AND FINANCIAL MARKETS
MULTIPLE CHOICE
1) Any long-lasting tool that people use to produce goods and services is called
a. a product
b. machinery
c. capital
d. equipment
e. labor assistance
Answer: C
2) The additional revenue a firm obtains from employing one more unit of capital is called
the
a. marginal revenue product of capital
b. total product of capital
c. marginal product of capital
d. production function
e. marginal product of labor
Answer: A
3) The marginal revenue product of capital is
a. the increase in output that results from employing one more unit of capital
b. the increase in profit that results from employing one more unit of capital
c. the increase in revenue that results from employing one more unit of labor
d. the increase in revenue that results from employing one more unit of capital
e. the increase in profits that results from employing one less unit of labor
Answer: D
4) A firm's choice about how much physical capital to employ differs from its choice of how
much labor to employ because
a. the firm has to pay for its capital
b. the productivity of labor depends on the firm's production function
c. firm must compare the marginal costs and benefits of acquiring more capital
d. firms do not own the labor they employ, but they frequently purchase capital outright
e. labor is productive but capital is not
Answer: D
5) The amount of money that someone would pay today for the right to receive a future
payment is called
a. the present value of the future payment
b. the determinate value of the future payment
c. the interest rate
d. the principal
e. the time discount
Answer: A
6) Which of the following changes would increase the present value of a future payment?
a. a decrease in the size of the payment
b. a decrease in the certainty of the payment actually being received
c. an increase in the amount of time that elapses before receiving the payment
d. a decrease in the interest rate
e. none of the above
Answer: D
7) You have a bond that you can redeem for $10,000 one year from now. The interest rate is
10 percent (0.10) per year. How much is the bond worth today?
a. $9,090.91
b. $10,000.00
c. $8,264.46
d. $9,523.81
e. $9,000.00
Answer: A
8) You have a bond that you can redeem for $10,000 one year from now. The interest rate is
3 percent (0.03) per year. How much is the bond worth today?
a. $9,090.91
b. $10,000.00
c. $8,264.46
d. $9,708.74
e. $9,000.00
Answer: D
9) If the interest rate is 5 percent (0.05) per year, what is the present value of $3,000 to be
received two years from now?
a. $2,850.00
b. $3,000.00
c. $2,707.50
d. $2,721.09
e. $2,857.14
Answer: D
10) If the interest rate at which you can lend funds is r percent per year, then the present value
of Y dollars to be received next year is
a. (1 + r)Y
b. Y / r
c. Y
d. Y - r
e. Y / (1 + r)
Answer: E
11) Suppose $X is the present value of $Y to be received next year. If you have $X and let it
earn interest at r percent annually, how much money do you expect to have after one year?
a. $Y
b. $Y/(1 + r)
c. $Y(1 + r)
d. $X/(1 + r)
e. $X/r
Answer: A
12) A snowplow will generate a net income of $2,000 per year for its owner. After 8 years,
the plow will break down and have zero value. The maximum amount of money anyone
would pay for the plow is
a. less than $2,000
b. $2,000
c. between $2,000 and $16,000
d. $16,000
e. more than $16,000
Answer: C
13) A new business computer will generate net income of $1,000 this year, $800 next year,
$400 the year after that, and nothing thereafter. Assume that each year's income is received at
the end of the year. What is the maximum amount a firm would be willing to pay for the
computer?
a. more than $2,200
b. $2,200
c. $1,000
d. between $1,000 and $2,200
e. less than $1,000
Answer: D
14) A formalwear shop will earn a net income of $1,500 per year on a tuxedo. A tuxedo is
good for two years, after which it will be worn out and worthless. If the interest rate is 10
percent (0.10) per year, what is the present value of a new tuxedo to the shop? (Assume that
each year's income is received at the end of the year.)
a. $148.76
b. $2,955.30
c. $2,955.59
d. $2.603.31
e. $3,000.00
Answer: D
15) A car rental company will earn a net income of $6,000 per year on a new car for the first
three years of its life. After three years, the car will be worthless. If the interest rate is 10
percent (0.10) per ear, what is the present value of the car to the car rental company?
(Assume that each year's income is received at the end of the year.)
a. $16,413.22
b. $14,921.11
c. $18,000.00
d. $16,363.62
e. $13,523.67
Answer: B
16) In New York City, you need a license to drive a taxicab. Each license is valid for three
years, and then it expires. The holder of a license can expect to earn $10,000 in profit each
year. If the interest rate is 5 percent (0.05) per year, what is the value of a newly issued
taxicab license? (Assume that each year's profit is received at the end of the year.)
a. $1,990.74
b. $10,000.00
c. $14,074.07
d. $27,232.48
e. $30,000.00
Answer: D
17) A new computer will generate $1,000 in net revenue for a firm during its first year, $500
during its second year, $250 during its third year, and nothing thereafter. If the interest rate is
10 percent (0.10) per year, what is the present value of the computer to the firm? (The first
payment will be received at the end of this year.)
a. $1,590.91
b. $1,510.14
c. $1,750.00
d. $1,446.28
e. $1,661.16
Answer: E
18) A new pinball machine will generate $3,000 in additional revenue each year for a game
arcade. It has a useful life of three years. Assume that each year's income is received at the
end of the year. If the interest rate is 10 percent (0.10) per year,, what is the present value of a
new pinball machine to the arcade?
a. $6,761.83
b. $8,181.82
c. $9,000.00
d. $7,460.56
e. $8,206.61
Answer: D
19) You have a choice among three options. Option 1: receive $900 immediately. Option 2:
receive $1,200 one year from now. Option 3: Receive $2,000 five years from now. The
interest rate is 15 percent (0.15) per year. Rank these three options from highest present value
to lowest present value.
a. Option 1, Option 2, Option 3
b. Option 3, Option 2, Option 1
c. Option 2, Option 3, Option 1
d. Option 3, Option 1, Option 2
e. Option 1, Option 3, Option 2
Answer: C
20) The table below shows the total number of loaves of bread a bakery can bake per year
with different numbers of ovens. The market for bread is perfectly competitive, with a market
price of $2 per loaf. What is the marginal revenue product of the third oven?
a. $1,200
b. 2,400 loaves of bread
c. $4,800
d. 600 loaves of bread
e. $1,600
Answer: A
21) The table below shows the total number of loaves of bread a bakery can bake per year
with different numbers of ovens. The market for bread is perfectly competitive, with a market
price of $2 per loaf. For which oven is the value of marginal product equal to $1400?
a. oven 1
b. oven 2
c. oven 3
d. oven 4
e. none of the ovens has value of marginal product equal to $1400
Answer: E
22) The table below shows the total number of tickets a movie theater can sell per year with
different numbers of screens. The market for movie tickets is perfectly competitive, with a
market price of $8 per ticket. What is the marginal revenue product of the second screen?
Number of
Screens Total Number of
Movie Tickets Sold
1 75,000
2 125,000
3 155,000
4 170,000
a. 50,000 tickets
b. $240,000
c. $400,000
d. 125,000 tickets
e. $1,000,000
Answer: C
23) According to the principle of asset valuation, the value of any asset is equal to
a. the sum of all the future benefits it generates
b. the revenue it generates during its first year
c. the sum of the present values of all the future net benefits it generates
d. the ratio of its final year's benefits to its price
e. the sum of all future benefits it generates minus its price
Answer: C
24) The principle of asset valuation applies to
a. physical capital
b. natural resources
c. human capital
d. stocks and bonds
e. all of the above
Answer: E
25) If each additional unit of capital increases a firm's yearly output by a smaller amount than
the previous unit of capital, and other inputs are held constant, then the firm is experiencing
a. diminishing returns to scale
b. negative marginal productivity of capital
c. diminishing marginal productivity of capital
d. capital depreciation
e. diminishing marginal productivity of labor
Answer: C
26) The relationship between the marginal product of capital (MPK), the product price (P),
and marginal revenue product of capital (MRPK) in a perfectly competitive market is
a. MPK = P ´ MRPK
b. MPK = P + MRPK
c. MRPK = P/MPK
d. MRPK = P ´ MPK
e. MRPK = P + MPK
Answer: D
27) A new moving van will increase a moving company's yearly revenue by $15,000. Its
useful life is three years. If the interest rate is 10 percent (0.1) per year, which of the
following is the highest price the firm would be willing to pay for the van? Assume that each
year's revenue is received at the end of the year. (Answers are rounded to the nearest $100.)
a. $15,000
b. $20,000
c. $37,300
d. $44,100
e. $45,000
Answer: C
28) A new file cabinet will generate $300 in net revenue each year for a Data Storage Co.
The file cabinet has a useful life of two years. At the end of the second year, the cabinet will
be sold as scrap metal for $200. If the interest rate is 10 percent (0.10) per year, what is the
present value of the file cabinet to Data Storage Co.? (Assume that each year's revenue is
received at the end of the year.)
a. $500
b. $600
c. $800
d. $1,000
e. none of the above
Answer: E
29) A shipping company can buy either a new truck or a used truck. Each truck will generate
$4,000 in net revenue per year. But the new truck has a useful life of three years, whereas the
used truck has a useful life of only two years. If the interest rate is 5 percent (0.05) per year,
what is the difference in value between the two trucks? (Assume that each year's revenue is
received at the end of the year.)
a. $0
b. $4,000.00
c. $3,455.35
d. $1,185.19
e. $8,000.00
Answer: C
30) The table below describes a lawn mowing company's revenues from different numbers of
lawn mowers. If the price of a lawn mower is $1,200, how many mowers should the company
buy?
a. 0
b. 2
c. 3
d. 4
e. 5
Answer: D
31) The table below describes a lawn mowing company's revenues from different numbers of
lawn mowers. If the price of a lawn mower is $2,000, how many mowers should the company
buy?
a. 0
b. 2
c. 3
d. 4
e. 5
Answer: B
32) The table below describes an amusement park's revenues from different numbers of
batting cages. If the price of constructing a new batting cage is $6,000, how many cages
should the park construct?
Number of
Batting Cages Marginal Revenue
Product of
Batting Cage (per year)Total Present Value
of Additional Revenue
1 $2,000.00 $13,333.33
2 $1,600.00 $10,666.67
3 $1,200.00 $ 8,000.00
4 $ 800.00 $ 5,333.33
5 $ 400.00 $ 2,666.67
a. 0
b. 2
c. 3
d. 4
e. 5
Answer: C
33) A decrease in the interest rate is represented by
a. a leftward shift of a firm's investment curve
b. a rightward shift of a firm's investment curve
c. a movement along a firm's investment curve, upward and to the left
d. a movement along a firm's investment curve, downward and to the right
e. a movement along a firm's investment curve, upward and to the right
Answer: D
34) A higher interest rate will lead a firm to purchase less capital because the higher interest
rate
a. lowers the marginal product of capital goods
b. causes technological change to cease
c. lowers the present value of capital goods
d. causes economies of scale to be exhausted
e. causes the capital market become monopolized
Answer: C
35) Other things equal, an increase in the interest rate will
a. decrease firms' investment expenditures
b. increase the standard of living in the economy
c. increase of the present value of capital good
d. increase firms' investment expenditures
e. encourage production of durable goods
Answer: A
36) The table below shows the present value of beds for a city hospital, at different interest
rates. The price of each bed is $800. If the interest rate decreases from 15 percent (0.15) to 5
percent (0.05) per year, how will the hospital's capital expenditure change?
a. decrease by $138.19
b. increase by $276.39
c. increase by $800
d. increase by $631.04
e. decrease by $1,600
Answer: C
37) The table below shows the present value of beds for a city hospital, at different interest
rates. For either interest rate, notice that the present value of each additional bed is less than
the present value of the previous bed. What most likely accounts for this fact?
a. diminishing returns to scale
b. diminishing marginal productivity of capital
c. an increased interest rate
d. increased time waiting for the revenue to be received
e. depreciation and lack of maintenance
Answer: B
38) The table below shows the present value of additional revenue from cash registers at a
fast food restaurant. If the price of a cash register is $700, what will be the restaurant's total
investment expenditure on cash registers?
a. $3,500.00
b. $4,545.93
c. $1,400.00
d. $3,409.45
e. $2,100.00
Answer: E
39) The table below shows the total present value of additional revenue from DVD players at
Video Wizard, a business that rents audiovisual equipment. If the price of a DVD player is
$450, what will be Video Wizard's total investment expenditure on cash registers?
a. $900.00
b. $1,800.00
c. $578.25
d. $3,469.48
e. $2,250.00
Answer: B
40) Which of the following is not a financial asset?
a. a corporate bond
b. a piece of real estate
c. an IOU
d. a share of Coca-Cola stock
e. a Treasury bond
Answer: B
41) A financial asset is
a. a unit of physical capital with a positive market value
b. any asset that generates a stream of income
c. a share in the ownership of a productive enterprise
d. a form of money
e. a promise to pay future income in some form
Answer: E
42) A bond with a face value of $10,000 (and no coupon payments) is always worth
a. $10,000
b. less than $10,000 before the maturity date
c. more than $10,000 if the interest rate is high enough
d. $10,000 on the date of purchase
e. $9,090.91 two years before the maturity date
Answer: B
43) What is the value of a newly issued 3-year bond with a face value of $5,000 and no
coupon payments? Assume the interest rate is 8 percent (0.08) per year.
a. $4,629.63
b. $5,000.00
c. $3,969.16
d. $3,756.57
e. $4,545.45
Answer: C
44) What is the value of a newly issued 10-year bond with face value of $10,000 and no
coupon payments? Assume the interest rate is 7 percent (0.07) per year.
a. $0
b. $5,083.49
c. $10,000
d. $95,632.41
e. $100,000.00
Answer: B
45) What would you pay for a newly issued 10-year bond with face value of $10,000 and no
coupon payments? Assume the interest rate is 5 percent (0.05) per year.
a. $0
b. $6,139.13
c. $10,000
d. $95,632.41
e. $100,000.00
Answer: B
46) You are thinking of purchasing a 5-year bond, with a face value of $8,000, on the
secondary bond market. The bond was issued three years ago, so it will mature two years
from today. If the interest rate is 10 percent (0.10) per year, what is the value of the bond?
a. $6,611.57
b. $8,000.00
c. $4,967.37
d. $6,010.52
e. $7,272.73
Answer: A
47) You are thinking of buying a 10-year bond on the secondary bond market. The face value
of the bond is $10,000, the interest rate is 5 percent (0.05) per year, and the bond was issued
exactly eight years ago. What is the value of the bond today?
a. $5,295.43
b. $9,070.30
c. $10,000.00
d. $20,000.00
e. $100,000.00
Answer: B
48) Your aunt gives you a PepsiCo bond with face value of $5,000. It will mature in two
years. Currently, the interest rate is 10 percent (0.10) per year. How will the value of the bond
change if the interest rate falls to 5 percent tomorrow morning?
a. It will rise by $413.22.
b. It will rise by $402.90.
c. It will rise by $432.90.
d. It will fall by $432.90.
e. It will fall by $402.92.
Answer: B
49) You have two bonds, both with a face value of $7,000. One of them matures one year
from today, while the other matures one year after that. If the interest rate is 8 percent (0.08)
per year, what is the difference in value between the two bonds?
a. $480.11
b. $578.52
c. $317.46
d. zero
e. $925.92
Answer: A
50) Microsoft issues a 2-year bond with a face value of $5,000. In addition to the principal
paid at maturity, the bond has 2 annual coupon payments of $500 each, to be received at the
end of the first and second year respectively. If the interest rate is 10 percent (0.10) per year,
what is the value of the newly issued bond?
a. $5,000.00
b. $6,000.00
c. $5,886.68
d. $4,901.48
e. $41.32
Answer: A
51) You are thinking of buying a newly issued, 5-year bond that has a face value of $10,000
and offers no annual coupon payments. What is the most you should pay for this bond, if the
interest rate is 5 percent (0.05) per year?
a. $5,000.00
b. $6,139.13
c. $7,835.26
d. $10,000.00
e. $43,294.77
Answer: C
52) A newly issued bond with a face value of $8,000 and no coupon payments is priced at
$7,000. The bond will mature in one year. What is the yield on this bond?
a. $1,000
b. 12.5 percent
c. 14.3 percent
d. $272.73
e. It depends on the interest rate
Answer: C
53) A newly issued bond with a face value of $12,000 and no coupon payments is priced at
$9,000. The bond will mature in one year. What is the yield on this bond?
a. 33.3 percent
b. 25 percent
c. $3,000
d. $1,909.09
e. It depends on the interest rate
Answer: A
54) Consider three bonds, from Corporation X, Corporation Y, and Corporation Z. The X and
Y bonds mature in 1 year, while the Z bond matures in 2 years. The Y and Z bonds have face
values of $5,000, while the X bond has a face value of $4,000. If the interest rate is 10
percent (0.10) per year, rank the three bonds from highest present value to lowest present
value.
a. X, Y, Z
b. Z, Y, X
c. Y, Z, X
d. Z, X, Y
e. Y, X, Z
Answer: C
55) Which of the following states the relationship between a bond's price and its yield?
a. As the price falls, the yield falls.
b. Price and yield are usually independent of each other.
c. As the price rises, the yield rises.
d. As the price rises, the yield falls.
e. As the yield rises, so does the price.
Answer: D
56) If a bond is sold in the secondary market,
a. the issuing firm is buying back its own bond
b. the issuing firm does not obtain any part of the price
c. the seller remits a portion of the price to the issuing firm
d. the yield must be insufficient to justify sale on the primary market
e. the seller is the issuing firm
Answer: B
57) The key difference between the primary and secondary bond markets is that __________
bonds are traded on the primary market, while __________ bonds are traded on the
secondary market.
a. newly issued; previously issued
b. government; corporate
c. more valuable; less valuable
d. low risk; high risk
e. high yield; low yield
Answer: A
58) The interest rate on U.S. government securities is often called the
a. prime rate
b. public discount
c. riskless rate
d. superior rate
e. universal discount
Answer: C
59) Which of the following will lower the present value of a bond?
a. a fall in the interest rate
b. an increase in the principal
c. a shorter time to maturity
d. an increased risk of default
e. none of the above
Answer: D
60) Which of the following will increase the yield on a bond?
a. a reduction principal
b. an increased risk of default
c. an increase in the bond's price
d. a reduced risk of default
e. none of the above
Answer: B
61) Which of the following types of bond typically has the highest yields? (The letters are
Moody's ratings.)
a. a federal government bond
b. a corporate bond rated Aaa
c. a corporate bond rated Aa
d. a corporate bond rated A
e. a corporate bond rated Baa
Answer: E
62) Which of the following is a correct statement about bond prices, other things equal?
a. a lower face value leads to a higher bond price
b. a higher risk of default leads to a higher bond price
c. a higher risk of default leads to a lower yield
d. fewer coupon payments lead to a higher bond price
e. a higher price leads to a lower yield
Answer: E
63) When the market estimate of a company’s riskiness increases the market adjusts by
a. having the supply of that bond increase.
b. having the supply of that bond decrease.
c. having the demand for that bond increase.
d. having the demand for that bond decrease.
Answer: D
64) When the market estimate of a company’s riskiness decreases the market adjusts by
a. having the supply of that bond increase.
b. having the supply of that bond decrease.
c. having the demand for that bond increase.
d. having the demand for that bond decrease.
Answer: C
65) When the demand for alternative investments increases, the market for a particular bond
adjusts by
a. having the supply of that bond increase.
b. having the supply of that bond decrease.
c. having the demand for that bond increase.
d. having the demand for that bond decrease.
Answer: D
66) When the demand for alternative investments decreases, the market for a particular bond
adjusts by
a. having the supply of that bond increase.
b. having the supply of that bond decrease.
c. having the demand for that bond increase.
d. having the demand for that bond decrease.
Answer: C
67) The key difference between a share of stock and a bond is that
a. a share of stock is a riskless asset
b. the holder of a bond receives only one future payment
c. the holder of a share stock has a share in the ownership of a firm
d. bonds are issued only by the government, while stock is issued only by corporations
e. there are secondary markets for stocks, but not for bonds
Answer: C
68) On a secondary stock market, such as the New York Stock Exchange,
a. firms sell new issues of stock
b. firms make initial public offerings
c. previously issued bonds are sold and resold
d. previously issued shares of corporations are sold and resold
e. firms sell newly issued bonds
Answer: D
69) A corporation that specializes in owning shares of stock in other corporations is called a
a. secondary market
b. mutual fund
c. stock broker
d. second hander
e. day trader
Answer: B
70) The payments made to shareholders from a firm's profits are called
a. owner subsidies
b. principal
c. coupon payments
d. retained earnings
e. dividends
Answer: E
71) Agrophonic.com has issued 80 million shares of stock. You own 5 million of them. You
also own Agrophonic.com bonds with a present value of $1 million. What percentage of
Agrophonic.com do you own?
a. zero
b. 7.1%
c. 6.3%
d. 5.9%
e. 4.7%
Answer: C
72) The total value of dividends paid out to shareholders by a firm is equal to
a. its total after-tax profits
b. its total after-tax profits minus its retained earnings
c. its total after-tax profits minus its bond payments
d. its total after-tax profits plus its retained earnings
e. the present value of the firm
Answer: B
73) Stretchy Socks, Inc., is expected to earn $2,000,000 in after-tax profits each year forever.
The interest rate is 0.1. What is the total value of all shares of stock in Stretchy Socks?
a. $1,818,182
b. $2,000,000
c. $16,528,926
d. $18,181,818
e. $20,000,000
Answer: E
74) If you own 10% of the shares of a corporation's stock, and the corporation is expected to
earn $9 million a year in after-tax profits forever, and the interest rate is 0.05, what is the
value of your shares?
a. $18 million
b. $900,000
c. $9 million
d. $6 million
e. $180 million
Answer: A
75) Elena Johnson owns 100 shares of Funky Foods, which has 100,000 shares of stock
outstanding. Funky Foods is expected to earn $1 million in after-tax profits every year
forever. The interest rate is 5 percent (0.05) per year. According to the principle of asset
valuation, what is the value of Elena's shares?
a. $200,000
b. $10,000
c. $20,000
d. $100,000
e. $2,000
Answer: C
76) Which of the following would increase the value of a firm's stock?
a. a decrease in the firm's present profit
b. a decrease in the anticipated growth rate of future profits
c. an increase in the perceived riskiness of future profits
d. a fall in the interest rate
e. an anticipated increase in the interest rate
Answer: D
77) The price/earnings (PE) ratio of a stock is found by
a. dividing the most recent year's dividend by the current stock price
b. dividing the current stock price by the after-tax profit per share
c. dividing the most recent year's dividend by retained earnings
d. dividing the current stock price by the Dow Jones Industrial Average
e. dividing the current stock price by the present value of the firm
Answer: B
78) Xanadu Corp. has issued 90 million shares of stock, and it has no plans to issue any more
in the near future. If the demand for Xanadu stock increases,
a. the price and quantity of Xanadu stock will both increase
b. the price and quantity of Xanadu stock will both decrease
c. the price will remain constant, and the quantity of Xanadu stock will increase
d. the quantity of Xanadu stock will remain constant, and the price will increase
e. the price will increase, and the quantity of Xanadu stock will decrease
Answer: D
79) Crazy Cryptography is a software corporation that has 1,000 shares of stock in existence.
The corporation has just surprised the market by announcing a new software package that
will increase the company's after-tax profit by $500,000 each year, forever. If the interest rate
is 8 percent (0.08) per year, by how much will the value of a single share of stock increase?
a. $500.00
b. $6,250.00
c. $5,000.00
d. $10,000.000
e. $8,333.33
Answer: B
80) The demand curve for shares of a stock is typically
a. downward sloping, because people calculate present value according to different
expectations and attitudes toward risk
b. vertical, because only a fixed number of shares of stock are available
c. horizontal, because everyone values the stock according to its present value
d. upward sloping, because a higher stock price signals to potential shareholders that the firm
is more valuable
e. horizontal, because no one is willing to pay more than the market price
Answer: A
81) Which of the following would be most likely to cause a rightward shift of the demand for
shares of Planet X, Inc.'s stock?
a. the appearance of a strong competitor in Planet X's market
b. a ban on Planet X's product in a large export market
c. the announcement of a profitable new product line from Planet X
d. news of a labor strike against Planet X
e. the announcement of a new public offering of Planet X stock
Answer: C
82) Travel Expert is a corporation that specializes in selling vacation packages in
Transylvania and Stansylvania. There are a fixed number of shares of Travel Expert's stock
available to the public. If the two countries go to war, making it much more dangerous to
travel there, what will most likely happen to the Travel Expert's share price and the number
of shares outstanding?
a. Price will fall; number of shares will fall.
b. Price will fall; number of shares will rise.
c. Price will rise; number of shares will remain the same.
d. Price will remain the same; number of shares will fall.
e. Price will fall; number of shares will remain the same.
Answer: E
83) Abacus.com has just made an initial public offering of stock with the help of an
investment bank. It sold 5 million shares at a price of $84 each. How much money did the
corporation raise through this stock offering?
a. $420 million
b. zero, because a firm only acquires funds on the secondary market
c. $336 million
d. $420 million minus fees paid to the investment bank
e. It depends on the interest rate
Answer: D
84) Which of the following would increase the price of a firm's stock?
a. an decrease in demand for the firm's products
b. the emergence of a promising new competitor
c. the approval of a new patent for the firm
d. an increase in the interest rate
e. the threat a major lawsuit against the firm
Answer: C
85) A new public offering that significantly shifts the supply curve for a firm's shares will
a. have no impact on the stock's price
b. decrease the stock's price
c. increase the stock's price
d. decrease the value of the firm's previously issued bonds
e. decrease the firm's working capital
Answer: B
86) Which of the following functions is not performed by financial markets?
a. facilitating large-scale production
b. reallocating spending across time
c. reducing risk through diversification
d. discovering new production techniques
e. disciplining management of corporations
Answer: D
87) Stocks and bonds are similar in the sense that
a. both are sold initially in primary markets and then traded in secondary markets
b. both are means of providing firms with the means of financing capital expenditures
c. their prices are both perceived as signals of a firm's performance by management
d. their values can both be calculated by discounting future payments to obtain a present
value
e. all of the above
Answer: E
88) Which of the following is a primary function served by financial markets?
a. creating new products and product lines
b. facilitating large-scale production methods
c. encouraging laborers to unionize
d. implementing new production techniques
e. discovering new markets for existing products
Answer: B
89) Which of the following factors would not be considered by a fundamental analyst when
predicting stock prices?
a. the future demand for a firm's products
b. the patents held by a firm
c. the likelihood of new firms competing with an existing firm
d. potential changes in a firm's costs of production
e. recent jumps in a firm's stock price
Answer: E
90) Which of the following factors would be considered by a fundamental analyst when
predicting a firm's stock price?
a. recent changes in the stock's price
b. the knowledge and skills of the firm's current management
c. the marketing strategies of the firm's competitors
d. a "head and shoulders" shape in a line graph of the firm's stock price
e. both b and c
Answer: E
91) Which of the following factors would not be considered by a technical analyst when
predicting a firm's stock price?
a. a large drop in the stock price yesterday
b. a "head and shoulders" pattern in the recent movements of the stock's price
c. the likely success of the firm's new product line
d. the probable behavior of other buyers and sellers of the stock
e. a large jump in the stock's price last week
Answer: C
92) Which of the following factors would be considered by a technical analyst when
predicting a firm's stock price?
a. the strategies adopted by the current management of a firm
b. the strategies adopted by the firm's competitors
c. the typical behavior of other investors
d. the possibility of new trade policies that will open new markets for the firm
e. the threat of a major lawsuit against the firm
Answer: C
93) According to the efficient markets theory of stock prices,
a. fundamental analysis is a way to profit from predicting stock prices
b. fundamental and technical analysis are largely useless
c. technical analysis is the best approach to profit from predicting stock prices
d. fundamental and technical analysis must be synthesized in order to profit from predicting
stock prices
e. whether fundamental and technical analysis can be profitable depends on the specific firm
being analyzed
Answer: B
94) If you carefully research the products, technologies, patents, and management of firms,
the efficient markets theory of stock prices, predicts that
a. you will probably reap significant gains
b. you will actually decrease your odds of doing better than the average investor
c. you will probably do about as well as someone who did no research
d. you will lose money unless you failed to consider historical stock price patterns
e. both b and d
Answer: C
95) The efficient markets theory of stock prices, says that new information
a. is quickly and completely incorporated into stock prices
b. is incorporated into stock prices only when discovered by fundamental analysis
c. causes stock prices to increase
d. has little impact on stock prices
e. is incorporated into stock prices with a time lag of a few days
Answer: A
96) According to the efficient markets theory of stock prices, some investors outperform the
market because
a. they are especially skilled at analyzing stock price trends
b. in any large group of investors, there will probably be some unusually lucky ones
c. they are most likely the beneficiaries of insider trading
d. they have better information about firms' technologies and production costs
e. they have a superior ability to predict consumer behavior
Answer: B
97) The efficient markets theory of stock prices, implies that
a. mutual funds are the best means of investing in the stock market
b. it's better not to invest in the stock market at all
c. you should only invest in the stock market if you have inside information
d. you should alter your portfolio frequently to keep up with the quick movements of the
market
e. you can do as well on the stock market as an expert, even if you pick your stocks randomly
Answer: E
98) According to the efficient markets theory of stock prices, who are the primary
beneficiaries of a sudden rise in demand for a firm's stock?
a. the consumers of the firm's products
b. the current shareholders at the time of the rise in demand
c. the investors who buy the firm's stock shortly after the rise in demand
d. the investors who sell their shares just before the rise in demand
e. the investors who have been carefully watching stock price patterns
Answer: B
99) Suppose the Dow Jones Industrial Average has risen for three days in a row. According
to the efficient markets theory of stock prices,
a. it will probably fall again tomorrow
b. it will probably rise tomorrow to compensate for recent losses
c. it is more likely to rise tomorrow than if it had fallen three days in a row
d. it is just as likely to rise again tomorrow as if it had fallen three days in a row
e. it will most likely remain unchanged tomorrow
Answer: D
100) With one year of study, Rob Sanchez can earn a master's degree, which will cost him
$15,000 in tuition and $20,000 in lost wages. The degree will increase his yearly income by
$20,000 per year for three years after receiving the degree. The interest rate is 10 percent
(0.10) per year. What should Rob do? (Assume that costs are incurred and income is received
at the end of the year.)
a. he should obtain the degree because education always pays off
b. because the cost of tuition and lost wages ($35,000) is less than the extra income
($60,000), he should obtain the degree
c. he should subtract the present value of tuition from the total present value of the additional
income. If the number is positive, he should obtain the degree
d. he should subtract the total present value of the tuition and lost wages from the total
present value of the additional income. If the number is positive, he should obtain the degree
e. he should subtract the present value of lost wages from the total present value of additional
income. If the number is positive, he should obtain the degree
Answer: D
101) Other things equal, a person with a cosmetician's certificate from a vocational school
will earn $4,000 more per year than a person without one, starting the year the certificate is
received. But after 6 years, the difference in income will disappear because styles have
changed. If the interest rate is 5 percent (0.05) per year, what is the present value of having
just received a certificate? (Assume that each year's income is received at the end of the
year.)
a. $21,317.91
b. $24,000.00
c. $22,857.14
d. $19,379.92
e. It depends on the cost of acquiring the certificate
Answer: A
102) Taking a course in computer repair will increase an individual's yearly income by
$10,000 per year, starting the year after the course is completed. After three years, the skills
learned will be obsolete. What is the present value of taking the course if the interest rate is 8
percent (0.08) per year?
a. $1,248.29
b. $10,356.65
c. $25,770.97
d. $30,000.00
e. none of the above
Answer: C
103) The fact that the supply curve for a given firm’s bond is vertical reflects the fact that
a. at any given point in time there are a fixed number of those bonds in existence.
b. firms adjust the number of bonds they issue on a daily basis
c. investors do not adjust their portfolios when interest rates change
d. government limits the amount of bonds a company can issue
Answer: A
104) The supply curve for a particular bond is vertical.
a. True
b. False
Answer: A
105) The supply curve for a particular bond is horizontal.
a. True
b. False
Answer: B
106) You just won the lottery. You have a choice of three different prize options.
Option #1: receive $1,200 immediately
Option #2: receive $1,500 a year from now
Option #3: receive $5,000 five years from now.
If the interest rate is 10% the ranking of the options, from the lowest present value to the
highest is
a. Option #2, Option #3, Option #1
b. Option #3, Option #1, Option #2
c. Option #1, Option #2, Option #
d. Option #1, Option #3, Option #2
e. Option #3, Option #2, Option #1
Answer: C
107) You just won the lottery. You have a choice of three different prize options.
Option #1: receive $1,200 immediately;
Option #2: receive $1,500 a year from now;
Option #3: receive $1,800 five years from now.
If the interest rate is 15% the ranking of the options, from the lowest present value to the
highest is
a. Option #2, Option #3, Option #1
b. Option #3, Option #1, Option #2
c. Option #1, Option #2, Option #
d. Option #1, Option #3, Option #2
e. Option #3, Option #2, Option #1
Answer: B
108) A pizza shop owner who needs to buy a new pizza oven is trying to decide between two
different used ones. Whichever oven he buys, it will generate $6,000 net revenue per year.
But the older pizza oven has a useful life of only 3 years and the newer oven has a useful life
of 5 years. If the interest rate is 7% per year, what is the difference in value between the two
ovens? (Assume that each year’s revenue is received at the end of the year.)
a. 413.25
b. $10,892.99
c. $15,745.90
d. $24,601.18
e. $8,855.29
Answer: E
109) A pizza shop owner needs to buy a new pizza oven and he is trying to decide between
two different used ones. Whichever oven he buys, it will generate $3,000 net revenue per
year. The older use oven has a useful life of only 2 years and the newer oven has a useful life
of 4 years. If the interest rate is 8% per year, what is the difference in value between the two
ovens? (Assume that each year’s revenue is received at the end of the year.)
a. $4,586.58
b. $5,349.79
c. $2,205.09
d. $2,777.78
e. $3,000
Answer: A
110) A pizza shop owner needs to buy a pizza oven and is deciding between a new one and a
used one. If he buys an older used one it will generate $4,000 of net income for 3 years. If he
buys a new one it will generate $5,000 of net income for 4 years. If the interest rate is 10%,
what is the difference in value between the two ovens? (Assume that each year’s revenue is
received at the end of the year.)
a. $793.83
b. $2,577.10
c. $6,252.25
d. $2,777.78
e. $1,000
Answer: C
111) There is a specific relationship between the price of a bond and its yield. Which of the
following describes that relationship?
a. If the price falls, the yield stays the same, but if the price rises, the yield rises.
b. As the price falls, the yield falls.
c. If the price rises, the yield stays the same, but if the price falls, the yield falls.
d. As the price rises, the yield rises.
e. As the price rises, the yield falls.
Answer: E
112) Consider the following three bonds, Bond F, Bond J and Bond P. Bonds F and P mature
in 1 year while Bond J matures in 2 years. Bond F and J have a face value of $10,000 while
Bond P has a face value of $12,000. If the interest rate is 15%, rank the three bonds from
highest present value to lowest present value.
a. Bond F, Bond P, Bond J
b. Bond P, Bond F, Bond J
c. Bond J, Bond F, Bond P
d. Bond P, Bond J, Bond F
e. Bond F, Bond J, Bond P
Answer: B
113) Consider the following three bonds, Bond F, Bond J and Bond P. Bonds F and P mature
in 1 year while Bond J matures in 4 years. Bond F and J have a face value of $10,000 while
Bond P has a face value of $11,000. If the interest rate is 15%, rank the three bonds from
highest present value to lowest present value.
a. Bond F, Bond P, Bond J
b. Bond P, Bond F, Bond J
c. Bond J, Bond F, Bond P
d. Bond P, Bond J, Bond F
e. Bond F, Bond J, Bond P
Answer: B
114) Claire was trying to decide if she should buy a share of stock in her favorite company or
a bond issued by that same company. She discussed the dilemma with her father. Her father
made the following five statements. All of them are accurate except for one. Which one is the
exception?
a. “If you buy a share of stock you will own a piece of the company”
b. “If you buy a bond you will own a piece of the company”
c. “If you buy a bond and change your mind you can sell it on the secondary bond market”
d. “You should be careful because if you buy a share of stock you could loose your original
investment”
e. “If you buy a stock it may be worth more in the future”
Answer: B
Test Bank for Microeconomics: Principles and Applications
Robert E. Hall, Marc Lieberman
9781111822569, 9781478405238, 9781478498056
