CHAPTER 3 Flashcards
The NPV of a project is the difference between the present value of its benefits and the present value of its costs.
YES
When faced with a set of alternatives, choose the one with the lowest NPV in order to minimize the preset value of costs.
NO
Good projects will have a positive NPV.
YES
The NPV represents the value of the project in terms of cash today.
YES
The practice of buying and selling equivalent goods in different markets to take
advantage of a price difference is known as arbitrage.
YES
In financial markets it is possible to sell a security you do not own by doing a short sale.
YES
We call the price of a security in a normal market the no-arbitrage price for the security.
YES
When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds.
NO
The general formula for the no-arbitrage price of a security is Price(security) = PV(All cash flows paid by the security).
YES
The price or value of the entire firm is equal to the sum of the values of all
projects and investments within the firm.
YES
To maximize the value of the entire firm, managers should make decisions that
maximize NPV.
YES
Value additivity does not have important consequences for the value of the entire
firm, only on portfolios of firms.
NO
The value of a portfolio is equal to the sum of the values of its parts.
YES
When we compute the return of a security based on the average payoff we
expect to receive, we call it the expected return.
YES
Because investors are risk averse, the risk-free interest rate is not the right rate to
use when converting risky cash flows across time.
YES
