Topic 1

Question 1

The process of finding present values is frequently called:
a. discounting
b. leasing
c. annualising
d. compounding

Answer 1

a. discounting

Question 2

The the risk of receiving future cash flows, the will be the
present value of those cash flows.
a. Lower, lower
b. Lower, greater
c. Greater, greater
d. None of the above

Answer 2

b. Lower, greater

Question 3

Shareholder returns can take the form of:
a. Proceeds from the sale of the stock
b. A and D
c. Periodic interest payments
d. Periodic dividend payments

Answer 3

a. Proceeds from the sale of the stock
d. Periodic dividend payments

Question 4

Which of the following is not a mechanism to control management agency
problems?
a. Creating incentives for profit maximization such as annual bonuses
b. Separating the roles of chairman and chief executive officer
c. Having remuneration and audit committees in place
d. Appointing non-executive directors to the board of a company

Answer 4

a. Creating incentives for profit maximization such as annual bonuses

Question 5

The financial risk of a firm refers to the:
a. The use of fixed cost resources in operations as opposed to variable cost
resources
b. Variability in the price of a firm’s securities
c. Increased variability in a firm’s earnings due to the use of variable-cost
financing
d. Increased variability in a firm’s earnings due to the use of fixed-cost financing

Answer 5

d. Increased variability in a firm’s earnings due to the use of fixed-cost financing

Question 6

The difference between an ordinary annuity and an annuity due is the:
a. Amount of the cash flows
b. The discount rate used for valuation
c. The timing of the payments
d. The number of periods

Answer 6

c. The timing of the payments

Question 7

Shareholder wealth is measured by:
a. Book value of the company’s assets
b. Book value of the shareholders’ ordinary share capital
c. Market value of the shareholders’ ordinary share capital
d. Market value of the company’s assets

Answer 7

c. Market value of the shareholders’ ordinary share capital

Question 8

The less frequent the compounding, the the fair value of the deposit,
and the is the effective interest rate.
a. Greater, greater
b. Greater, lesser
c. Lesser, greater
d. Lesser, lesser

Answer 8

d. Lesser, lesser