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D076 OA EXAM UPDATED EXAM WITH
VERIFIED SOLUTIONS.
Suppose you are a manager at a firm. One of your financial
analysts places a report on your desk of valuation calculations for
some potential investment projects. When you look at the
calculations later, you notice that the analyst did not indicate if
she used the NPV or IRR method. However, you do notice that
the results of the calculations are all percentages. What can you
conclude?
The calculations are all wrong.
The calculations are incomplete.
The analyst used the IRR method.
The analyst used the NPV method. - correct answer -The analyst
used the IRR method.
You are considering a project that has a profitability index of 1.
What does this mean?
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The benefit outweighs the cost of the project by the exact same
amount as the initial cost.
The project has a negative net present value.
The project has the internal rate of return equal to the cost of
capital.
The project has a positive net present value. - correct answer -
The project has the internal rate of return equal to the cost of
capital.
You just purchased a bond for $1,000 that has a par value of
$1,000. What type of bond is this?
A par bond
A premium bond
A preferred bond
A discount bond - correct answer -A par bond
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Why is it appropriate to calculate the value of a preferred stock in
the same way that you would find the present value of a
perpetuity?
Preferred stocks pay a coupon every six months, the coupon
amount is constant, and the stock has a maturity date.
For a preferred stock, a fixed amount is paid forever to
compensate the investors.
Even though a preferred stock has a fixed length, the cash flows
differ each year.
The cash flows that come from owning a preferred stock grow at a
constant rate every year and continue forever. - correct answer -
Preferred stocks pay a coupon every six months, the coupon
amount is constant, and the stock has a maturity date.
Why is it important to consider the time value of money in an ideal
evaluation method for capital investment?
Because a project's cash flows may be uncertain
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Because without considering every cash flow of a potential
project, you do not know how the project would enhance the firm's
value
Because the value of a cash flow today is different from the value
of a cash flow of the same dollar amount in 10 years
Because each project has different amount of risk - correct
answer -Because the value of a cash flow today is different from
the value of a cash flow of the same dollar amount in 10 years
Which scenario correctly describes opportunity cost?
Donatello has a side business making sculptures in addition to his
regular job. If he spends more time on his side business, the
opportunity cost is the money he makes from selling his
sculptures.
Caroline makes $25 an hour. Instead of working one night, she
goes to a concert that costs $50 and lasts two hours. The
opportunity cost of the concert is $50.
Alexandra decides to spend $50 on some new clothes instead of
using that money to pay her electric bill. The opportunity cost is
having the electricity turned off.
D076 OA EXAM UPDATED EXAM WITH
VERIFIED SOLUTIONS.
Suppose you are a manager at a firm. One of your financial
analysts places a report on your desk of valuation calculations for
some potential investment projects. When you look at the
calculations later, you notice that the analyst did not indicate if
she used the NPV or IRR method. However, you do notice that
the results of the calculations are all percentages. What can you
conclude?
The calculations are all wrong.
The calculations are incomplete.
The analyst used the IRR method.
The analyst used the NPV method. - correct answer -The analyst
used the IRR method.
You are considering a project that has a profitability index of 1.
What does this mean?
, Page | 2
The benefit outweighs the cost of the project by the exact same
amount as the initial cost.
The project has a negative net present value.
The project has the internal rate of return equal to the cost of
capital.
The project has a positive net present value. - correct answer -
The project has the internal rate of return equal to the cost of
capital.
You just purchased a bond for $1,000 that has a par value of
$1,000. What type of bond is this?
A par bond
A premium bond
A preferred bond
A discount bond - correct answer -A par bond
, Page | 3
Why is it appropriate to calculate the value of a preferred stock in
the same way that you would find the present value of a
perpetuity?
Preferred stocks pay a coupon every six months, the coupon
amount is constant, and the stock has a maturity date.
For a preferred stock, a fixed amount is paid forever to
compensate the investors.
Even though a preferred stock has a fixed length, the cash flows
differ each year.
The cash flows that come from owning a preferred stock grow at a
constant rate every year and continue forever. - correct answer -
Preferred stocks pay a coupon every six months, the coupon
amount is constant, and the stock has a maturity date.
Why is it important to consider the time value of money in an ideal
evaluation method for capital investment?
Because a project's cash flows may be uncertain
, Page | 4
Because without considering every cash flow of a potential
project, you do not know how the project would enhance the firm's
value
Because the value of a cash flow today is different from the value
of a cash flow of the same dollar amount in 10 years
Because each project has different amount of risk - correct
answer -Because the value of a cash flow today is different from
the value of a cash flow of the same dollar amount in 10 years
Which scenario correctly describes opportunity cost?
Donatello has a side business making sculptures in addition to his
regular job. If he spends more time on his side business, the
opportunity cost is the money he makes from selling his
sculptures.
Caroline makes $25 an hour. Instead of working one night, she
goes to a concert that costs $50 and lasts two hours. The
opportunity cost of the concert is $50.
Alexandra decides to spend $50 on some new clothes instead of
using that money to pay her electric bill. The opportunity cost is
having the electricity turned off.
