Question 26 As long as the interest rate is greater than zero, the future value

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Question 26

As long as the interest rate is greater than zero, the future value of a single sum will always:

Select one:

a. Be less than the present value.

b. Equal the future value if the time period is one year.

c. Increase as the number of periods increases.

d. Increase as the period of time decreases.

e. Decrease as the interest rate decreases.

Question 27

The bank quotes 6% for 5 year car loans. This is a real rate.

Select one:

True

False

Question 28

Consider a portfolio made up of two risky assets and a risk-free asset. You invest 30% in asset A with a beta of 1.25 and 40% in asset B with a beta of 2.05. What is the beta of the portfolio?

Select one:

a. 0.96

b. 1.03

c. 1.20

d. 0.94

e. 1.12

Question 29

A firm that only accepts projects for which the IRR is equal to the firm's required return will, on average, create wealth for its shareholders.

Select one:

True

False

Question 30

In a corporate structure with shareholders, managers, and a board of directors:

Select one:

a. directors are agents

b. managers are agents

c. shareholders are generally both principals and agents

d. shareholders are agents

e. managers are principals

Explanation / Answer

26. option C is correct; as according to the rule of compounding, future value increases as the number of periods increases because there will be more periods for compounding.

27. False; As this is a nominal rate.

28. The beta of a portfolio is the sum of the weight of each asset times the beta of each asset. We also need to remember that the beta of the risk-free asset is zero. It has to be zero since the asset has no risk. Setting up the equation:

?P = 0.30(0) + 0.30(1.25) + 0.40(2.05)

= 0 + 0.375 + 0.82 = 1.195 or 1.20

Hence, option C is correct.

29. False; Because A firm that only accepts projects for which the IRR is equal to the firm's required return will, onaverage, neither create nor destroy wealth for its shareholders as at that rate NPV is zero.

30. option A is correct; the principals of a corporation are the owners or investors, referred to as shareholders or stockholders. The agents of the corporation are generally considered to be the board of directors, officers or other persons thecorporation authorizes to act on its behalf.

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