KEY - Final Examination A - Page 4 of 17 Finance (FINE) 12. The impact of increa
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KEY - Final Examination A - Page 4 of 17 Finance (FINE) 12. The impact of increasing financial leverage, all else remaining equal, is to A) B) C) D) An improvement in liquidity Increase the return on capital employed A reduction in the return on equity Increase the level of risk in the company 13. Which of the following best describes the financial loss involved in choosing a less profitable option? A) Marginal cost B) Opportunity cost C) Sub optimization D) Terminal loss 14. Another way to say fair value of a bond is A) B) C) D) Book value of the bond Adjusted value of the bond Face value of the bond Market value of the bond 15. Which of the following is the best description of the Rule of 72? It tells how long it takes an investment to double at a given interest rate It tells how long it takes an investment to triple at a given interest rate A) B) C) It tells what an investment is worth when interest rates are expected to double D) It tells what interest rates are when an investment is expected to double 16. Of the current methods of investment appraisal, which offers the best measurement? A) Net Present Value B) Payback Period Marginal Rate of Return Internal Rate of Return C) D) Which of the following best describes the discount rate that when applied to the future cash flows makes them equal to the initial cash expenditures? A) B) C) D) Net Present Value Payback Period Marginal Rate of Return Internal Rate of ReturnExplanation / Answer
12.
Increasing Financial leverage , all else remaining equal, increases debt and consequently increases the debt servicing cost. If the earnings are not enough, the company well not be able to pay its increased payment obligations in time.
Hence, the risk increases.
Answer:
D) Increased level of risk in the company
13.
The most profitable option is chosen by optimization of various parameters in a business to maximize profit.
Sub optimization is a situation when the system yields less than the best possible outcome
Answer:
C) Sub Optimization
14.Fair value of an asset is determined by the value in the market. Market is the mechanism of value discovery of an asset which may be a stock or a real estate, commodity or bond.
Answer:
D)Market value of the Bond
15.
Rule of 72 states that years required to double the initial investment is approximately equal to 72 dvided by the annual interest rate in percentage.
If interest rate is 6%, it will take approximately (72/6)=12 years to double your investment.
Answer :
A)It tells how long it takes an investment to double at a given interest rate
16.Net Present value (NPV) indicates how much value the investment is likely to create.
Other parameters like payback period, internal rate of return and marginal rate of return may be used to eliminate or reject projects not meeting the minimum criteria of return or payback.
For final selection of project NPV should be used.
Answer:
.A)Net Present value
17.Internal rate of return is defined as the discount rate at which the Net Present Value is zero
Or Present Value of discounted future cash flows equal to initial cash flow.
Hence, Answer:
D) Internal Rate of Return
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