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CMFAS Module 4a
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Question 1 of 30
1. Question
The formula of perpetuity is simplified as:-
Present value PV = future cash flows X/interest rate r
Using the above formula, what is the present value of an annual payment of $10 if the interest rate is 10%?Correct
The formula for the present value is:-
Present value PV = future cash flows X/interest rate r
PV=10/0.1=100 $
So the answer is 100 $Incorrect
The formula for the present value is:-
Present value PV = future cash flows X/interest rate r
PV=10/0.1=100 $
So the answer is 100 $ -
Question 2 of 30
2. Question
Which of the following is an asset that pays a fixed amount each year for a specified finite number of years?
Correct
An annuity can be defined as an asset that pays a fixed amount each year for a specified finite number of years. Examples of annuity in routine life are premium paid on insurance, instalments paid on the home mortgage.
Incorrect
An annuity can be defined as an asset that pays a fixed amount each year for a specified finite number of years. Examples of annuity in routine life are premium paid on insurance, instalments paid on the home mortgage.
-
Question 3 of 30
3. Question
Which of the following refers to the frequency with which interest is added to the principal?
Correct
Compound Interest refers to the frequency with which interest is added to the principal. The future value FV at time t compounding n times per period at a constant interest rate r, the following formula is used
FVt = PV (1+r/n)ntIncorrect
Compound Interest refers to the frequency with which interest is added to the principal. The future value FV at time t compounding n times per period at a constant interest rate r, the following formula is used
FVt = PV (1+r/n)nt -
Question 4 of 30
4. Question
Compound Interest formula is FVt = PV (1+r/n)nt, where
FV = future value
PV = present value
r = interest rate
n = Compounding time
t = total time period (year)
If invest $ 100 at a 10% annual interest rate for 10 years, what will be the FV with daily compounding (360 days)?Correct
Compound Interest formula is FVt = PV (1+r/n)nt
PV = present value = 100
r = interest rate = 0.1
n = Compounding time = 360
t = total time period (year) = 10
Putting the values in the formula
FV = 100(1+0.1/360)360X10
FV= 271.8Incorrect
Compound Interest formula is FVt = PV (1+r/n)nt
PV = present value = 100
r = interest rate = 0.1
n = Compounding time = 360
t = total time period (year) = 10
Putting the values in the formula
FV = 100(1+0.1/360)360X10
FV= 271.8 -
Question 5 of 30
5. Question
Which of the following is true for fixed income security?
I. It is a security that offers a predetermined sequence of future payments
II. A sequence of payments each period into indefinite future
III. The typical fixed-income security is a bond
IV. It is an asset that pays a fixed amount each year for a specified finite number of yearsCorrect
The following is true for fixed income security:-
(I) It is a security that offers a predetermined sequence of future payments
(II) The typical fixed-income security is a bondIncorrect
The following is true for fixed income security:-
(I) It is a security that offers a predetermined sequence of future payments
(II) The typical fixed-income security is a bond -
Question 6 of 30
6. Question
Which of the following is true for Equity?
I. Equity is ownership of assets
II. Equity = Liabilities – Assets
III. Equity = Assets – Liabilities
IV. Equity is simply the liabilitiesCorrect
In finance, the following is true for Equity:-
(I) Equity is ownership of assets
(II) Equity = Liabilities – AssetsIncorrect
In finance, the following is true for Equity:-
(I) Equity is ownership of assets
(II) Equity = Liabilities – Assets -
Question 7 of 30
7. Question
In finance, which of the following is not an example of fixed-income security?
I. Treasury bonds
II. Corporate bonds
III. Liabilities
IV. Certificates of deposit (CDs)Correct
The examples of fixed income security are:-
(I) Treasury bonds
(II) Corporate bonds
(III) Certificates of deposit (CDs)Incorrect
The examples of fixed income security are:-
(I) Treasury bonds
(II) Corporate bonds
(III) Certificates of deposit (CDs) -
Question 8 of 30
8. Question
The XYZ corporation will pay dividends of 1 next year. Dividends are expected to grow (g) by 2% per year. The current interest rate (r) is 10%. As we know the formula for stock price i.e.
Stock price = Dividend/ (r-g)
Keeping the above formula, what is the stock price?Correct
The formula for stock price i.e.
Stock price = Dividend/ (r-g)
So putting the values in the above formula
Stock price = 1/(0.1-0.02)=12.5Incorrect
The formula for stock price i.e.
Stock price = Dividend/ (r-g)
So putting the values in the above formula
Stock price = 1/(0.1-0.02)=12.5 -
Question 9 of 30
9. Question
In capital budgeting, how the interest rate is referred to?
Correct
In capital budgeting, the interest rates implicit in prices of future cash flows are referred to as discount rates. Discount rates reduce the cash flow towards their present value.
Incorrect
In capital budgeting, the interest rates implicit in prices of future cash flows are referred to as discount rates. Discount rates reduce the cash flow towards their present value.
-
Question 10 of 30
10. Question
A project costs 100 today and has future cash flows i.e in 1st year 50 (C1) and 2nd year 80 (C2). If the interest rate rt=5% for t-1 and t-2, and the formula for NPV is
NPV = C1/(1+r) +C2/(1+r2)- initial cost
What will the NPV?Correct
As we know the formula for Net present value:-
NPV = C1/(1+r) +C2/(1+r2)- initial cost
C1= 50
C2= 80
rt= 5 %
Initial cost =100
so putting the values
NPV = 50/(1+0.05) +80/(1+0.052) -100
NPV = 120.18-100=20.18Incorrect
As we know the formula for Net present value:-
NPV = C1/(1+r) +C2/(1+r2)- initial cost
C1= 50
C2= 80
rt= 5 %
Initial cost =100
so putting the values
NPV = 50/(1+0.05) +80/(1+0.052) -100
NPV = 120.18-100=20.18 -
Question 11 of 30
11. Question
Which of the following is considered as accounting numbers?
I. Profit
II. Loss
III. Bond
IV. Book valueCorrect
In Finance, the following are considered as accounting numbers:-
(I) Profit
(II) Loss
(III) Book valueIncorrect
In Finance, the following are considered as accounting numbers:-
(I) Profit
(II) Loss
(III) Book value -
Question 12 of 30
12. Question
Which of the following can be dangerous to the company’s financial health and only to be used to reduce tax payments?
Correct
By managing the overall company’s performance, the following should be acted upon:-
(A) Accountants can be dangerous to a company’s financial health
(B) They are only to be used to reduce tax paymentsIncorrect
By managing the overall company’s performance, the following should be acted upon:-
(A) Accountants can be dangerous to a company’s financial health
(B) They are only to be used to reduce tax payments -
Question 13 of 30
13. Question
By managing the overall company’s performance, which of the following are true for accountants?
I. Accountants can be dangerous to a company’s financial health
II. Accountants can be benefitted to the company’s financial health
III. They are only to be used to reduce tax payments
IV. They are not to be used to reduce tax paymentsCorrect
By managing the overall company’s performance, the following should be acted upon:-
(A) Accountants can be dangerous to a company’s financial health
(B) They are only to be used to reduce tax paymentsIncorrect
By managing the overall company’s performance, the following should be acted upon:-
(A) Accountants can be dangerous to a company’s financial health
(B) They are only to be used to reduce tax payments -
Question 14 of 30
14. Question
Which of the following is an important way in which accountants affect the NPV of a project?
Correct
There is an important way in which accountants affect the NPV of a project, namely through depreciation. Depreciation can be used to reduce taxes only to the extent that you have positive profits.
Incorrect
There is an important way in which accountants affect the NPV of a project, namely through depreciation. Depreciation can be used to reduce taxes only to the extent that you have positive profits.
-
Question 15 of 30
15. Question
In finance, which of the following are the examples of Cash outflow?
I. Payment of the Loan
II. Cost of project
III. Salaries paid to employees
IV. Payments received from the profit the projectCorrect
Examples of Cash outflow are given below:-
(I) Payment of the Loan
(II) Cost of project
(III) Salaries paid to employeesIncorrect
Examples of Cash outflow are given below:-
(I) Payment of the Loan
(II) Cost of project
(III) Salaries paid to employees -
Question 16 of 30
16. Question
In finance which of the following are the examples of Cash inflow?
I. Profit earned from the sale
II. Remittance received
III. Salaries paid to employees
IV. Payments received from the profit the projectCorrect
Examples of Cash inflow are given below:-
(I) Profit earned from the sale
(II) Remittance received
(III) Payments received from profit the projectIncorrect
Examples of Cash inflow are given below:-
(I) Profit earned from the sale
(II) Remittance received
(III) Payments received from profit the project -
Question 17 of 30
17. Question
Which of the following is not the example of cash inflow?
Correct
Examples of Cash inflow are given below:-
(I) Profit earned from the sale
(II) Remittance received
(III) Payments received from the profit the projectIncorrect
Examples of Cash inflow are given below:-
(I) Profit earned from the sale
(II) Remittance received
(III) Payments received from the profit the project -
Question 18 of 30
18. Question
When someone makes an investment, he may have to forgo money that he would otherwise have made automatically is the definition for which of the following?
Correct
When an option of investment is chosen from many other available options, the opportunity cost can be defined as the “cost” incurred by not enjoying/ getting the benefits associated with the best alternative available option.
Incorrect
When an option of investment is chosen from many other available options, the opportunity cost can be defined as the “cost” incurred by not enjoying/ getting the benefits associated with the best alternative available option.
-
Question 19 of 30
19. Question
Which of the following are correct with respect to the opportunity cost?
I. The cost incurred by not enjoying the benefits associated with the best alternative available option
II. The loss of potential gain from other alternatives when one alternative is chosen
III. The benefit not received as a result of not selecting the next best option
IV. The profit made from the project chosen from the available optionCorrect
The following are correct for opportunity cost
(I) The cost incurred by not enjoying the benefits associated with the best alternative available option
(II) The loss of potential gain from other alternatives when one alternative is chosen
(III) The benefit not received as a result of not selecting the next best optionIncorrect
The following are correct for opportunity cost
(I) The cost incurred by not enjoying the benefits associated with the best alternative available option
(II) The loss of potential gain from other alternatives when one alternative is chosen
(III) The benefit not received as a result of not selecting the next best option -
Question 20 of 30
20. Question
Which of the following is correct for depreciation?
I. It can be used to reduce taxes only to the extent that you have positive profits
II. A reduction in the value of an asset over time, due in particular to wear and tear
III. A decrease in the value of a currency relative to other currencies
IV. An increase in the value of a currency relative to other currenciesCorrect
In finance, the following are correct for depreciation
(I) It can be used to reduce taxes only to the extent that you have positive profits
(II) A reduction in the value of an asset over time, due in particular to wear and tear
(III) A decrease in the value of a currency relative to other currenciesIncorrect
In finance, the following are correct for depreciation
(I) It can be used to reduce taxes only to the extent that you have positive profits
(II) A reduction in the value of an asset over time, due in particular to wear and tear
(III) A decrease in the value of a currency relative to other currencies -
Question 21 of 30
21. Question
Which of the following is/ are correct regarding the payback period of investment?
I. It is defined as the number of years before a project returns its cost
II. It is defined as the number of years before a project returns its loss and liabilities
III. The decision rule is to accept a project with a shorter payback period
IV. The decision rule is to accept a project with a longer payback periodCorrect
Payback period of an investment can be defined as the number of years before a project returns its cost and the decision rule is to accept a project with a shorter payback period.
Incorrect
Payback period of an investment can be defined as the number of years before a project returns its cost and the decision rule is to accept a project with a shorter payback period.
-
Question 22 of 30
22. Question
The number of years before a project returns its cost is the definition of which of the following?
Correct
The number of years before a project returns its cost is the definition of the Payback Period of an investment. In other words, the payback period of an investment is the period for an investment to be in profit.
Incorrect
The number of years before a project returns its cost is the definition of the Payback Period of an investment. In other words, the payback period of an investment is the period for an investment to be in profit.
-
Question 23 of 30
23. Question
Which of the following is the definition of The Internal Rate of Return (IRR)?
Correct
The Internal Rate of Return (IRR) can be defined as and when The interest rate that makes the NPV of a project zero. So in this way, it is also a factor to decide whether it is feasible to invest in it or not.
Incorrect
The Internal Rate of Return (IRR) can be defined as and when The interest rate that makes the NPV of a project zero. So in this way, it is also a factor to decide whether it is feasible to invest in it or not.
-
Question 24 of 30
24. Question
What is the decision rule for IRR?
I. It provides a guideline for deciding whether to proceed with a project or investment
II. It could not provide any guideline for selecting a project
IIII. IRR rule simply states that a project should not be pursued if the internal rate of return is greater than the minimum required rate of return.
IV. IRR rule simply states that a project should be pursued if the internal rate of return is greater than the minimum required rate of return.Correct
The decision rule for IRR can be described below:-
(A) It provides a guideline for deciding whether to proceed with a project or investment
(B) IRR rule simply state that a project should be pursued if the internal rate of return is greater than the minimum required rate of return.Incorrect
The decision rule for IRR can be described below:-
(A) It provides a guideline for deciding whether to proceed with a project or investment
(B) IRR rule simply state that a project should be pursued if the internal rate of return is greater than the minimum required rate of return. -
Question 25 of 30
25. Question
The present value of the project divided by its cost is the definition for which of the following?
Correct
The Profitability index can be defined as the present value of the project divided by its cost. So if the probability index is greater than 1, the project is feasible. If we compare two projects, the project with higher probability index is feasible.
Incorrect
The Profitability index can be defined as the present value of the project divided by its cost. So if the probability index is greater than 1, the project is feasible. If we compare two projects, the project with higher probability index is feasible.
-
Question 26 of 30
26. Question
In the context of the Profitability index, what is the decision rule used for accepting the projects?
Correct
The Profitability index can be defined as the present value of the project divided by its cost and from the definition of The Profitability index, it is understood that accepting the projects is feasible which has A profitability index larger than one.
Incorrect
The Profitability index can be defined as the present value of the project divided by its cost and from the definition of The Profitability index, it is understood that accepting the projects is feasible which has A profitability index larger than one.
-
Question 27 of 30
27. Question
In finance, why corporate bonds are risky?
Correct
corporate bond has no particular definition. In some cases, these are used including all bonds except those which are issued by the government in their own currencies but that are risky because of the default probability.
Incorrect
corporate bond has no particular definition. In some cases, these are used including all bonds except those which are issued by the government in their own currencies but that are risky because of the default probability.
-
Question 28 of 30
28. Question
In pricing corporate bonds, how can be a convertible bond can be valued?
I. As the combination of a risk-free bond
II. As the combination of (writing) a put option
III. As a combination of a call option on the shares of the firm
IV. As the combination of a risky bondCorrect
A convertible bond is a fixed income corporate debt that demands interest payments and it can be given value as a combination of a risk-free bond, a put option and a call option on the shares of the firm.
Incorrect
A convertible bond is a fixed income corporate debt that demands interest payments and it can be given value as a combination of a risk-free bond, a put option and a call option on the shares of the firm.
-
Question 29 of 30
29. Question
Which bond gives the holder the right to exchange the bond for a number of shares of equity?
Correct
A convertible bond is a bond that offers investors a type of hybrid security that includes the features of a bond, such as interest payments, while also having the option to own the underlying stock.
Incorrect
A convertible bond is a bond that offers investors a type of hybrid security that includes the features of a bond, such as interest payments, while also having the option to own the underlying stock.
-
Question 30 of 30
30. Question
In capital structure, what is meant by corporate tax?
I. A direct tax imposed by a jurisdiction on the income
II. A direct tax imposed by a jurisdiction on the capital of corporations
III. The indirect tax imposed by the government
IV. The direct tax imposed by a jurisdiction on analogous legal entitiesCorrect
A corporate tax, other names are corporation tax and company tax is a direct tax imposed by a jurisdiction on the income or capital of corporations or analogous legal entities. These taxes may be referred to as income tax or capital tax.
Incorrect
A corporate tax, other names are corporation tax and company tax is a direct tax imposed by a jurisdiction on the income or capital of corporations or analogous legal entities. These taxes may be referred to as income tax or capital tax.