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Exam 27: Tools of Finance

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Question 31

True/False

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Diversification can reduce firm-specific risk.

A) True
B) False

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Question 32

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According to the rule of 70, if you earn an interest rate of 3.5 percent, your savings will double about every 20 years.

A) True
B) False

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Question 33

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Benjamin would like to double the money in his retirement account in seven years. According to the rule of 70, what rate of interest would he need to earn to attain his objective?

From the standpoint of the economy as a whole, the role of insurance is to greatly reduce or eliminate the risks inherent in life.

The objective of diversification is to reduce risk. How does a person diversify a stock portfolio? How is risk measured?

Suppose the McCormick Corporation releases an earnings report that fails to meet the market's expectations. What does the efficient markets hypothesis predict will happen to McCormick's stock price?

Ahmet decided to increase the number of stocks in his portfolio. In doing so, Ahmet reduced

Give two conditions that are important to the efficient market theory. List one implication of the efficient market theory.

As the interest rate increases, the present value of future sums decreases, so firms will find fewer investment projects profitable.

If a savings account pays 5 percent annual interest, then the rule of 70 tells us that the account value will double in approximately 14 years.

Thompson Corporation is considering the purchase of a new piece of machinery. Thompson expects the new machinery to increase its revenues by $70,000 at the end of year 1, $60,000 at the end of year 2, and $50,000 at the end of year 3 at which point the machinery will have exhausted its useful life. If the interest rate is 4%, what is the most Thompson should be willing to pay today for this piece of machinery?

Discuss the statistical evidence concerning the efficient markets hypothesis.

Other things the same, an increase in the interest rate makes the quantity of loanable funds demanded

An automobile manufacturer unexpectedly announces that it has hired a new chief executive officer. It is widely believed that the presence of this individual will raise the profitability of the corporation. At the same time interest rates unexpectedly rise. Which of the above would tend to make the price of the stock rise?

If you wish to rely on fundamental analysis to choose a portfolio of stocks, then you have no choice but to do all the necessary research yourself.

Suppose your bank account pays a 5% interest rate. You are considering purchasing a share of stock in DH Corporation for $250. The stock will pay you a $10 dividend at the end of years 1, 2, 3, 4, and 5. You expect to be able to sell the stock at the end of year 5 for $300. Is DH a good investment? Provide evidence to support your answer.

Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins $50. This implies that Thom's

Which of the following is the correct way to compute the future value of $100 put into an account that earns 4 percent interest for 10 years?

If you believe the stock market is informationally efficient, then it is a waste of time to engage in fundamental analysis.

Anthony closes out his account in which he deposited $500 five years ago at an interest rate of 5%. Mark closes out his account in which he deposited $500 ten years ago at an interest rate of 5%. Who had more in their account? About how much more did he have?