MULTIPLE CHOICE QUESTIONS

Question 11

According to the expectations theory of the term structure of interest, if the 1-year bond rate today is 6.50% p.a., the 2-year bond rate today is 6.70% p.a., and the 3-year bond rate today is 7.00%, what will be the 2-year bond rate next year?

1. 6.70%
2. 6.90%
3. 7.00%
4. 7.25%

Question 12

Which of the following costs should be excluded from incremental cash flows?

1. The wage costs related to producing the new product.
2. The cost of establishing a new plant.
3. The consultant's fee previously spent for the feasibility study of the project.
4. The plant operating costs.

Question 13

Break-even analysis can be defined as:

1. analysis of the amount by which one input variable falls before a project ceases to be profitable.
2. analysis of the amounts by which one or more input variables may fall/increase before a project ceases to be profitable.
3. analysis of the effect of changing all of the input variables whose values are uncertain to observe the effects on the results.
4. none of the given options.

Question 14

Under the equivalent annual value method, the criterion for project acceptance is:

1. the project with the higher equivalent annual value is preferred.
2. the project with the lower equivalent annual value is preferred.
3. the project with the shorter life is preferred.
4. the project with the higher equivalent annual value is preferred, provided that both projects have the same cost of capital.

Question 15

An 'efficient' portfolio is one that:

1. combines assets whose returns are not perfectly correlated.
2. offers the highest expected return for a given level of risk.
3. holds a proportion of all possible assets.
4. combines many diverse assets.

Question 16

Which type of risk can't be eliminated by diversification?

1. firm specific risk
2. unsystematic risk
3. systematic risk
4. residual risk