Question
1. As a general rule, the value of any financial asset, such as a stock or bond, or physical investment project is determined by which
1. As a general rule, the value of any financial asset, such as a stock or bond, or physical investment project is determined by which of the following processes?
A. Measuring the present value of the net cash flows generated by the asset using a risk adjusted required rate of return as a discount factor. | |
B. Measuring the present value of the profits of the investment using a risk adjusted required return as a discount factor. | |
C. Adding the value of profits over the life of the investment and deducting the cost of that investment. | |
D. Any of the above methods are acceptable. |
2. What is the primary difference between accounting profits and economic profits?
A. Accounting profits include all revenues and expenses, while economic profits omit certain revenues and expenses from the calculation. | |
B. Accounting profits are measured only on an annual basis, while economic profits can be measured over longer periods of time. | |
C. Accounting profits do not include measures of opportunity cost, while economic profits do include measures of opportunity cost in the calculation. | |
D. All of the above are differences between accounting and economic profits. |
3. A firm is identified as earning a "normal" profit level. Which of the following is true?
A. The firm's economic profit is greater than zero. | |
B. The firm's economic profit is equal to zero. | |
C. The firm's economic profit is less than zero. | |
D. It is impossible to tell the economic profit level from the information provided. |
4. Which of the following statements are true?
A. Positive economic profits will lead to entry of investment capital into an industry. | |
B. Economic profits can be negative even if accounting profits are positive. | |
C. Both a and b are true. | |
D. Neither a nor b are true. |
5. Which of the following statements best describe the function of financial markets in a competitive economy?
A. Financial markets provide a way to reinsert consumer savings into the circular flow of money through the economy. | |
B. Financial markets provide a means of funding investments that earn returns that are equal to or greater than the returns required by investors. | |
C. Financial markets provide a mechanism for determining the optimal value of different investment opportunities. | |
D. All of the above are true. |
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