QUESTION 1 An efficient capital market is best defined as a market in which security prices reflect which one of the following? O A. The historical arithmetic rate of return OB. Available information OC. The historical geometric rate of return O D. Current inflation O E. A risk premium New Labs just announced that it has received a patent for a product that will eliminate all tu viruses. This news is they expo major medical advancement. Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient? O A The price of New Labs stock remains unchanged. O B. All stocks quickly increase in value and then all but New Labs stock fall back to their original values, O The price of New Labs stock increases rapidly to a higher price and then remains at that price. The value of all stocks suddenly increase and then level off at their higher values. O E. The price of New Labs stock increases rapidly and then settles back to its pre-announcement level. QUESTION 3 You are considering the following two mutually exclusive projects. The required return on each project is 14 percent. Which project should you accept and what is the best reason for that decision? Year Project A Project B 0-$46,000 $46,000 1 25,000 11,000 2 18,000 19,000 3 16,000 32,000 O A. Project B; because it has the higher net present value B. Project A; because it has the higher internal rate of retum O OC. Project B; because it has the higher internal rate of return OD. Project A; because it pays back faster E. Project A; because it has the higher net present value QUESTION 4 Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B? O A Dual return B. Conventional . Crosswise D. Mutually exclusive E. Multiple choice