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| 1 | |
Firms generate economic rents because: |
| | A) | They have monopoly power |
| | B) | They are in a purely competitive industry |
| | C) | They have erroneous information |
| | D) | All of these options |
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| 2 | |
A building is appraised at $1 million. This estimate is based on a forecast of net rent of $80,000 per year discounted at 8% (PV = 80,000/0.08= 1,000,000). The rent is net of repair and maintenance costs and taxes. Suppose the building is currently in disrepair and it takes one year and $200,000 to bring it into rentable condition. How much would you be willing to pay for the building today? |
| | A) | $1,000,000 |
| | B) | $925,926 |
| | C) | $740,741 |
| | D) | $850,550 |
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| 3 | |
A new grocery store cost $30 million in initial investment. It is estimated that the store will generate $2 million after tax cash flows for five years. At the end of 5 years it can be sold for $40 million. What is the NPV of the project at a discount rate of 10%? |
| | A) | $2.42 million |
| | B) | $18 million |
| | C) | $.69 million |
| | D) | $1.38 million |
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| 4 | |
Suppose the current price of gold is $300 per ounce. The price of gold is expected to grow at 4% per year for the foreseeable future. If the approximate discount rate is 10%, then the present value of gold is: |
| | A) | Less than $300 per ounce |
| | B) | $300 per ounce |
| | C) | Greater than $300 per ounce |
| | D) | Not enough information |
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| 5 | |
Investing in gold is like: |
| | A) | Investing in a stock that pays quarterly dividends |
| | B) | Investing in a stock that pays annual dividends |
| | C) | Investing in a stock that pays no dividends |
| | D) | Investing in bonds |
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| 6 | |
When futures prices are used to estimate cash flows, the estimates are: |
| | A) | Present value of future cash flows |
| | B) | Certainty equivalents |
| | C) | Same as the estimates using spot prices |
| | D) | None of these options |
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| 7 | |
You have inherited 100 acres of Iowa farm land. There is an active market in this type of land and other similar properties are selling for 10,000 per acre. If planted with corn, the net cash flows are expected to be $800 per acre forever. If the discount rate is 10%, how much is the land worth per acre? |
| | A) | $10,000 |
| | B) | $8,000 |
| | C) | $18,000 |
| | D) | $9,500 |
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| 8 | |
The annual demand (in millions) for tennis balls is given by the equation: Demand = 10(4 − price). If the price of tennis balls is $1.50, what is the demand for tennis balls? |
| | A) | 10 million |
| | B) | 15 million |
| | C) | 25 million |
| | D) | 12 million |
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| 9 | |
Flinton Technology Company is currently valued at $200 million. It is proposing a new plant with a net present value of $100 million. But the new plant will reduce the value of the existing plant by $30 million. What is the value of the company if it takes up the new plant? |
| | A) | $270 million |
| | B) | $200 million |
| | C) | $300 million |
| | D) | $230 million |
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| 10 | |
The most reliable source for asset values is: |
| | A) | Stock analysts |
| | B) | Market values |
| | C) | Book values |
| | D) | Internal estimates |
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| 11 | |
If space in a building is used to produce a product worth $3 million in NPV over three years and rent for comparable space in the area generates $400,000 annually in cash flows, what should the owner of the company do if the expected return on capital is 12%? |
| | A) | Rent more space in another building |
| | B) | Continue the existing business |
| | C) | Close down the business and rent the building |
| | D) | Repair the building |
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| 12 | |
Two projects have the exact same NPV. Which of the following statements could be considered true? |
| | A) | NPV should be the only factor in deciding which project to take |
| | B) | Both NPV values will always have the same preference |
| | C) | The project with the more dispersed distribution of possible NPVs is a better project |
| | D) | The project with the more narrow distribution of possible NPVs is a better project |
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| 13 | |
Profits that more than cover the cost of capital are called the |
| | A) | Economic rents |
| | B) | Economic products |
| | C) | Economics added |
| | D) | Economic cost of capital |
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| 14 | |
Demand and price are |
| | A) | Positively correlated |
| | B) | Not related to each other |
| | C) | Usually inversely related |
| | D) | Loosely related |
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| 15 | |
NPVs can be positive because |
| | A) | There are errors in the forecast |
| | B) | The company can expect to earn economic rents |
| | C) | There are biases in the cash flow forecasts |
| | D) | All of these options |
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