51) Investors generally don’t like risk. Therefore, a typical investor A) will not be induced to take on any risk. B) will only take on the least risk possible. C) will only take on additional risk if he expects to be compensated in the form of additional return. D) will only accept a zero return if the risk is zero.
52) In finance, we assume that investors are generally A) neutral to risk. B) averse to risk. C) fond of risk. D) none of the above
53) Consider the after-tax cash flows for Project S and Project L:
Project S Project L Year 1 $3000 0 Year 2 0 $3000 Project S Project L Year 1 $3000 0 Year 2 0 $3000
A rational person would prefer ________. A) Project S because the money can be reinvested sooner B) Project L because they can avoid taxes by receiving cash flows later C) information about profits instead of cash flows D) neither investment over the other
54) Assume that an investor is offered a choice of a risk-free government bond or a high-risk corporate stock. Further assume that the expected return is the same for both. According to one of the axioms of finance, which investment would be chosen? A) the corporate stock B) the government bond C) neither, the investor would be indifferent D) none of the above
55) Assume that an investor is offered a choice of a risk-free government bond that is expected to return 3.5% or a high-risk corporate stock. According to one of the principles of finance, what would induce the investor to purchase the corporate stock? A) a return that is substantially lower than 3.5% B) cash dividends C) a return that is substantially higher than 3.5% D) none of the above
56) Assume that you went to Las Vegas and hit the jackpot for $5 million. Further assume that you were offered a choice to receive the $5 million today, or receive it in two years. According to one of the principles of finance, which would you take? A) the $5 million in two years because you would be afraid of spending it all right away B) the $5 million in two years because it would be worth more than if you would receive it today C) You would be indifferent as to when you would receive the $5 million. D) the $5 million today because it would be worth more than if you would receive it in two years
57) Assume that you won the Lotta Dough Lotto jackpot for $20 million. Further assume that you were offered a choice to receive the $20 million today, or receive it in equal installments of $1 million per year for 20 years. According to one of the principles of finance, which would you take? A) the $20 million in equal installments of $1 million per year for 20 years because you would be afraid of spending it all right away B) the $20 million today because it would be worth more than if you would receive it in equal installments of $1 million per year for 20 years C) You would be indifferent as to when you would receive the $20 million since the total number of dollars received is the same either way. D) the $20 million in equal installments of $1 million per year for 20 years because it would be worth more than if you would receive it today
58) Which of the following statements best represents the “Agency Problem”? A) Managers might attempt to benefit themselves in terms of salary and perquisites at the expense of shareholders. B) The agency problem results from the separation of management and the ownership of the firm. C) The agency problem may interfere with the implementation of maximizing shareholder wealth. D) all of the above
59) As of today, the most severe economic crisis to afflict the United States economy is considered to be A) the Great Depression of the 1930s. B) the Great Recession of 2007 – 2009. C) the Reagan Tax Law Changes of 1985. D) the Savings and Loan Crisis of 1978 – 1982.
60) The “perfect storm” of factors that contributed to the economic crisis of 2007 include A) increases in the minimum wage rate, unchecked illegal immigration, and state government deficits. B) financial deregulation, unchecked commodity prices, floating currency exchange rates. C) poorly chosen mortgage loans, falling housing prices, and a contracting economy. D) agency costs, inefficient markets, and perfect capital markets.