S66 Part 2 - Economic Factors and Business Information

any time an investment's IRR is less than required rate of return, the NPV is

negative and should be avoided.

A client wishes to endow an annual scholarship of $40,000 at her alma mater. If the investment can provide a perpetual return of 4.2% per annum, the lump sum deposit required to provide this income is A)$168,000.00. B)$417,536.53. C)$1,052,631.50. D)$952,380.95.

D)$952,380.95. annual amount / rate of return = lump sum required You should be able to "eyeball" this one. If the return were 4%, you would need $1 million to generate $40,000 per year. With a rate of 4.2%, you would need slightly less. There is only one answer that is slightly less than $1 million (and that would be true on the actual exam).

Investment risk may broadly be categorized as either unsystematic or systematic risk; both types of risk together constitute total, or absolute, risk. Total risk is measured by A)opportunity cost. B)beta coefficient. C)correlation coefficient.

D)standard deviation Unlike beta, which only measures systematic risk, standard deviation reflects both systematic and unsystematic risk, revealing the total risk of the investment.

The financial ratio that shows the relationship between the price of a company's stock and the company's net worth (stockholders' equity) is A)the dividend discount ratio B)the price-earnings (PE) ratio. C)the price-sales ratio D)the price-to-book-value ratio

D)the price-to-book-value ratio The price-to-book-value ratio is calculated by dividing the price per share by the stockholders' equity per share. This ratio shows the relationship between a company's stock price and the company's book value.

Which of the following best describes net present value? A)The difference between the sum of the discounted cash flows that are expected from an investment and its initial cost B)It is the true interest yield expected from an investment expressed as a percentage C)The discount rate that results in a return of zero for a series of future cash flows D)The amount of money that must be invested today at some specified rate of return to equal a targeted value in a specified number of years

A)The difference between the sum of the discounted cash flows that are expected from an investment and its initial cost Net present value is a computation taking into consideration future cash flows, discounted to the present, and comparing that to the capital investment necessary to obtain those flows. It is always expressed in monetary units and, if positive, indicates a potentially worthwhile investment.

If you had expectations of high inflation, you would A)increase equity exposure and reduce fixed income exposure B)increase fixed-income exposure and reduce tangible asset exposure C)increase fixed-income exposure and reduce commodity exposure D)increase fixed-income exposure and reduce equity exposure

A)increase equity exposure and reduce fixed income exposure Rising inflation will reduce real returns on fixed-income investments, so you would want to reduce that exposure. Equities, tangible assets, and commodities tend to increase along with the inflation rate.

NPV is expressed as _____________ and IRR is expressed as ______________

NPV = dollar IRR = percentage