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Exam 27: Tools of Finance

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Question 81

Multiple Choice

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Suppose interest of 5% each year for two years can be earned on $1,000 saved today with no risk. What is the least amount a person would need to have a 50% chance of winning to be willing to face a 50% chance of losing $1,000 today and be considered risk averse?

A) $907.03 to be paid in two years
B) $1,000.01 to be paid in two years
C) $1,100.01 to be paid in two years
D) $1,102.51 to be paid in two years

E) C) and D)
F) None of the above

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Question 82

Multiple Choice

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Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is

A) a mutual fund.
B) an insurance company.
C) a diversified company.
D) an equity-financed company.

E) C) and D)
F) All of the above

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Question 83

True/False

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People who are risk averse dislike bad outcomes more than they like comparable good outcomes.

The value of a stock depends on the ability of the company to generate dividends and the expected price of the stock when the stockholder sells her shares.

Which of the following is the correct expression for finding the present value of a $500 payment two years from today if the interest rate is 6 percent?

According to the efficient markets hypothesis, the number of people who think a stock is overvalued exactly balances the number of people who think a stock is undervalued.

A firm has three different investment options. Option A will give the firm $10 million at the end of one year, $10 million at the end of two years, and $10 million at the end of three years. Option B will give the firm $15 million at the end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option C will give the firm $30 million at the end of one year, and nothing thereafter. Which of these options has the highest present value?

Alivia deposited $3,000 into an account two years ago. The first year she earned 6 percent interest; the second year she earned 5 percent. How much money does Alivia have in her account today?

Actively managed mutual funds usually fail to outperform index funds, and this fact provides evidence in favor of the efficient markets hypothesis.

Suppose you place $500 into a savings account that will pay you 6% interest per year. What will be the future value of the savings account in 15 years?

Fundamental analysis shows that Johnson's Lumber Corporation's stock is overvalued.

You are tearing down a building and find $1 in change that someone lost when working on the building 140 years ago. If, instead of being careless with the $1 in change, this person had deposited it into a bank and earned 2 percent interest every year for 140 years, how much would be in the account today according to the rule of 70?

The future value of $1 saved today is $1/(1 + r).

Rory has purchased a product from an insurance company that requires the insurance company to pay him $5,000 each year, and he will continue to receive these payments until he dies. This series of payments is called

How does moral hazard matter in the market for insurance?

Write the formula for finding the future value in n years of $x today.

From the standpoint of the economy as a whole, the role of insurance is not to eliminate the risks inherent in life. Then what is its purpose?

If a person had increasing marginal utility, then the decline in utility from losing $1,000 would be greater than the increase in utility from gaining $1,000.

Figure 27-3 The following figure shows a utility function for Dexter. -Refer to Figure 27-3. From the appearance of the utility function, we know that

Figure 27-3 The following figure shows a utility function for Dexter. -Refer to Figure 27-3. From the appearance of the graph, we know that