1. Which of the following statements is correct? A) In the long run, a firm can

Question

1. Which of the following statements is correct?

A) In the long run, a firm can change its plant but not the quantity of its labor.

B) Long-run decisions are easily reversed.

C) Short-run decisions are not easily reversed.

D) A firm does not need to take into account its sunk cost when making current decisions.

2. Generally with bond ratings, the lower the rating, the ________ the interest rate an investor will receive and the

________ the risk that the issuer of the bond will default.

A) higher; higher

B) higher; lower

C) lower; higher

D) lower; lower

3. A normal rate of return refers to the ________ that investors must earn on the funds they invest in a firm,

expressed as a percentage of the amount invested.

A) minimum amount B) maximum amount C) total amount D) profit

4. What is the present value of $575 in one year if the current rate of interest is 3 percent?

A) $552.88 B) $558.25 C) $592.25 D) $747.50

Explanation / Answer

1. D) A firm does not need to take into account its sunk cost when making current decisions.

Explanation: sunk costs are the costs incurred in the past and can not be recovered and it is not considered for taking current and future decisions.

2. A) higher; higher

Explanation: A lower grade bond carries higher default risk and high interest rate

3. A) minimum amount

4. B) $558.25

Explanation: PV = F(P/F, i, n)

= 575(P/F, 3%, 1)

= 575(0.9709) = $558.25

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