Question : 55) The rate of return earned in the market called the : 1196197

 

55)

The rate of return earned in the market is called the 55)

______ A)

nominal rate. B)

real rate. C)

marginal rate. D)

inflation rate. E)

investment risk rate.

56)

When making capital-budgeting decisions, the inflation rate 56)

______ A)

is automatically considered because it equals the market rate. B)

increases the minimum desired rate of return on projects. C)

should be ignored since it’s impossible to know what future inflation rates will be. D)

is important, but it’s impossible to estimate the effect on capital-budgeting decisions. E)

reduces the minimum desired rate of return on projects.

57)

The nominal rate of return would be .38 if 57)

______ A)

the real rate was .20, and the required rate was .15 B)

the real rate was .18, and the inflation rate was .20 C)

the real rate was .20, and the inflation rate was .18 D)

the real rate was .20, and the inflation rate was .15 E)

Both A and B are correct.

58)

Borry operates a shop in a resort in an area known for its high inflation rate. The inflation rate for the last few years has been averaging 3 percent a month. His long-term real rate of return is 12 percent, or 1 percent a month. On April 1 he anticipates that real dollar sales during the summer of 2001 will be as follows:

 

June$40,000

July $50,000

August$36,000

 

What is the nominal rate of return on a monthly basis for Borry’s shop during the summer of 2001? 58)

______ A)

0.0150 B)

0.0430 C)

0.0403 D)

0.0100 E)

0.0400

59)

Assume that in recent years a global economic crisis has produced a very high annual inflation rate of 25 percent. Columbian Coffee has decided to use a nominal rate to determine capital budgeting decisions. Its traditional real rate of return is 10 percent. The company is planning on purchasing a special coffee grinding machine that costs $30,000. It is anticipated the equipment will generate savings in nominal dollars as follows:

 

Year 1

$15,000

Year 2

15,000

Year 3

10,000

 

The anticipated salvage value of the equipment at the end of three years is $5,000. The income tax rate of Columbian Coffee is 40 percent. The company uses straight-line amortization for all equipment for tax purposes. The present value factors, in simplified form, are:

 

 

YearPV of $1PV of annuity of $1

10%25%35%37.5%10%25%35%37.5%

10.910.800.700.680.910.800.700.68

20.830.630.580.541.741.431.281.22

30.750.500.420.402.491.931.701.62

40.680.400.350.323.172.332.051.94

 

What is the company’s nominal traditional rate of return? 59)

______ A)

0.375 B)

0.100 C)

0.300 D)

0.350 E)

0.250

Use the information below to answer the following question(s).

 

The owner of Leather Shoe cannot decide how to project the real costs of opening a new shoe store in a community shopping centre. She knows the capital investment that will be made but is not sure of the returns of a store in a new mall. Historically, the retail shoe business has had an inflation rate equal to the economic norm. Both the selling prices and operating costs increase to some degree. The owner desires an internal rate of return of 10 percent. It is anticipated that inflation will be 3 percent during the next few years. The company expects a new store to show a growth rate, without inflation, of 8 percent. First year sales are expected to be $800,000.

60)

What is the nominal rate of return that the store must earn to achieve the owner’s objective? 60)

______ A)

0.103 B)

0.160 C)

0.130 D)

0.110 E)

0.133

61)

What will be the sales figures for years two and three, respectively, assuming the owner uses the nominal rate approach? 61)

______ A)

$906,400 and $1,026,951 B)

$944,000 and $1,113,920 C)

$906,400 and $1,113,920 D)

$904,000 and $1,021,520 E)

$880,000 and $968,000

62)

Borry operates a store in an area where the inflation rate for the last few years has been averaging 3 percent a month. His long-term real rate of return is 12 percent, or 1 percent a month. On June 1 he anticipates that real dollar sales during the summer of 2001 will be as follows:

 

June$40,000

July$50,000

August$36,000

 

What will the sales figures be for each month, respectively, assuming the owner uses the real rate approach? 62)

______ A)

$40,000; $51,500; and $38,192 B)

$40,000; $51,500; and $39,338 C)

$41,200; $51,500; and $39,338 D)

$41,200; $53,044 rounded; and $39,338 E)

$40,000; $50,000; and $36,000

63)

Borry operates a store in an area where the inflation rate has been averaging 3 percent a month. His goal is to have a real rate of return is 12 percent, or 1 percent a month. On April 1 he anticipates that real dollar sales during the summer of 2001 will be as follows:

 

June $40,000

July$50,000

August$36,000

 

What will the sales figures be for each month, respectively, assuming the owner uses a nominal rate approach? 63)

______ A)

$40,000; $51,500; and $39,338 B)

$40,000; $51,500; and $38,192 C)

$41,200; $51,500; and $39,338 D)

$41,200; $53,045; and $39,338 E)

$40,000; $50,000; and $36,000

64)

When cash flows are stated in real dollars and discounted using the a nominal rate, 64)

______ A)

this overstates the Present Value of the future cash flows. B)

this is a normal adjustment made to account for risky projects. C)

this understates the Present Value of the future cash flows. D)

this neither understates nor overstates the Present Value of the future cash flows. E)

this increases the payback period and increases the RRR.