Fin 3002
An efficient market is one in which any change in available information will be reflected in the company's stock price ____
immediately
While making capital budgeting decisions, which of the following sentence is true regarding the initial investment of net working capital?
it is expected to be recovered by the end of the project's life
The basic approach to evaluating cash flow and NPV estimates involves asking:
what-if questions
If you receive $2 a dividend per share on your 100 shares, you total dividend income is:
$200
If your total dollar return was $7 and your dividend was $2, then the price change on your stock must have been ____
$5
In the Ibbotson-Sinquefield studies, long term corporate bonds have which of the following characteristics?
-20 year maturity -high quality
Which of the following are needed to describe the distribution of stock returns?
-the standard deviation of returns -the mean return
Palmer Company had the following returns: 2009: 12% 2010: 10% 2011: -8% 2012: 4% 2013: 22% What is the variance of Palmer's returns?
0.0122
When McDonald's decides to build a new restaurant at a particular location, which of the following competitors might also be tempted to locate new facilities in the same area?
1. Wendy's 2. Burger King
Rank each of the following in order from most important to least important as they pertain to project analysis
1. cash flow 2. accounting income
The bonuse depreciation in 2019 will be:
100%
The rules for depreciating assets for tax purposes are based upon provisions in the _____
1986 Tax reform
A share of common stock currently sells for $100 and will pay a dividend of $2 at the end of the year. If the price is expected to increase to $113 at the end of one year, what is the stock's current dividend yield?
2% (2/100)
According to the bottom-up approach, what is the OCF if EBIT is $600, depreciation is $1,800, and the tax rate is 21%
2274 600 x (1-.21)+1800
If a firm's current assets are $150,000, its total assets are $320,000, and its current liabilities are $80,000, what is its net working capital?
70,000 150,000-80,000
What is risk premium?
It is additional compensation for taking risk, over and above the risk-free rate
What is the definition of expected return?
It is the return that an investor expects to earn on a risky asset in the future
Which of the following is an example of a sunk cost?
Research and development expense incurred in the past
Mona Corporation has a variance of returns of 343, while Scott Company has a variance of returns of 898. Which company's actual returns vary more from their mean return?
Scott Corporation
From a managerial perspective, highly uncertain projects can be dealt with by keeping the degree of operating leverage:
as low as possible
In a competitive market, positive NPV projects are:
uncommon
The efficient markets hypothesis contends that ____ capital markets such as the NYSE are efficient.
well-organized
Which of the following represents the accounting profit break-even point?
(Fixed costs + Depreciation) / Contribution Margin
Which of the following are examples of a portfolio?
- investing $100,000 in the stocks of 50 publicly traded corporation - holding $100,000 investment in a combination of stocks and bonds - investing $100,000 in a combination of US and Asian stocks
What does variance measure?
- it measures the dispersion of the sample of returns - it measures the riskiness of an investment's returns
Investment in net working capital arises when _____ (3)
-cash is kept for unexpected expenditures -inventory is purchased -credit sales are made
Which of the following are fixed costs? (2)
-cost of equipment -rent on a production facility
Which of the following is a fixed cost for a tire manufacturing business?
1. Manager's salary 2. Building rent
The possibility that errors in projected cash flows will lead to incorrect decisions is known as:
1. estimation risk 2. forecasting risk
Which of the following are true about depreciation expense?
1. it affects cash flows 2. it is a non-cash expense 3. it affects the accounting profit break-even point
Arrange the following investments from highest to lowest return based on what our study of capital market history has revealed about risk premiums
1. small-company common stock 2. long-term corporate bonds 3. U.S. Treasury bills
What is Net Present Value
The difference between the market value of a project and its cost (present value of cash flows minus initial investments)
Among the three main sources of cash flow, which source of cash flow is the most important and also the most difficult to forecast?
The operating cash flows from net sales over the life of the project
Which of the following is an opportunity cost in the context of a vacant building that a firm currently owns?
The potential rental income lost by using the empty building for a project
If you wish to create a portfolio of stocks, what is the required minimum number of stocks?
You must invest in stocks of more than one coporation
Cash flows should always be considered on a(n) _____ basis
after-tax
Financial break-even is the sales level that results in:
an NPV of zero
A capital gain on a stock results from ____
an increase in stock price
When analyzing a project, sunk costs _____ incremental cash outflows
are not
What will the shapes of total revenue and total costs be on a graph that depicts number of units on the x0axis and dollar amount (revenues and cost) on the y-axis?
both the total revenue and total cost curves will slope upward
The main focus of sensitivity analysis is to:
determine theone variable that has the highest level of risk
Historically, there is a(n) _____ relationship between risk and expected return in the stock market
direct
Incremental cash flows come about as a(n) _____ consequence of taking a project under consideration
direct
When developing cash flows for capital budgeting, it is _____ to overlook important items
easy
If Kellogg's introduces a new brand of cereal, it will most likely lead to _____ in its sales of existing cereals
erosion, i.e., a decrease
The second lesson from studying capital market history is that risk is:
handsomely rewarded
Sunk costs are costs that _____
have already occurred and are not affected by accepting or rejecting a project
A firm with higher operating leverage will have _____ fixed costs relative to a firm with low operating leverage
high
To get the worst case scenario, we assign the least favorable value to each item. This means to assign low values for items like units sold and price per unit and:
high values for costs
If the variance of a portfolio increases, then the portfolio standard deviation will _____
increase
The capital gains yield can be found by finding the difference between the ending stock price and the initial stock price and dividing it by the ________.
initial stock price
Accounts receivable and accounts payable are not an issue with project cash flow estimation unless changes in _____ are overlooked
net working capital
The difference between a firm's current assets and its current liabilities is known as the _____
net working capital
Evans Corporation estimated that the cash flows last year from a particular project would be $40,000, but the actual cash flow turned out to be $37,500. Evans Corporation should:
not expect cash flow estimated to be exactly right every time
Based upon the following graph, which variable should Simmons Co. be most concerned about?
price
Erosion will _____ the sales of existing products
reduce
The first step in estimating cash flow is to determine the _____cash flows
relevant
A fixed cost is a cost that _____
remains constant as the level of business activity changes
When using _____ all of the variables except one are frozen in order to determine how sensitive the NPV estimate is to changes in that particular variable
sensitivity analysis
Geometric averages are _____ arithmetic averages
smaller than
The standard deviation is the _____ of the variance
square root
According to the _____ principle, once he incremental cash flows from a project have been identified, the project can be viewed as a "minifirm"
stand-alone
When reviewing a graph of data from sensitivity analysis, the _____ the line, the _____ the sensitivity of the estimated Net Profit Value
steeper, greater
When an investor is diversified only _____ risk matters
systematic
The standard deviation is _____
the square root of the variance
The weighted average of the standard deviations of the assets in Portfolio C is 12.9%. Which of the following are possible values for the standard deviation of the portfolio?
-10.9% -12.9%
Side effects from investing in a project refer to cash flows from: (2)
-beneficial spillover effects -erosion effects
Which of the following are considered relevant cash flows? (3)
-cash flows from beneficial spillover effects -cash flows from opportunity costs 0cash flows from erosion effects
When we estimate the best-case, worst-case, and base-case cash flows and calculate the corresponding NPVs, we are engaging in:
-scenario analysis -asking what-if questions
When dealing with the history of capital market returns, an average stock market return is useful because it ______
-simplifies detailed market data -is the best estimate of any one year's stock market return during the specified period
Studying market history can reward us by demonstrating that:
-the greater the potential reward is, the greater the risk -on average, investors wil earn a reward for bearing risk
Look at the frequency distribution in FIgure 12.9 and rank he following ranges of stock returns in order from highest to lowest frequency
1. 10-20% 2. 20-30% 3. 0-10% 4. -10-0%
What is the depreciation tax shield if EBIT is $600, depreciation is $1,800, and the tax rate is 21%?
378
What is the arithmetic average return for a mutual fund that reported a return of 5% every year for the last 3 years
5%
What is the return on a portfolio that consists of: $50,000 in an index fund, $30,000 in a bond fund, and $20,000 in a foreign stock fund? The expected returns are 7 percent, -3 percent, and 18 percent, respectively
6.2%
Which of the following correctly describes the relationship between depreciation, income, taxes, and investment cash flows?
As depreciation expense increases, net income and taxes will decrease, while cash flows will increase
Which one of the following is the equation for estimating operating cash flows using the tax shield approoach?
OCF= (Sales- Costs) x (1- Tax rate) + Depreciation x Tax rate
What is the equation for estimating operating cash flows using the top-down approach?
OCF= Sales- Costs- Taxes
Interest expenses incurred on debt financing are _____ when computing cash flows from a project.
ignored
A potential problem with DCF analysis is that a project may appear to have a positive NPV because the estimated cash flows are _____
inaccurate
An increase in depreciation expense will _____ cash flows from operations
increase
Using your personal savings to invest in your business is considered to have a(n) _____ because you are giving up the use of these funds for other investments or uses, such as a vacation or paying off a debt
opportunity cost
The Ibbotson-Sinquefield data shows that _______.
- U.S. T-bills had the lowest risk or variability - long-term corporate bonds had less risk or variability than stocks.
A positive NPV exists when the market value of a project exceeds its cost. Unfortunately, most of the time the market value of a project:
cannot be observed
when a company declares a dividend, shareholders generally receive ___
cash
Broadband, Inc. has estimated preliminary cash flows for a project andfound that the NPV for those cash flows is $400,000. The company now plans to perform a scenario analysis on the cash flow and NPV estimates. It will use an NPV of _____ as the base case
$400,000
According to the top-down approach,, what is the operating cash flow if sales are $200,000, total cash costs are $190,636, and the tax bill is $1,144?
$8220
In an efficient market:
-assets are priced at the present value of their future cash flows -all investments have NPV=0
Which of the following are ways to make money by investing in stocks?
-capital gains -dividends
Operating cash flow is a function of: (3)
-earnings before interest and taxes -taxes -depreciation
The Ibbotson-Sinquefield data presents returns from 1925 to the recent past for:
-large cap stocks -small cap stocks -US T-bill
Identify the three main sources of cash flows over the life of a typical project (3)
-net cash flows from salvage value at the end of the project -net cash flows from sales and expenses over the life of the project -cash outflows from investment in plant and equipment at the inception of the project
Once cash flows have been estimated, which of the following investment criteria can be applied to them? (3)
-payback period -NPV -IRR
Which of the following statements regarding the relationship between book value, sales price, and taxes are true when a firm sells a fixed asset? (3)
-there will be a tax savings if the book value exceeds the sales price -book value represents the purchase price minus the accumulated depreciation -taxes are based on the difference between the book value and the sales price
Which of the following is true about variable costs?
-total variable costs increase as the total number of units produced increases -the variable cost per unit may remain constant as the number of units produced increases
Which costs are included in the numerator of the accounting profit break-even point equation?
1. Fixed costs 2. depreciation
John's portfolio consists of $1,200 worth of Chi Corporation common stock and $400 worth of Lambda Corporation common stock. Lambda's portfolio weight is 25%, and Chi's portfolio weight is:
75.00%
If the annual stock market returns for Berry Company were 19 percent, 13 percent, and -8 percent, what was the arithmetic mean for those 3 years?
8%
If Boom and Recession have an equal probability of occurring, what is the expected return on a portfolio consisting of 80% Company X and 20% Company Y?
9.0%
Probability of an outcome being within 2 standard deviations of the mean in a normal distribution is approximately ____ percent
95%
Match the scenarios below with "best case", "worst case", or "base case"
Best 1.sales are $2 million 2. Net profit margin is %5 Worst 1. Sales are 1 million 2. net profit margin is 2% Base 1. Sales are 1.5 million 2. Net profit margin is 3%
The dividend yield for a one-year period is equal to the annual dividend amount divided by the _____.
beginning stock price
opportunity costs are _____
benefits lost due to taking on a particular project
The year 2008 was:
one of the worst years for stock market investors in U.S. history
If fixed costs are $3,500 and the operating cash flow is $4,500, then the degree of operating leverage (DOL) is:
1.78
Place the steps in the computation of variance in the correct order from the first step to the last step
1. Calculate the expected return 2. determine the squared deviation from the expected return 3. multiply each squared deviation by its probability 4. the result is the variance
Which of the following are examples of variable costs for a car manufacturer?
1. Labor costs 2. freight costs 3. cost of steel
Which of the following are reasons why NPV is considered a superior capital budgeting technique?
1. NPV considers all the cash flows 2. NPV considers time value of money
Which of the following is a legitimate reason for a project to have a positive NPV for Palmer Corporation?
1. Palmer can produce the product more cheaply than its competition 2. Palmer has a better distribution channel than its competition 3. Palmer has a better product than its competition
Arrange the following investments in ascending order from lowest historical risk premium at the top to highest historical risk premium at the bottom
1. U.S. Treasury Bill 2. Long-term corporate bonds 3. Large-company stocks 4. Small-company stocks
Match each information type to the form of market efficiency that identifies that type of information as being quickly and accurately reflected in stock prices. 1. all information 2. all public information 3. historical stock prices
1. strong form efficiency 2. semistrong form efficiency 3. weak form efficiency
Marks Company believes that there is a sixty percent chance of a recession and a forty percent chance of a boom. In the case of recession, the company expects to earn a 2% return. In the case of boom, the company expects to earn 22%. What is Marks Company's expected return?
10%
Palmer Company had the following returns: 2013: 12% 2014: 10% 2015: -8% 2016: 4% 2017: 22% What is the standard deviation of Palmer's return?
11.05%
