FIN Exam 2

A decrease in which one of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used and ignore taxes.

Sales Per Unit

Which of the following statements best describes the principle of diversification?

Spreading an investment across many diverse assets will eliminate some of the total risk.

Which one of the following is an example of a sunk cost?

$2,000 paid last year to rent equipment

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?

0.5

All else constant, if a firm decreases its operating costs, which one of the following will also decrease?

Price-earnings ratio

The most important reason to diversify a portfolio is to:

eliminate asset-specific risk.

Which one of the following is a project cash inflow? Ignore any tax effects.

Decrease in Inventory

On the statement of cash flows, which one of the following is considered an operating activity?

Decrease in accounts payable

Based on the capital asset pricing model (CAPM), which of the following should earn the highest risk premium?

Stock with a beta of 1.24

All other things beings equal, and assuming all ratios have positive values, an increase in current liabilities will:

decrease the quick ratio.

According to the statement of cash flows, an increase in inventory will ______ the cash flow from ______ activities.

decrease; operating

When evaluating any capital project proposal, the cost of capital:

depends upon how the funds raised for that project are going to be spent.

You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value. To determine that sales level you should compute the:

financial break-even point.

Assume a firm utilizes its WACC as the discount rate for every capital project it implements. Accordingly, the firm will tend to:

increase the average risk level of the company over time.

Mortgage lenders probably have the most interest in the ______ ratios.

long-term debt and times interest earned

An investor who owns a well-diversified portfolio would consider ________ to be irrelevant.

unsystematic risk

The slope of the security market line is the:

market risk premium.

Thornton Homes has multiple divisions which operate as separate lines of business and face risks unique to those lines. The firm uses its overall WACC as the discount rate to evaluate all proposed projects. Accordingly, each division within the firm will tend to:

prefer higher risk projects over lower risk projects.

The excess return is computed as the:

return on a risky security minus the risk-free rate.

The security market line intercepts the vertical axis at the:

risk-free rate.

For any given capital project proposal, the discount rate should be based on the:

risks associated with the use of the funds required by the project.

When determining a firm's weighted average cost of capital, the item with the least amount of impact is the:

standard deviation of the company's common stock.

Of the options listed below, which is the best example of unsystematic risk?

A national decrease in consumer spending on entertainment

A firm's liquidity is measured with which one of the following ratios?

Current ratio

Which one of the following accurately lists the three components of the DuPont identity?

Equity multiplier, net profit margin, and total asset turnover.

The DuPont identity can be used to help managers answer which of the following questions related to a company's operations? I. How many sales dollars are being generated per each dollar of assets? II. How many dollars of assets have been acquired per each dollar in shareholders' equity? III. How much net profit is being generated per dollar of sales? IV. Does the company have the ability to meet its debt obligations in a timely manner?

I, II, and III only

An analyst wishes to estimate the amount of additional reward she will receive for investing in a risky asset rather than a risk-free asset. The minimum values she will need to know are: I. both assets' standard deviations II. the risky asset's beta III. the risk-free rate of return IV. the market risk premium

II and IV only

Which of the following values will be equal to zero when a project is operating at the accounting break-even level of output?

IRR and net income

Of the options listed below, which is the best example of systematic risk?

Investors panic causing security prices around the globe to fall precipitously.

Which of the following statements regarding unsystematic risk is accurate?

It can be effectively eliminated by portfolio diversification.

Which of the following statements is true of a portfolio's standard deviation?

It can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

Which of the following statements regarding the cost of preferred stock is accurate?

It equals the dividend yield.

A ________ is the market's measure of systematic risk.

beta of 1

The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following?

Opportunity Cost