FRL 301 MT1

The notion that capital markets, such as the NYSE, price securities fairly based on available information is called the:

efficient market hypothesis.

The annual annuity stream of payments with the same present value as a project's costs is called the project's _____ cost.

equivalent annual

Which one of the following takes the shape of a bell curve?

frequency distribution

The average compound return earned per year over a multi-year period is called the _____ average return.

geometric

The cash flows of a project should:

include the effects of erosion.

According to theory, studying historical stock price movements to identify mispriced stocks:

is ineffective even when the market is only weak form efficient.

The cash flows of a project should exclude the incremental changes in which one of the following accounts?

long-term debt

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

Stand-alone principle

Which one of the following creates a tax shield?

noncash expense

Financial markets fluctuate daily because:

the markets are continually reacting to new information.

The bid price is:

the minimum price you should charge if you want to financially breakeven.

Small-company stocks, as the term is used in the textbook, are defined as the common stock of:

the smallest twenty percent of the firms listed on the NYSE.

Frederick is comparing machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs, differing machine lives, and will be replaced when worn out. These machines should be compared using:

their effective annual costs.

The average squared difference between the actual return and the average return is called the:

variance.

If you excel in analyzing the future outlook of firms, you would prefer the financial markets be ____ form efficient so that you can have an advantage in the marketplace.

weak

The equivalent annual cost method is useful in determining:

which one of two machines to purchase when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.

A company which utilizes the MACRS system of depreciation:

will have a greater tax shield in year two of a project than they would have if the firm had opted for straight-line depreciation.

Which one of the following is indicative of a totally efficient stock market?

zero net present values for all stocks

Which one of the following is correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero?

NI + D

A project's operating cash flow will increase when:

depreciation expense increases.

The tax savings generated as a result of a firm's depreciation expense is called the:

depreciation tax shield

To convince investors to accept greater volatility in the annual rate of return on an investment, you must:

increase the risk premium.

Uptown Stores just announced they are increasing their annual dividend from $1.34 per share to $1.40 per share. If the dividend yield remains at its pre-announcement level, then you know the stock price:

increased proportionately with the dividend increase.

The stand-alone principle advocates that project analysis should focus on _____ costs.

incremental

The most valuable investment given up if an alternative investment is chosen is a(n):

opportunity cost

What is a standard deviation?

positive square root of a variance

The primary purpose of Blume's formula is to:

project future rates of return.

A pro forma financial statement is one that:

projects future years' operations

Lester's Dairy gathers and processes cow's milk for distribution to retail outlets. Lester's is currently considering processing goat's milk as well. Which one of the following is most apt to be an incremental cash flow related to the goat milk project?

purchasing additional milk jugs to handle the increased volume of milk

In an efficient market, the price of a security will:

react immediately to new information with no further price adjustments related to that information.

The excess return is computed as the:

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

The excess return required from a risky asset over that required from a risk-free asset is called the:

risk premium.

The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the:

risk premium.

Your best friend works in the finance office of Capital Leasing. You are aware that this friend trades stocks based on information he overhears in the office. You know that this information is not known to the general public. Your friend continually brags to you about the profits he earns on these trades. Based on this information, you would tend to argue that the financial markets are at best _____ form efficient.

semistrong

You spent $600 last week repairing the brakes on your car. Now, the starter is acting up and you are trying to decide whether to fix the starter or trade the car in for a newer model. In analyzing the starter situation, the $600 you spent fixing the brakes is a(n) _____ cost.

sunk

The book value of a fixed asset must be used in the computation of which one of the following?

tax due on the sale of a fixed asset

Erosion is best described as:

the cash flows of a new project that come at the expense of a firm's existing cash flows

The bottom-up approach to computing the operating cash flow applies only when:

the interest expense is equal to zero.

What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average?

16 percent

Which one of the following statements is correct concerning market efficiency?

A firm will generally receive a fair price when it sells shares of stock.

Which one of the following statements is correct?

A project can create a positive operating cash flow without affecting sales

Net working capital:

Can create either an initial cash inflow or outflow

If the variability of the returns on large-company stocks were to decrease over the long-term, you would expect which one of the following to occur as a result?

Decrease in the 68 percent probability range of returns

Bayside Marina just announced it is decreasing its annual dividend from $1.64 per share to $1.50 per share effective immediately. If the dividend yield remains at its pre-announced level, then you know the stock price:

Decreased proportionately with the dividend decrease

Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions?

Efficient capital market

Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs and machine lives, and will be replaced when worn out. Which one of the following computational methods should Dan use as the basis for his decision?

Equivalent annual cost

Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The firm is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project?

Hiring additional employees to handle the increased workload should the firm accept the wreath project

The top-down approach to computing the operating cash flow:

Ignores noncash expenses

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

Incremental

The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's:

Incremental cash flows

Evidence seems to support the view that studying public information to identify mispriced stocks is:

Inefffective

As long as the inflation rate is positive, the real rate of return on a security will be ______ the nominal rate of return.

Less than

The depreciation method currently allowed under U.S. tax law governing the accelerated write-off of property under various lifetime classifications is called:

MACRS

Estimates of the rate of return on a security based on the historical arithmetic average will probably tend to _____ the expected return for the long-term and estimates using the historical geometric average will probably tend to _____ the expected return for the short-term.

Overestimate; underestimate

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?

Selling fewer hot dogs because hamburgers were added to the menu

You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor continually brags to you about the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best _____ form efficient.

Semi strong

Inside information has the least value when financial markets are:

Strong form efficient

Which one of the following costs was incurred in the past and cannot be recouped?

Sunk

Which one of the following is a correct statement concerning risk premium?

The greater the volatility of returns, the greater the risk premium.

Which one of the following statements is correct concerning bid prices?

The winning bid may be at a price that is below break-even especially if there is a related aftermarket for the product.

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

a decrease in accounts receivable

What is a normal distribution?

a symmetrical frequency distribution which is defined by its mean and standard deviation

The return earned in an average year over a multi-year period is called the _____ average return.

arithmetic

The total return on a security is based on the:

both the dividend yield and the capital gains yield.

Changes in the net working capital:

can affect the cash flows of a project every year of the project's life.

A project which improves the operating efficiency of a firm but which generates no revenue is referred to as a(n) _____ project.

cost-cutting

The book value of equipment will:

decrease slower under straight-line depreciation than under MACRS.

Increasing which one of the following will increase the operating cash flow?

depreciation

You are considering the purchase of new equipment. Your analysis includes the evaluation of two machines which have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine which has the:

lowest equivalent annual cost.

Individuals who continually monitor the financial markets seeking mispriced securities:

make the markets increasingly more efficient.

The pre-tax salvage value of an asset is equal to the:

market value.

The real rate of return on a stock is approximately equal to the nominal rate of return:

minus the inflation rate.

The operating cash flows for a cost reduction project:

must consider the depreciation tax shield.

Which one of the following correctly describes the dividend yield?

next year's annual dividend divided by today's stock price

An efficient capital market defined as a market in which:

security prices reflect available information.

Which one of the following best illustrates erosion as it relates to project analysis?

selling less hamburgers because you also started selling hot dogs

The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Based on this fact, you would tend to argue that the financial markets are at best _____ form efficient.

semistrong

The variance of a series of returns on a security is computed by dividing the sum of the:

squared deviations by the number of returns minus one.

Trading on inside information does not offer any advantages if the financial markets are:

strong form efficient.