MGMT304 Exam 3

The internal rate of return (IRR) is defined as:

Discount rate which causes the net present value of a project to equal zero.

Valenica Corporation has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most apt to be granted to the preferred shareholders?

Right to share in company profits prior to other shareholders

Why is payback often used as the sole method of analyzing a proposed small project?

The benefits of payback analysis usually outweigh the costs of analysis

NYSE designated market makers:

act as dealers

Which of the following are advantages of the payback method of project analysis?

Liquidity bias; ease of use

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

Mutually Exclusive

What method should firm heavily rely on to accept a project: NPV, IRR, Profitability Index, Payback, ARR

NPV

Which of the following characteristics is most associated with financing type projects?

Prepaid services

The primary purpose of Blume's formula is to:

Project future rates of return

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2019? Long-term government bonds U.S. Treasury bills Long-term corporate bonds Small-company stocks Large-company stocks

U.S. Treasury Bills

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst?

Weak

An agent who maintains an inventory from which he or she buys and sells securities is called a:

dealer

Efficient financial markets fluctuate continuously because:

the markets are continually reacting to new information

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:

grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.

Based on the period 1926-2019, the actual real return on large-company stocks has been around:

9 percent

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

Accepted because the profitability index is greater than 1

Which of the following statements best defines the efficient market hypothesis? Security prices in efficient markets remain steady as new information becomes available. All securities in an efficient market are zero net present value investments. All securities provide the same positive rate of return when the market is efficient. Mispriced securities are common in efficient markets. Efficient markets limit competition.

All securities in an efficient market are zero net present value investments

Which of the following statements related to capital gains is correct? The capital gains yield represents the total return earned by an investor. The capital gains yield includes only realized capital gains. An increase in an unrealized capital gain will increase the capital gains yield. The capital gains yield must be either positive or zero. The capital gains yield is expressed as a percentage of a security's total return.

An increase in an unrealized capital gain will increase the capital gains yield

Mutually exclusive projects are best defined as competing projects that:

Both require the total use of the same limited resources

Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings? Dual class Cumulative Noncumulative Preferred Common

Common

Which of the following best describes Nasdaq

Computer network of securities dealers

What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate

Constant Growth Model

Which of the following statements is correct based on the period 1926-2019 Long-term government bonds had more volatile annual returns than did the long-term corporate bonds. U.S Treasury bills have a zero variance in returns because they are risk-free. The standard deviation of the annual rate of inflation was less than 3 percent. The risk premium on small-company stocks was less than 10 percent. The risk premium on all U.S. government securities is 0 percent.

Long-term government bonds had more volatile annual returns than did the long-term corporate bonds.

The historical record for the period 1926-2019 supports which of the following statements? The return on U.S. Treasury bills exceeds the inflation rate by at least .5 percent each year. The inflation rate was positive each year throughout the period. Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year. When large-company stocks have a negative return, they will have a negative return for at least two consecutive years. There was only one year during the period when double-digit inflation occurred.

Small-company stocks have lost as much as 50 percent and have gained as much as 100 percent is a single year

Which of the following statements is correct? Stocks can only be assigned one dividend growth rate. Preferred stocks generally have variable growth rates. Dividend growth rates must be either zero or positive. All stocks can be valued using the dividend discount models. Stocks can have negative growth rates.

Stocks can have negative growth rates

The annual dividend yield is computed by dividing ________ annual dividend by the current stock price.

next year's

Small-company stocks, as the term is used in the textbook, are best defined as the:

smallest 20 percent of companies listed on the NYSE

Standard deviation is a measure of:

volatility