MIDTERM!!!

Dan is a chemist for ABC, a major drug manufacturer. Dan cannot earn excess profits on ABC stock based on the knowledge he has related to his experiments if the financial markets are:

strong form efficient. If they are semi stong then he will.

One year ago, you purchased 100 shares of a stock. This morning you sold those shares and realized a total return of 8.2 percent. Given this information, you know for sure the:

sum of the dividend yield and the capital gains yield is 8.2 percent.

The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:

tax shield.

which one of the following statements is correct

the payback method is biased towards short term projects

which one of the following statements is correct?

the payback period ignores the time value of money

The average risk premium on long-term government bonds for the period 1926-2011 was equal to:

the rate of return on the bonds minus the T-bill rate.

A project has annual depreciation of $16,200, costs of $87,100, and sales of $123,000. The applicable tax rate is 40 percent. What is the operating cash flow according to the tax shield approach?

$28,020

A cost-cutting project will decrease costs by $58,500 a year. The annual depreciation on the project's fixed assets will be $10,300 and the tax rate is 34 percent. What is the amount of the change in the firm's operating cash flow resulting from this project?

$42,112

The Nifty Fifty is considering opening a new store at a start-up cost of $720,000. The initial investment will be depreciated straight-line to zero over the 15-year life of the project. What is the average accounting rate of return?

14.35 percent

Based on the capital asset pricing model, which one of the following must increase the expected return on an individual security, all else constant?

A decrease in the risk-free rate given a security beta of 1.06

Which one of the following portfolios will have a beta of zero?

A portfolio comprised solely of U. S. Treasury bills

Which one of the following statements related to the security market line is correct?

A security with a beta of 1.54 will plot on the security market line if it is correctly priced.

Which one of the following is the best example of unsystematic risk?

A warehouse fire

Which of the following are cash inflows from net working capital? I. Increase in accounts payable II. Increase in inventory III. Decrease in accounts receivable IV. Decrease in fixed assets

I and III only

Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently?

Internal rate of return and net present value

Which one of the following is an indicator that an investment is acceptable?

Internal rate of return that exceeds the required return

The Flour Baker is considering a project with the following cash flows. Should this project be accepted based on its internal rate of return if the required return is 11 percent?

No, because the project's rate of return is 7.78 percent

Which one of the following indicates that a project is expected to create value for its owners?

Positive net present value

Which one of the following can be defined as a benefit-cost ratio?

Profitability index

Investors require a 4 percent return on risk-free investments. On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called?

Risk Premium

Mark is analyzing a proposed project to determine how changes in the variable costs per unit would affect the project's net present value. What type of analysis is Mark conducting?

Sensitivity analysis

Ignoring the option to wait:

may underestimate the net present value of a project.

the average accounting return

measures profitability rather than cash flow

The average accounting return:

measures profitability rather than cash flow.

which one of the following is specifically designed to compute the rate of return on a project that has unconventional cash flows

modified internal rate of return

the possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as

multiple rates of return

The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as:

multiple rates of return.

both project A and B are acceptable as independent projects....

mutually exclusive

Mary has just been asked to analyze an investment to determine if it is acceptable....

net present value

which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities

net present value

which one of the following methods of analysis is most appropriate to use when two investments are mutually exculsive

net present value

When, if ever, will the geometric average return exceed the arithmetic average return for a given set of returns?

never

If the financial markets are semistrong form efficient, then:

only individuals with private information have a marketplace advantage.

What is the beta of the following portfolio? B, (S, .97. T, 1.26, U, .79, V, 1.48)

1.02

You own a portfolio of two stocks, A and B. Stock A is valued at $6,500 and has an expected return of 11.2 percent. Stock B has an expected return of 8.1 percent. What is the expected return on the portfolio if the portfolio value is $9,500?

10.22 percent

The stock of Wiley United has a beta of 0.92. The market risk premium is 8.6 percent and the risk-free rate is 3.2 percent. What is the expected return on this stock?

11.11 percent

Given the following information, what is the standard deviation of the returns on a portfolio that is invested 40 percent in Stock A, 35 percent in Stock B, and the remainder in Stock C? RoR, (A, 14.3, B, 16.7, C, 18.2)

11.86 percent

Given the following information, what is the expected return on a portfolio that is invested 30 percent in both Stocks A and C, and 40 percent in Stock B? RoR, (A, 7.8, B, 23.6, C, 18.4)

11.97 percent

You own a portfolio that has $1,900 invested in Stock A and $2,700 invested in Stock B. If the expected returns on these stocks are 9 percent and 15 percent, respectively, what is the expected return on the portfolio?

12.52 percent

Which one of the following statements is correct?

An underpriced security will plot above the security market line.

The expected return on a security depends on which of the following? I. Risk-free rate of return II. Amount of the security's unique risk III Market rate of return IV. Standard deviation of returns

I and III only

Consider a portfolio comprised of four risky securities. Assume the economy has three states with varying probabilities of occurrence. Which one of the following will guarantee that the portfolio variance will equal zero?

The portfolio expected rate of return must be the same for each economic state.

The addition of a risky security to a fully diversified portfolio:

may or may not affect the portfolio beta.

Systematic risk is:

measured by beta.

If a security plots to the right and below the security market line, then the security has ____ systematic risk than the market and is ____.

more; overpriced

Assume you own a portfolio of diverse securities which are each correctly priced. Given this, the reward-to-risk ratio:

of each security must equal the slope of the security market line.

The beta of a risky portfolio cannot be less than _____ nor greater than ____.

the lowest individual beta in the portfolio; the highest individual beta in the portfolio

Standard deviation measures _____ risk while beta measures _____ risk.

total; systematic

A portfolio is comprised of 35 securities with varying betas. The lowest beta for an individual security is 0.74 and the highest of the security betas of 1.51. Given this information, you know that the portfolio beta:

will be greater than or equal to 0.74 but less than or equal to 1.51.

Which one of the following is the computation of the risk premium for an individual security? E(R) is the expected return on the security, Rf is the risk-free rate, β is the security's beta, and E(RM) is the expected rate of return on the market.

β[E(RM) - Rf]

A $36,000 portfolio is invested in a risk-free security and two stocks. The beta of Stock A is 1.29 while the beta of Stock B is 0.90. One-half of the portfolio is invested in the risk-free security. How much is invested in Stock A if the beta of the portfolio is 0.58?

$12,000

Currently, you own a portfolio comprised of the following three securities. How much of the riskiest security should you sell and replace with risk-free securities if you want your portfolio beta to equal 90 percent of the market beta? B, (A, 1.06, B, 1.32. C, .98)

$9,613.64

Stock A has a beta of 1.47 while Stock B has a beta of 1.08 and an expected return of 13.2 percent. What is the expected return on Stock A if the risk-free rate is 4.5 percent and both stocks have equal reward-to-risk premiums?

16.34 percent

You own a portfolio that is invested as follows: $11,400 of Stock A, $8,800 of Stock B, $14,900 of Stock C, and $3,200 of Stock D. What is the portfolio weight of Stock C?

38.90 percent

Ben & Terry's has an expected return of 12.9 percent and a beta of 1.25. The expected return on the market is 11.7 percent. What is the risk-free rate?

6.92 percent

Given the following information, what is the standard deviation of the returns on this stock? B, .20, N, .70, R, .10

7.80 percent

A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock?

A decrease in the probability of an economic boom

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset?

Beta coefficient

The expected return on a security is currently based on a 22 percent chance of a 15 percent return given an economic boom and a 78 percent chance of a 12 percent return given a normal economy. Which of the following changes will decrease the expected return on this security? I. An increase in the probability of an economic boom II. A decrease in the rate of return given a normal economy III. An increase in the probability of a normal economy IV. An increase in the rate of return given an economic boom

II and III only

The systematic risk principle states that the expected return on a risky asset depends only on which one of the following?

Market risk

Which one of the following is the slope of the security market line?

Market risk premium

Diversifying a portfolio across various sectors and industries might do more than one of the following. However, this diversification must do which one of the following?

Reduce the portfolio's unique risks

Which one of the following describes systemic risk?

Risk that affects a large number of assets

Which one of the following is the vertical intercept of the security market line?

Risk-free rate

Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic risk associated with an individual security?

Zero

The capital asset pricing model:

considers the time value of money.

The lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk.

lower; lower

Contingency planning focuses on the:

managerial options implicit in a project.

Which one of the following is most closely related to the net present value profile?

Internal rate of return

The payback method of analysis ignores which one of the following?

Time value of money

Miller Lite, Inc. is considering a new four-year expansion project that requires an initial fixed asset investment of $3.6 million. The fixed asset will be depreciated straight-line to zero over its four-year life, after which time it will be worthless. The project is estimated to generate $3.9 million in annual sales, with costs of $2.6 million. If the tax rate is 35 percent, what is the OCF for this project?

$1,160,000

An asset used in a three-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $5.4 million and will be sold for $1.2 million at the end of the project. If the tax rate is 35 percent, what is the aftertax salvage value of the asset?

$1,324,320

What is the net present value of the following cash flows if the relevant discount rate is 8 percent?

$1,587.61

You are analyzing a project and have developed the following estimates: unit sales = 2,600, price per unit = $56, variable cost per unit = $39, fixed costs = $24,700. The depreciation is $15,800 a year and the tax rate is 35 percent. What effect would a decrease of $1 in the variable cost per unit have on the operating cash flow?

$1,690

Marshall's & Co. purchased a corner lot in Eglon City five years ago at a cost of $550,000. The lot was recently appraised at $605,000. At the time of the purchase, the company spent $42,000 to grade the lot and another $3,700 to build a small building on the lot to house a parking lot attendant who has overseen the use of the lot for daily commuter parking. The company now wants to build a new retail store on the site. The building cost is estimated at $1,160,000. What amount should be used as the initial cash flow for this building project?

$1,765,000

What is the net present value of a project that has an initial cost of $40,000 and produces cash inflows of $8,000 a year for 11 years if the discount rate is 15 percent?

$1,869.69

The Outpost currently sells short leather jackets for $349 each. The firm is considering selling long coats also. The coats would sell for $689 each and the company expects to sell 900 a year. If the firm decides to carry the long coat, management feels that the sales of the short jacket will decline from 1,420 to 1,265 units. Variable costs on the jacket are $210 and $445 on the long coat. The fixed costs for this project are $42,000, depreciation is $11,000 a year, and the tax rate is 33 percent. What is the projected operating cash flow for this project?

$108,187

Rock Haven has a proposed project that will generate sales of 1,680 units annually at a selling price of $22 each. The fixed costs are $12,700 and the variable costs per unit are $5.95. The project requires $28,000 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. The salvage value of the fixed assets is $6,900 and the tax rate is 34 percent. What is the operating cash flow for year 4?

$11,794

Six years ago, China Exporters paid cash for a new packaging machine that cost $287,000. Three years ago, the firm spent $3,900 on repairs and modifications to the machine. The machine is now fully depreciated and has just sat idly in a back corner of the shop for the past seven months. The estimated value of the machine today is $125,500. The firm is considering using this machine in a new project. If it does so, what value should be assigned to this machine and included in the initial costs of the new project?

$125,500

Consider an asset that costs $465,000 and is depreciated straight-line to zero over its six-year tax life. The asset is to be used in a four-year project; at the end of the project, the asset can be sold for $120,000. If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset?

$132,250

Outdoor Sports is considering adding a miniature golf course to its facility. The course would cost $138,000, would be depreciated on a straight-line basis over its five-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $72,000 a year with $24,000 of that amount being variable cost. The fixed cost would be $11,600. In addition, the firm anticipates an additional $14,000 in revenue from its existing facilities if the golf course is added. The project will require $3,000 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 12 percent and a tax rate of 34 percent?

$14,439

Your local athletic center is planning a $1.23 million expansion to its current facility. This cost will be depreciated on a straight-line basis over a 20-year period. The expanded area is expected to generate $524,000 in additional annual sales. Variable costs are 48 percent of sales, the annual fixed costs are $79,400, and the tax rate is 35 percent. What is the operating cash flow for the first year of this project?

$147,027

You want to create a $65,000 portfolio comprised of two stocks plus a risk-free security. Stock A has an expected return of 14.2 percent and Stock B has an expected return of 17.8 percent. You want to own $20,000 of Stock B. The risk-free rate is 4.8 percent and the expected return on the market is 13.1 percent. If you want the portfolio to have an expected return equal to that of the market, how much should you invest in the risk-free security?

$15,266

You are analyzing a project and have developed the following estimates. The depreciation is $7,600 a year and the tax rate is 34 percent. What is the worst-case operating cash flow?

$274

Travel America Coaches currently sells 15,000 motor homes per year at $94,000 each, and 1,500 luxury motor coaches per year at $159,000 each. The company wants to introduce a low-range camper to fill out its product line; it hopes to sell 6,000 of these campers per year at $14,500 each. An independent consultant has determined that if Travel Coaches introduces the new campers, it should boost the sales of its existing motor homes by 1,500 units per year, and reduce the sales of its luxury motor coaches by 450 units per year. What amount should be used as the annual sales figure when evaluating this project?

$156,450,000

Sun Lee's Furniture just purchased some fixed assets classified as 5-year property for MACRS. The assets cost $85,000. What is the amount of the depreciation expense for the third year?

$16,320

You are analyzing a project and have developed the following estimates. The depreciation is $3,200 a year and the tax rate is 34 percent. What is the best-case operating cash flow?

$17,423

A nine-year project is expected to generate annual revenues of $114,500, variable costs of $73,600, and fixed costs of $14,000. The annual depreciation is $3,500 and the tax rate is 34 percent. What is the annual operating cash flow?

$18,944

Hunter's Lodge purchased $578,000 of equipment four years ago. The equipment is seven-year MACRS property. The firm is selling this equipment today for $199,500. What is the aftertax cash flow from this sale if the tax rate is 35 percent? The MACRS allowance percentages are as follows, commencing with year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent.

$192,873.52

The Blue Lagoon is considering a project with a five-year life. The project requires $110,000 of fixed assets that are classified as five-year property for MACRS. Variable costs equal 71 percent of sales, fixed costs are $9,600, and the tax rate is 35 percent. What is the operating cash flow for year 4 given the following sales estimates and MACRS depreciation allowance percentages?

$2,342

What is the NPV of the following set of cash flows at a discount rate of zero percent? What if the discount rate is 15 percent?

$2,500; -$8,665.07

A portfolio has an expected return of 12.3 percent. This portfolio contains two stocks and one risk-free security. The expected return on Stock X is 9.7 percent and on Stock Y it is 17.7 percent. The risk-free rate is 3.8 percent. The portfolio value is $78,000 of which $18,000 is the risk-free security. How much is invested in Stock X?

$21,375

You are analyzing a project and have developed the following estimates. The depreciation is $14,800 a year and the tax rate is 35 percent. What is the base case operating cash flow?

$21,690

Hi-As-A-Kite is considering making and selling custom kites in two sizes. The small kites would be priced at $10 and the large kites would be $24. The variable cost per unit is $5 and $11, respectively. Jill, the owner, feels that she can sell 2,600 of the small kites and 1,700 of the large kites each year. The fixed costs would be only $2,100 a year and the tax rate is 34 percent. What is the annual operating cash flow if the annual depreciation expense is $900?

$22,086

A debt-free firm has net income of $228,400, taxes of $46,200, and depreciation of $21,300. What is the operating cash flow?

$249,700

The Tattle Teller has a printing press sitting idly in its back room. The press has no market value to another printer because the machine utilizes old technology. The firm could get $250 for the press as scrap metal. The press is six years old and originally cost $148,000. The current book value is $2,570. The president of the firm is considering a new project and feels he can use this press for that project. What value, if any, should be assigned to the press as an initial cost of the new project?

$250

A project will reduce costs by $34,000 but increase depreciation by $16,500. What is the operating cash flow of this project based on the tax shield approach if the tax rate is 40 percent?

$27,000

Cinram Machines has the following estimates for its new gear assembly project: price = $1,340 per unit; variable costs = $348 per unit; fixed costs = $5.1 million; quantity = 82,000 units. Suppose the company believes all of its estimates are accurate only to within ± 5 percent. What value should the company use for its total variable costs when performing its best-case scenario analysis?

$28,464,660

A firm is reviewing a project with labor cost of $7.40 per unit, raw materials cost of $23.65 a unit, and fixed costs of $17,000 a month. Sales are projected at 9,400 units over the 3-month life of the project. What are the total variable costs of the project?

$291,870

Three years ago, Stock Tek purchased some five-year MACRS property for $67,400. Today, it is selling this property for $28,000. How much tax will the firm owe on this sale if the tax rate is 35 percent? The MACRS allowance percentages are as follows, commencing with year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.

$3,006

What is the net present value of the following cash flows if the relevant discount rate is 9.0 percent?

$3,374.11

An all-equity firm has net income of $28,300, depreciation of $7,500, and taxes of $2,050. What is the firm's operating cash flow?

$35,800

The Green Tomato purchased a parcel of land six years ago for $299,500. At that time, the firm invested $64,000 grading the site so that it would be usable. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $28,000 a year. The Green Tomato is now considering building a hotel on the site as the rental lease is expiring. The current value of the land is $355,000. The firm has no loans or mortgages secured by the property. What value should be included in the initial cost of the hotel project for the use of this land?

$355,000

Burke's Corner currently sells blue jeans and T-shirts. Management is considering adding fleece tops to its inventory to provide a cooler weather option. The tops would sell for $49 each with expected sales of 3,600 tops annually. By adding the fleece tops, management feels the firm will sell an additional 220 pairs of jeans at $59 a pair and 350 fewer T-shirts at $18 each. The variable cost per unit is $36 on the jeans, $9 on the T-shirts, and $21 on the fleece tops. With the new item, the depreciation expense is $27,000 a year and the fixed costs are $62,000 annually. The tax rate is 34 percent. What is the project's operating cash flow?

$36,049

What is the net present value of a project with the following cash flows if the discount rate is 15 percent?

$39.80

Western Steer purchased some three-year MACRS property three years ago. What is the current book value of this equipment if the original cost was $58,000? The MACRS allowance percentages are as follows, commencing with year 1: 33.33, 44.45, 14.81, and 7.41 percent.

$4,298

Empire Industries is considering adding a new product to its lineup. This product is expected to generate sales for four years after which time the product will be discontinued. What is the project's net present value if the firm wants to earn a 13 percent rate of return?

$4,312.65

Fig Newton Industries is considering a project and has developed the following estimates: unit sales = 7,300, price per unit = $149, variable cost per unit = $91, fixed costs = $216,400. The depreciation is $94,700 a year and the tax rate is 40 percent. What effect would an increase of $1 in the selling price have on the operating cash flow?

$4,380

What is the net present value of the following set of cash flows at a discount rate of 7 percent? At 20 percent?

$4,518.47; -$321.76

What is the net present value of the following cash flows if the relevant discount rate is 8.0 percent?

$4,529.59

Custom Tailored Shirts is a specialty retailer offering T-shirts, sweatshirts, and caps. Its most recent annual sales consisted of $14,000 of T-shirts, $11,000 of sweatshirts, and $1,300 of caps. The company is adding polo shirts to the lineup and projects that this addition will result in sales next year of $14,000 of T-shirts, $8,000 of sweatshirts, $7,800 of Polo shirts, and $1,300 of caps. What sales amount should be used when evaluating the Polo shirt project?

$4,800

Ronnie's Custom Cars purchased some fixed assets two years ago for $80,000. The assets are classified as 5-year property for MACRS. Ronnie is considering selling these assets now so he can buy some newer fixed assets which utilize the latest in technology. Ronnie has been offered $42,000 for his old assets. What is the net cash flow from the salvage value if the tax rate is 34 percent?

$40,776.00

Green Woods sells specialty equipment for mountain climbers. Its sales for last year included $238,000 of tents and $411,000 of climbing gear. For next year, management has decided to sell specialty sleeping bags also. As a result of this change, sales projections for next year are $264,000 of tents, $426,000 of climbing gear, and $51,000 of sleeping bags. How much of next year's sales are derived from the side effects of adding the new product to its sales offerings?

$41,000

Classic Cars is considering a project that requires $148,000 of fixed assets that are classified as five-year property for MACRS. What is the book value of these assets at the end of year 3? The MACRS allowance percentages are as follows, commencing with year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.

$42,624

A project has an initial requirement of $261,000 for fixed assets and $27,000 for net working capital. The fixed assets will be depreciated to a zero book value over the four-year life of the project and have an estimated salvage value of $78,000. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $96,200 and the discount rate is 13 percent. What is the project's net present value if the tax rate is 35 percent?

$45,799

You are analyzing a project and have developed the following estimates. The depreciation is $52,000 a year and the tax rate is 34 percent. What is the worst-case operating cash flow?

$48,106

You own a $222,000,000 portfolio that is invested in Stocks A and B. The portfolio beta is equal to the market beta. Stock A has an expected return of 18.7 percent and has a beta of 1.42. Stock B has a beta of 0.88. What is the value of your investment in Stock A?

$49,333

We are evaluating a project that costs $1.68 million, has a five-year life, and has no salvage value. Assume depreciation is straight-line to zero over the life of the project. Sales are projected at 82,000 units per year. Price per unit is $43.29, variable cost per unit is $22.18, and fixed costs are $623,000 per year. The tax rate is 34 percent, and we require a 10 percent return on this project. What is the sensitivity of NPV to a 100-unit change in the sales figure?

$5,281.55

The Greasy Spoon Restaurant is considering a project with an initial cost of $525,000. The project will not produce any cash flows for the first three years. Starting in year 4, the project will produce cash inflows of $721,000 a year for three years. This project is risky, so the firm has assigned it a discount rate of 16 percent. What is the project's net present value?

$512,408.23

What is the year 2 depreciation on equipment costing $166,000 if it is classified as five-year property for MACRS purposes? The MACRS allowance percentages are as follows, commencing with year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.

$53,120

A project has an annual operating cash flow of $45,000. Initially, this four-year project required $3,800 in net working capital, which is recoverable when the project ends. The firm also spent $21,500 on equipment to start the project. This equipment will have a book value of $4,300 at the end of year 4. What is the cash flow for year 4 of the project if the equipment can be sold for $5,400 and the tax rate is 34 percent?

$53,826

Phil's Dinor purchased some new equipment two years ago for $89,500. Today, it is selling this equipment for $67,000. What is the aftertax cash flow from this sale if the tax rate is 35 percent? The MACRS allowance percentages are as follows, commencing with year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.

$58,586

Molly is considering a project with cash inflows of $918, $867, $528, and $310 over the next four years, respectively. The relevant discount rate is 10 percent. What is the net present value of this project if it the start-up cost is $2,100?

$59.50

Charles Henri is considering investing $36,000 in a project that is expected to provide him with cash inflows of $12,000 in each of the first two years and $18,000 for the following year. At a discount rate of zero percent this investment has a net present value of ____, but at the relevant discount rate of 17 percent the project's net present value is ____.

$6,000; -$5,739

You are analyzing a project and have developed the following estimates. The depreciation is $19,800 a year and the tax rate is 34 percent. What is the best-case operating cash flow?

$60,456

A project requires $360,000 of equipment that is classified as seven-year property. What is the depreciation expense in year 3 given the following MACRS depreciation allowances, starting with year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent?

$62,964

British Motor Works is reviewing its current accounts to determine how a proposed project might affect the account balances. The firm estimates the project will initially require $67,000 in additional current assets and $32,000 in additional current liabilities. The firm also estimates the project will require an additional $7,000 a year in current assets for each one of the four years of the project. How much net working capital will the firm recoup at the end of the project assuming that all net working capital can be recaptured?

$63,000

You are analyzing a project and have developed the following estimates: unit sales = 3,100, price per unit = $215, variable cost per unit = $115, fixed costs = $164,000. The depreciation is $59,000 a year and the tax rate is 35 percent. What effect would the sale of one more unit have on the operating cash flow?

$65.00

You would like to invest $19,000 and have a portfolio expected return of 12.3 percent. You are considering two securities, A and B. Stock A has an expected return of 15.6 percent and B has an expected return of 10.3 percent. How much should you invest in Stock A if you invest the balance in Stock B?

$7,170

The opportunities that a manager has to modify a project once it has started are called:

managerial options.

The net present value of a project's cash inflows is $8,216 at a 14 percent discount rate. The profitability index is 1.03 and the firm's tax rate is 34 percent. What is the initial cost of the project?

$7,976.70

Consider a three-year project with the following information: initial fixed asset investment = $770,000; straight-line depreciation to zero over the three-year life; zero salvage value; price = $34.99; variable costs = $23.16; fixed costs = $245,000; quantity sold = 94,500 units; tax rate = 40 percent. How sensitive is OCF to an increase of one unit in the quantity sold?

$7.10

You are analyzing a project and have developed the following estimates: unit sales = 1,320, price per unit = $79, variable cost per unit = $43, fixed costs = $24,900. The depreciation is $11,300 a year and the tax rate is 40 percent. What effect would an increase of $1 in the selling price have on the operating cash flow?

$792

A project has expected cash inflows, starting with year 1, of $2,200, $2,900, $3,500, and finally in year 4, $4,000. The profitability index is 1.14 and the discount rate is 12 percent. What is the initial cost of the project?

$8,166.19

Better Chocolates has a new project that requires $975,000 of equipment. What is the depreciation in year 6 of this project if the equipment is classified as seven-year property for MACRS purposes? The MACRS allowance percentages are as follows, commencing with year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent.

$86,970

A project is expected to create operating cash flows of $24,000 a year for three years. The initial cost of the fixed assets is $50,000. These assets will be worthless at the end of the project. An additional $2,500 of net working capital will be required throughout the life of the project. What is the project's net present value if the required rate of return is 10 percent?

$9,062.73

A project has sales of $462,000, costs of $274,000, depreciation of $26,000, interest expense of $3,400, and a tax rate of 35 percent. What is the value of the depreciation tax shield?

$9,100

Rocky Top, Inc. purchased some welding equipment six years ago at a cost of $579,000. Today, the company is selling this equipment for $110,000. The tax rate is 35 percent. What is the aftertax cash flow from this sale? The MACRS allowance percentages are as follows, commencing with year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent.

$98,635 $58,586

Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $649,000 that would be depreciated on a straight-line basis to a zero balance over the four-year life of the project. The estimated salvage value is $187,000. The project requires $38,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $198,500 a year. What is the net present value of this project if the relevant discount rate is 14 percent and the tax rate is 35 percent?

-$14,162

You are making a $120,000 investment and feel that a 20 percent rate of return is reasonable given the nature of the risks involved. You feel you will receive $48,000 in the first year, $54,000 in the second year, and $56,000 in the third year. You expect to pay out $12,000 as an additional investment in the fourth year. What is the net present value of this investment given your expectations?

-$15,879.63

A proposed project requires an initial cash outlay of $849,000 for equipment and an additional cash outlay of $48,500 in year 1 to cover operating costs. During years 2 through 4, the project will generate cash inflows of $354,000 a year. What is the net present value of this project at a discount rate of 13 percent? Round your answer to the nearest whole dollar.

-$152,232

The Sausage Hut is looking at a new sausage system with an installed cost of $438,000. This cost will be depreciated straight-line to zero over the project's four-year life, at the end of which the sausage system can be scrapped for $69,000. The sausage system will save the firm $129,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $29,000, which will be recouped at project end. If the tax rate is 35 percent and the discount rate is 9 percent, what is the NPV of this project?

-$18,870

Mind Blowers, Inc. has a new project in mind that will increase accounts receivable by $28,000, decrease accounts payable by $6,000, increase fixed assets by $36,000, and decrease inventory by $11,000. What is the amount the firm should use as the initial cash flow attributable to net working capital when it analyzes this project?

-$23,000

A new project you are considering is expected to generate an operating cash flow of $45,620 and will initially free up $22,000 in net working capital. Purchases of fixed assets costing $68,800 will be required to start up the project. What is the total cash flow for this project at time zero?

-$46,800

What is the net present value of a project with the following cash flows if the discount rate is 15 percent?

-$5,433.67

Jim's Hardware is adding a new product line to its sales lineup. Initially, the firm will stock $41,000 of the new inventory, which will be purchased on 30 days' credit from a supplier. The firm will also invest $6,000 in accounts receivable and $4,000 in equipment. What amount should be included in the initial project costs for net working capital?

-$6,000

Mike's Fish Market is implementing a project that will initially increase accounts payable by $4,600, increase inventory by $4,800, and decrease accounts receivable by $800. All net working capital will be recouped when the project terminates. What is the cash flow related to the net working capital for the last year of the project?

-$600

Professional Properties is considering remodeling the office building it leases to Heartland Insurance. The remodeling costs are estimated at $3.4 million. If the building is remodeled, Heartland Insurance has agreed to pay an additional $820,000 a year in rent for the next five years. The discount rate is 15 percent. What is the benefit of the remodeling project to Professional Properties?

-$651,233

A stock has an average return of 19.2 percent and a standard deviation of 10.7 percent. In any one given year, you have a 95 percent chance that you will not lose more than _____ percent nor earn more than ____ percent if you invest in this security.

-2.2; 40.6 95 percent probability range = 0.192 ± (2 × 0.107) = -2.2 percent to 40.6 percent

Beasley Enterprises stock has an expected return of 11.5 percent. Given the information below, what is the expected return if the economy is in a recession?

-5.72 percent

Consider the following information:What is the variance of a portfolio invested 30 percent each in Stocks A and B and 40 percent in Stock C? Boom, (.72, .06, .11, .17)

0.000065

Given the following information, what is the variance of the returns on this stock? B, .30, N, .65, R, .05

0.002759

Given the following information, what is the variance of the returns on a portfolio that is invested 40 percent in both Stocks A and B, and 20 percent in Stock C? RoR, (A, 13.4, B, 17.6, C, 9.3)

0.005746

Given the following information, what is the variance of the returns on this stock? B, .18, N, .77, R, .05

0.021449

You currently own a portfolio valued at $56,000 that has a beta of 1.28. You have another $10,000 to invest and would like to invest it in a manner such that the portfolio beta decreases to 1.20. What does the beta of the new investment have to be?

0.75

The Black Horse is currently considering a project that will produce cash inflows of $12,000 a year for three years followed by $6,500 in year 4. The cost of the project is $38,000. What is the profitability index if the discount rate is 7 percent?

0.96

You currently own a portfolio valued at $80,000 that is equally as risky as the market. Given the information below, what is the beta of Stock C? B, (A, 1.14, B, 1.06)

1.04

A firm is reviewing a project that has an initial cost of $71,000. The project will produce annual cash inflows, starting with year 1, of $8,000, $13,400, $18,600, $33,100, and finally in year 5, $37,900. What is the profitability index if the discount rate is 11 percent?

1.07

What is the beta of the following portfolio? B, (J, 1.48, K, 1.13, L, .99, M, 1.08)

1.13

BJB, Inc. stock has an expected return of 15.15 percent. The risk-free rate is 3.8 percent and the market risk premium is 8.6 percent. What is the stock's beta?

1.32

A stock has an expected return of 15.0 percent, the risk-free rate is 3.2 percent, and the market risk premium is 8.1 percent. What must the beta of this stock be?

1.46

Stock A has an expected return of 15.6 percent and a beta of 1.27. Stock B has an expected return of 11.4 percent and a beta of 0.89. Both stocks have the same reward-to-risk ratio. What is the risk-free rate?

1.56 percent

Currently, the risk-free rate is 4.0 percent. Stock A has an expected return of 9.6 percent and a beta of 1.08. Stock B has an expected return of 13.5 percent. The stocks have equal reward-to-risk ratios. What is the beta of Stock B?

1.83

You would like to create a portfolio that is equally invested in a risk-free asset and two stocks. One stock has a beta of 1.15. What does the beta of the second stock have to be if you want the portfolio to be equally as risky as the overall market?

1.85

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.12 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?

1.88

You own a portfolio consisting of the securities listed below. The expected return for each security is as shown. What is the expected return on the portfolio? ER, (W, 8.9, X, 11.6. Y, 28.4, 12.7)

14.20 percent

Sugar and Spice stock is expected to produce the following returns given the various states of the economy. What is the expected return on this stock?

10.05 percent

Miller Brothers is considering a project that will produce cash inflows of $61,500, $72,800, $84,600, and $68,000 a year for the next four years, respectively. What is the internal rate of return if the initial cost of the project is $225,000?

10.22 percent

What is the expected return on a security given the following information? R, .14, N, .75, B, .11

10.22 percent

A project has the following cash flows. What is the internal rate of return?

10.53 percent

Delta Mu Delta is considering purchasing some new equipment costing $400,000. The equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. Projected net income for the four years is $18,900, $21,300, $26,700, and $25,000. What is the average accounting rate of return?

11.49 percent

A project has the following cash flows. What is the internal rate of return?

14.09 percent

Stock J has a beta of 1.17 and an expected return of 14.4 percent, while Stock K has a beta of 0.68 and an expected return of 7.6 percent. You want a portfolio with the same risk as the market. What is the expected return of your portfolio?

12.04 percent

You own a portfolio that is invested 38 percent in Stock A, 43 percent in Stock B, and the remainder in Stock C. The expected returns on these stocks are 10.9 percent, 15.4 percent, and 9.1 percent, respectively. What is the expected return on the portfolio?

12.49 percent

Given the following information, what is the expected return on a portfolio that is invested 35 percent in Stock A, 45 percent in Stock B, and the balance in Stock C? RoR, (A, 11.4, B, 31.2, C, 7.3)

12.53 percent

You are considering the following two mutually exclusive projects. The crossover point is _____ and Project _____ should be accepted at a 12 percent discount rate.

14.02 percent; A

What was the average annual risk premium on small-company stocks for the period 1926-2011?

12.9 percent

You own a stock that has an expected return of 16.00 percent and a beta of 1.33. The U.S. Treasury bill is yielding 3.65 percent and the inflation rate is 2.95 percent. What is the expected rate of return on the market?

12.94 percent

Your firm is contemplating the purchase of a new $674,000 computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. It will be worth $58,000 at that time. You will save $185,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $29,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. If the tax rate is 34 percent, what is the IRR for this project?

13.01 percent

Textiles Unlimited has gathered projected cash flows for two projects. At what interest rate would the company be indifferent between the two projects? Which project is better if the required return is above this interest rate?

13.15 percent: B

You are considering the following two mutually exclusive projects. The crossover point is _____ and Project _____ should be accepted if the discount rate is 14 percent.

13.28 percent; B

Fiddler's Music Stores' stock has a risk premium of 9.6 percent while the inflation rate is 4.1 percent and the risk-free rate is 3.9 percent. What is the expected return on this stock?

13.5 percent

What is the IRR of the following set of cash flows? (-26,300)

15.81 percent

You want to create a $48,000 portfolio that consists of three stocks and has an expected return of 14.5 percent. Currently, you own $16,700 of Stock A and $24,200 of Stock B. The expected return for Stock A is 18.7 percent, and for Stock B it is 11.2 percent. What is the expected rate of return for Stock C?

15.87 percent

You are considering an equipment purchase costing $187,000. This equipment will be depreciated straight-line to zero over its three-year life. What is the average accounting return if this equipment produces the following net income?

16.51 percent

You're trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $26 million, which will be depreciated straight-line to zero over its three-year life. If the plant has projected net income of $2,348,000, $2,680,000, and $1,920,000 over these three years, what is the project's average accounting return (AAR)?

17.82 percent

Southern Wear stock has an expected return of 14.6 percent. Given the information below, what is the expected return on this stock if the economy is normal? Round your answer to the nearest whole percentage.

18 percent

Bama Entertainment has common stock with a beta of 1.46. The market risk premium is 9.2 percent and the risk-free rate is 4.6 percent. What is the expected return on this stock?

18.03 percent

Stock J has a beta of 1.47 and an expected return of 15.8 percent. Stock K has a beta of 1.05 and an expected return of 11.9 percent. What is the risk-free rate if these securities both plot on the security market line?

2.15 percent

Stock Y has a beta of 1.28 and an expected return of 13.7 percent. Stock Z has a beta of 1.02 and an expected return of 11.4 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?

2.38 percent

A bond has an average return of 6.3 percent and a standard deviation of 3.8 percent. What range of returns would you expect to see 68 percent of the time on this security?

2.5 percent to 10.1 percent

What is the probability associated with a return that lies in the upper tail when the mean plus two standard deviations is graphed?

2.5%

A project has the following cash flows. What is the payback period?

2.60 years

Given the following information, what is the standard deviation of the returns on a portfolio that is invested 35 percent in both Stocks A and C, and 30 percent in Stock B? RoR, (A, 16.4, B, 31.8, C, 11.4)

2.77 percent

Services United is considering a new project that requires an initial cash investment of $78,000. The project will generate cash inflows of $29,500, $32,700, $18,500, and $10,000 over each of the next four years, respectively. How long will it take to recover the initial investment?

2.85 years

Industrial Services is analyzing a proposed investment that would initially require $538,000 of new equipment. This equipment would be depreciated on a straight-line basis to a zero balance over the four-year life of the project. The estimated salvage value is $187,000. The project requires $39,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $194,900 a year. What is the internal rate of return on this project if the relevant tax rate is 34 percent?

20.49 percent

You are considering the following two mutually exclusive projects. What is the crossover point?

22.56

A stock has a beta of 1.86, the expected return on the market is 14.72, and the risk-free rate is 4.65. What must the expected return on this stock be?

23.38 percent

You own a $46,000 portfolio comprised of four stocks. The values of Stocks A, B, and C are $6,600, $16,700, and $11,400, respectively. What is the portfolio weight of Stock D?

24.57 percent

Auto Detailers is buying some new equipment at a cost of $228,900. This equipment will be depreciated on a straight-line basis to a zero book value its eight-year life. The equipment is expected to generate net income of $36,000 a year for the first four years and $22,000 a year for the last four years. What is the average accounting rate of return?

25.34 percent

Given the following information, what is the standard deviation of the returns on this stock? B, .04, N, .74, R, .22

25.52 percent

What is the payback period for a project with the following cash flows?

3.17 years

A project has the following cash flows. What is the payback period?

3.21 years

What is the payback period for a $28,500 investment with the following cash flows?

3.65 years

Quattro, Inc. has the following mutually exclusive projects available. The company has historically used a four-year cutoff for projects. The required return is 11 percent.

3.92 years; 3.79 years; $780.85; -$7,945.93; accept Project A only

Noah's Landing stock is expected to produce the following returns given the various states of the economy. What is the expected return on this stock?

4.05 percent

The Golden Goose is considering a project with an initial cost of $46,700. The project will produce cash inflows of $10,000 a year for the first two years and $12,000 a year for the following three years. What is the payback period?

4.23 years

Greenbriar Cotton Mill is spending $330,000 to update its facility. The company estimates that this investment will improve its cash inflows by $56,500 a year for 10 years. What is the payback period?

5.84 years

EKG, Inc. is considering a new project that will require an initial cash investment of $398,000. The project will produce no cash flows for the first two years. The projected cash flows for years 3 through 7 are $79,000, $88,000, $102,000, $140,000, and $160,000, respectively. How long will it take the firm to recover its initial investment in this project?

5.92 years

Consider the following information on a portfolio of three stocks: The portfolio is invested 35 percent in each Stock A and Stock B and 30 percent in Stock C. If the expected T-bill rate is 3.90 percent, what is the expected risk premium on the portfolio? Boom, (.15, .05, .21, .18)

6.19 percent

Diamond Enterprises is considering a project that will produce cash inflows of $238,000 a year for three years followed by $149,000 in year 4. What is the internal rate of return if the initial cost of the project is $749,000?

6.32 percent

Chasteen, Inc. is considering an investment with an initial cost of $185,000 that would be depreciated straight-line to a zero book value over the life of the project. The cash inflows generated by the project are estimated at $76,000 for the first two years and $30,000 for the following two years. What is the internal rate of return?

6.94 percent

A stock has an expected return of 17.2 percent and a beta of 1.65. The risk-free rate is 5.1 percent. What is the slope of the security market line?

7.33 percent

The Golf Range is considering adding an additional driving range to its facility. The range would cost $76,000, would be depreciated on a straight-line basis over its seven-year life, and would have a zero salvage value. The anticipated income from the project is $34,000 a year with $14,400 of that amount being variable cost. The fixed cost would be $16,200. The firm believes that it will earn an additional $13,000 a year from its current operations should the driving range be added. The project will require $2,000 of net working capital, which is recoverable at the end of the project. What is the internal rate of return on this project at a tax rate of 34 percent?

7.53 percent

The Steel Factory is considering a project that will produce annual cash flows of $36,800, $45,500, $56,200, and $21,800 over the next four years, respectively. What is the internal rate of return if the initial cost of the project is $135,000?

7.56 percent

A stock has a beta of 1.47 and an expected return of 16.6 percent. The risk-free rate is 4.8 percent. What is the slope of the security market line?

8.03 percent

A project has the following cash flows. What is the internal rate of return?

8.26 percent

A project has an initial requirement of $698,700 for fixed assets and $61,000 for net working capital. The fixed assets will be depreciated to a zero book value over the four-year life of the project and will be worthless at the end of the project. All of the net working capital will be recouped after four years. The expected annual operating cash flow is $218,000. What is the project's internal rate of return if the tax rate is 35 percent?

8.41 percent

A stock has a beta of 1.24, an expected return of 13.68 percent, and lies on the security market line. A risk-free asset is yielding 2.8 percent. You want to create a $6,000 portfolio consisting of Stock A and the risk-free security such that the portfolio beta is 0.65. What rate of return should you expect to earn on your portfolio?

8.50 percent

Miller and Sons is evaluating a project with the following cash flows:

8.54 percent; 7.38 percent; 8.59 percent

Chestnut Tree Farms has identified the following two mutually exclusive projects:

9.55 percent or less

A risky security has less risk than the overall market. What must the beta of this security be?

> 0 but < 1

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule? A) Project A only B) Project B only C) Both A and B D) Neither A nor B

A) Project A only

What is the net present value of a project with the following cash flows if the discount rate is 15 percent? Year Cash Flow 0 -$39,400 1 $12,800 2 $21,700 3 $18,100 A) $39.80 B) $1465.92 C) $5178.93 D) $13,200

A) $39.80

The Black Horse is currently considering a project that will produce cash inflows of $12,000 a year for three years followed by $6,500 in year 4. The cost of the project is $38,000. What is the profitability index if the discount rate is 7 percent? Round your answer to two decimal places. A) 0.96 B) 0.99 C) 1.04 D) 1.09

A) 0.96

What is the net present value of a project with the following cash flows if the discount rate is 15 percent? Year/Cash Flow 0/-48100 1/15600 2/28900 3/15200 A. -$2,687.98 B. -$1,618.48 C. $1,044.16 D. $1,035.24 E. $9,593.19

A. -$2,687.98 NPV = - $48,100 + $15,600 / 1.15 + $28,900 / 1.152 + $15,200 / 1.153 NPV = -$2,687.98

The net present value: A. decreases as the required rate of return increases. B. is equal to the initial investment when the internal rate of return is equal to the required return. C. method of analysis cannot be applied to mutually exclusive projects. D. ignores cash flows that are distant in the future. E. is unaffected by the timing of an investment's cash flows.

A. decreases as the required rate of return increases.

Which one of the following refers to a method of increasing the rate at which an asset is depreciated?

Accelerated cost recovery system

The variance is the average squared difference between which of the following?

Actual return- Avg. Return

Home Grown Tomatoes stock returned 28.7 percent, 2.6 percent, 13.1 percent, 12.2, and 11.8 percent over the past five years, respectively. What is the arithmetic average return for this period?

Arithmetic average = (0.287 + 0.026 + 0.131 + 0.122 + 0.118)/5 = 13.68 percent

Over the last four years, a stock has had an arithmetic average return of 8.8 percent. Three of those four years produced returns of 16.3 percent, 10.2 percent, and -14.1 percent, respectively. What is the geometric average return for this four-year period?

Arithmetic average return = 0.088 = (0.163 + 0.102 - 0.141 + x)/4 x = 22.8 percent Geometric average return = [1.163 × 1.102 × 0.859 × 1.228)1/4 - 1 = 7.83 percent

Over the last four years, the common stock of Plymouth Shippers has had an arithmetic average return of 9.3 percent. Three of those four years produced returns of 14.1 percent, 15.6 percent, and 3.4 percent, respectively. What is the geometric average return for this four-year period?

Arithmetic average return = 0.093 = (0.141 + 0.156 + 0.034 + x)/4 x = 0.041 Geometric average return = [1.141 × 1.156 × 1.034 × 1.041)1/4 - 1 = 9.16 percent

An efficient capital market is best defined as a market in which security prices reflect which one of the following?

Available information

Which one of the following analytical methods is based on net income?

Average accounting return

Which one of the following methods of analysis ignores cash flows?

Average accounting return

Which one of the following methods of analysis is most similar to computing the return on assets (ROA)?

Average accounting return

A stock has yielded returns of 6 percent, 11 percent, 14 percent, and -2 percent over the past four years, respectively. What is the standard deviation of these returns?

Average return = (0.06 + 0.11 + 0.14 - 0.02)/4 = 0.0725 σ2 = [(0.06 - 0.0725)2 + (0.11 - 0.0725)2 + (0.14 - 0.0725)2 + (-0.02 - 00.0725)2 ]/(4 - 1) = 0.004892 σ = √0.004892 = 6.99 percent

Over the past five years, a stock returned 8.3 percent, -32.5 percent, -2.2 percent, 46.9 percent, and 11.8 percent, respectively. What is the variance of these returns?

Average return = (0.083 - 0.325 - 0.022 + 0.469 + 0.118)/5 = 0.0646 σ2 = [(0.083 - 0.0646)2 + (-0.325 - 0.0646)2 + (-0.022 - 0.0646)2 + (0.469 - 0.0646)2 + (0.118 - 0.0646)2]/(5 - 1) = 0.081504 Subtract avg and square, sum, and then divided by (n-1)

A stock has produced returns of 11 percent, 18 percent, -6 percent, -13 percent, and 21 percent for the past five years, respectively. What is the standard deviation of these returns?

Average return = (0.11 + 0.18 - 0.06 - 0.13 + 0.21)/5 = 0.062 σ2 = [(0.11 - 0.062)2 + (0.18 - 0.062)2 + (-0.06 - 0.062)2 + (-0.13 - 00.062)2 + (0.21 - 0.062)2]/(5 - 1) = 0.02247 σ = √0.02247 = 14.99 percent

A security produced returns of 12 percent, -11 percent, -2 percent, 15 percent, and 9 percent over the past five years, respectively. Based on these five years, what is the probability that an investor in this stock will lose more than 17.06 percent in any one given year?

Average return = (0.12 - 0.11 - 0.02 + 0.15 + 0.09)/5 = 0.046 σ2 = [(0.12 - 0.046)2 + (-0.11 - 0.046)2 + (-0.02 - 0.046)2 + (0.15 - 0.046)2 + (0.09 - 0.046)2]/(5 - 1) = 0.01173 σ = √0.01173 = 0.108305 Lower end of 95 percent probability range = 0.046 - (2 × 0.108305) = -17.06 percent Probability of losing more than 17.06 percent = (1 - 0.95)/2 = 2.5 percent

A security produced returns of 13 percent, 18 percent, 9 percent, 23 percent, and -17 percent over the past five years, respectively. Based on these five years, what is the probability that this stock will earn more than 24.76 percent in any one given year?

Average return = (0.13 + 0.18 + 0.09 + 0.23 - 0.17)/5 = 0.092 σ2 = [(0.13 - 0.092)2 + (0.18 - 0.092)2 + (0.09 - 0.092)2 + (0.23 - 00.092)2 + (-0.17 - 00.092)2]/(5 - 1) = 0.024220 σ = √0.024220 = 0.155628 Upper end of 68 percent probability range = 0.092 + 0.155628 = 24.76 percent Probability of earning more than 24.76 percent = (1 - 0.68)/2 = 16 percent

Over the past six years, a stock had annual returns of 14 percent, -3 percent, 8 percent, 21 percent, -16 percent, and 4 percent, respectively. What is the standard deviation of these returns?

Average return = (0.14 - 0.03 + 0.08 + 0.21 - 0.16 + 0.04)/6 = 0.046667 σ2 = [(0.14 - 0.046667)2 + (-0.03 - 0.046667)2 + (0.08 - 0.046667)2 + (0.21 - 00.046667)2 + (-0.16 - 0.046667)2 + (0.04 - 0.046667)2]/(6 - 1) = 0.017027 σ = √0.017027 = 13.05 percent

Over the past four years, a stock produced returns of 15 percent, 6 percent, 11 percent, and 22 percent, respectively. Based on these four years, what range of returns would you expect to see 95 percent of the time?

Average return = (0.15 + 0.06 + 0.11 + 0.22)/4 = 0.135 σ2 = [(0.15 - 0.135)2 + (0.06 - 0.135)2 + (0.11 - 0.135)2 + (0.22 - 00.135)2]/(4 - 1) = 0.004567 σ = √0.004567 = 0.067577 95 percent probability range = 0.135 ± (2 × 0.067577) Range of returns = -0.02 percent to 27.02 percent

Five years ago, you purchased 600 shares of stock. The annual returns have been 7.2 percent, -19.4 percent, 3.8 percent, 14.2 percent, and 27.9 percent, respectively. What is the variance of these returns?

Average return = (0.226 + 0.187 + 0.113 - 0.198 + 0.024)/5 = 0.0704 σ2 = [(0.226 - 0.0704)2 + (0.187 - 0.0704)2 + (0.113 - 0.0704)2 + (-0.198 - 0.0704)2 + (0.024 - 0.0704)2]/(5 - 1) = 0.028453

Windsor stock has produced returns of 22.6 percent, 18.7 percent, 11.3 percent, -19.8 percent, and 2.4 percent over the past five years, respectively. What is the variance of these returns?

Average return = (0.226 + 0.187 + 0.113 - 0.198 + 0.024)/5 = 0.0704 σ2 = [(0.226 - 0.0704)2 + (0.187 - 0.0704)2 + (0.113 - 0.0704)2 + (-0.198 - 0.0704)2 + (0.024 - 0.0704)2]/(5 - 1) = 0.028453

A stock has returns for five years of 23 percent, -17 percent, 8 percent, 22 percent, and 3 percent, respectively. The stock has an average return of ______ percent and a standard deviation of _____ percent.

Average return = (0.23 - 0.17 + 0.08 + 0.22 + 0.03)/5 = 0.078 σ2 = [(0.23 - 0.078)2 + (-0.17 - 0.078)2 + (0.08 - 0.078)2 + (0.22 - 00.078)2 + (0.03 - 00.078)2]/(5 - 1) = 0.026770 σ = √0.026770 = 16.36 percent

over the past four years, a stock produced returns of 23 percent, -39 percent, 4 percent, and 16 percent, respectively. Based on these four years, what range of returns would you expect to see 99 percent of the time?

Average return = (0.23 - 0.39 + 0.04 + 0.16)/4 = 0.01 σ2 = [(0.23 - 0.01)2 + (-0.3 - 0.01)2 + (0.04 - 0.01)2 + (0.16 - 0.01)2]/(4 - 1) = 0.077267 σ = √0.077267 = 0.277969 99 percent probability range = 0.01 ± (3 × 0.277969) Range of returns = -82.39 percent to 84.39 percent

Kelly decided to accept the risk and purchased a high growth stock. Her returns for the past five years are 48 percent, 39 percent, -56 percent, 61 percent, and -24 percent, respectively. What is the standard deviation of these returns?

Average return = (0.48 + 0.39 - 0.56 + 0.61 - 0.24)/5 = 0.136 σ2 = [(0.48 - 0.136)2 + (0.39 - 0.136)2 + (-0.56 - 0.136)2 + (0.61 - 00.136)2 + (-0.24 - 0.136)2]/(5 - 1) = 0.258330 σ = √0.258330 = 50.83 percent

A stock produced returns of 19 percent, 27 percent, and -38 percent over three of the past four years, respectively. The arithmetic average for the past four years is 7 percent. What is the standard deviation of the stock's returns for the four-year period?

Average return = 0.07 = (0.19 + 0.27 - 0.38 + x)/4 x = 0.20 σ2 = [(0.19 - 0.07)2 + (0.27 - 0.07)2 + (-0.38 - 0.07)2 + (0.20 - 0.07)2]/(4 - 1) = 0.091267 σ = √0.091267 = 30.21 percent

A stock produced returns of 16 percent, 9 percent, and 21 percent over three of the past four years, respectively. The arithmetic average for the past four years is 10 percent. What is the standard deviation of the stock's returns for the four-year period?

Average return = 0.10 = (0.16 + 0.09 + 0.21 + x)/4 x = -0.06 σ2 = [(0.16 - 0.10)2 + (0.09 - 0.10)2 + (0.21 - 0.10)2 + (-0.06 - 0.10)2]/(4 - 1) = 0.0138 σ = √0.0138 = 11.75 percent

What is the net present value of a project that has an initial cost of $42,700 and produces cash inflows of $9,250 a year for 9 years if the discount rate is 14.65 percent? A. $798.48 B. $1,240.23 C. $1,992.43 D. $2,111.41 E. $2,470.01

C. $1,992.43 NPV = -$42,700 + $9,250 ×{1 - [1 / (1 + .1465)9]} / .1465 NPV = $1,992.43

You are analyzing a project and have gathered the following data: Year Cash Flow 0 -$175,000 1 $56,400 2 $61,800 3 $72,000 4 $75,000 Required payback period: 2.5 years Required AAR: 11.5 percent Required return: 14.5 percent Based on the internal rate of return of ____ percent for this project, you should ____ the project. A) 14.67; accept B) 17.91; accept C) 14.67; reject D) 17.91; reject

B) 17.91; accept

Chasteen, Inc. is considering an investment with an initial cost of $185,000 that would be depreciated straight-line to a zero book value over the life of the project. The cash inflows generated by the project are estimated at $76,000 for the first two years and $30,000 for the following two years. What is the internal rate of return? Round your answer to two decimal places and express as a percent (example: 8.01, not 0.0801) A) 6.44 percent B) 6.94 percent C) 7.43 percent D) 7.55 percent

B) 6.94 percent

Which one of the following defines the internal rate of return for a project? A) Discount rate that creates a zero cash flow from assets B) Discount rate that results in a zero net present value for the project C) Discount rate that results in a net present value equal to the project's initial cost D) Rate of return required by the project's investors

B) Discount rate that results in a zero net present value for the project

Which one of the following is the primary advantage of payback analysis? A) Incorporation of the time value of money concept B) Ease of use C) Research and development bias D) Arbitrary cutoff point

B) Ease of use

Rosa's Designer Gowns creates exquisite gowns for special occasions on a prepaid basis only. The required return is 8 percent. Rosa has estimated the cash flows for one gown as follows. Should Rosa sell this gown at the price she is currently considering based on the estimated internal rate of return (IRR)? Year Cash Flow 0 $165,000 1 -$172,000 A) Rose can sell the gown for as little as $153,819 and still earn her required return. B) The gown must be sold for a minimum price of $159,259 if Rosa is to earn her required return. C) The IRR decision rule cannot be applied to this project. D) Rosa should sell the gown for $155,000.

B) The gown must be sold for a minimum price of $159,259 if Rosa is to earn her required return.

Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of 15.1 percent, and a payback period of 3.2 years. The required return is 14.5 percent and the required payback period is 3.0 years. Which one of the following statements correctly applies to this project? A )The net present value indicates accept while the internal rate of return indicates reject. B) The payback decision rule could override the accept decision indicated by the net present value. C) The payback rule will automatically be ignored since both the net present value and the internal rate of return indicate an accept decision. D) The net present value decision rule is the only rule that matters when making the final decision.

B) The payback decision rule could override the accept decision indicated by the net present value.

Which one of the following is the primary advantage of payback analysis? A. Incorporation of the time value of money concept B. Ease of use C. Research and development bias D. Arbitrary cutoff point E. Long-term bias

B. Ease of use

The internal rate of return is the: A. discount rate that causes a project?s aftertax income to equal zero. B. discount rate that results in a zero net present value for the project. C. discount rate that results in a net present value equal to the project's initial cost. D. rate of return required by the project's investors. E. project's current market rate of return.

B. discount rate that results in a zero net present value for the project.

Consider the following two mutually exclusive projects: Whichever project you choose, if any, you require a 14 percent return on your investment. If you apply the payback criterion, you will choose Project ______; if you apply the NPV criterion, you will choose Project ______; if you apply the IRR criterion, you will choose Project _____; if you choose the profitability index criterion, you will choose Project ___. Based on your first four answers, which project will you finally choose?

B; A; B; A; A

Based on the period 1926-2011, what rate of return should you expect to earn over the long-term if you are unwilling to bear risk?

Between 3 and 4 percent

Joe and Rich are both considering investing in a project with the following cash flows. Joe is content earning a 9 percent return, but Rich desires a return of 16 percent. Who, if either, should accept this project?

Both Joe and Rich

Which one of the following indicates that a project is expected to create value for its owners? A) Profitability index less than1.0 B) Payback period greater than the requirement C) Positive net present value D) Positive average accounting rate of return

C) Positive net present value

Which one of the following statements is correct? A) If the IRR exceeds the required return, the profitability index will be less than 1.0. B) The profitability index will be greater than 1.0 when the net present value is negative C) When the internal rate of return is greater than the required return, the net present value is positive. D) If two projects are mutually exclusive, you should select the project with the shortest payback period.

C) When the internal rate of return is greater than the required return, the net present value is positive.

Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires. Which one of the following changes to the project would be most expected to increase the project's internal rate of return? A) decreasing the required discount rate B) increasing the initial investment in fixed assets C) condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows D) eliminating the salvage value

C) condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows

What is the net present value of a project that has an initial cost of $40,000 and produces cash inflows of $8,000 a year for 11 years if the discount rate is 15 percent? A) $798.48 B) $1240.23 C) $1869.69 D) $2111.41

C) $1869.69

A project has the following cash flows. What is the payback period? Round your answer to two decimal places. Year Cash Flow 0 -$92,000 1 $27,000 2 $45,800 3 $16,800 4 $11,200 A) 2.59 years B) 2.96 years C) 3.21 years D) 3.43 years

C) 3.21 years

13. A project has the following cash flows. What is the payback period? Year/Cash Flow 0/-28000 1/11600 2/11600 3/6500 4/6500 A. 2.38 years B. 2.49 years C. 2.74 years D. 3.01 years E. 3.33 years

C. 2.74 years Payback = 2 + ($28,000 -11,600 -11,600)/$6,500 = 2.74 years

Which one of the following methods of analysis ignores cash flows? A. Profitability index B. Payback C. Average accounting return D. Modified internal rate of return E. Internal rate of return

C. Average accounting return

Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently? A. Payback and net present value B. Payback and internal rate of return C. Internal rate of return and net present value D. Net present value and profitability index E. Profitability index and internal rate of return

C. Internal rate of return and net present value

Which one of the following statements is correct? A. A longer payback period is preferred over a shorter payback period. B. The payback rule states that you should accept a project if the payback period is less than one year. C. The payback period ignores the time value of money. D. The payback rule is biased in favor of long-term projects. E. The payback period considers the timing and amount of all of a project's cash flows.

C. The payback period ignores the time value of money.

The Flour Baker is considering a project with the following cash flows. Should this project be accepted based on its internal rate of return if the required return is 18 percent? Year/Cash Flow 0/-49000 1/9500 2/26200 3/38700 A. Yes; because the project's rate of return is 7.78 percent B. Yes; because the project's rate of return is 16.08 percent C. Yes; because the project's rate of return is 19.47 percent D. No; because the project's rate of return is 19.47 percent E. No; because the project's rate of return is 16.08 percent

C. Yes; because the project's rate of return is 19.47 percent NPV = 0 = -$49,000 + $9,500 / (1 + IRR) + $26,200 / (1 + IRR)2 + $38,700 / (1 + IRR)3 IRR = 19.47 percent The project should be accepted because its IRR is greater than the required return.

One year ago, you bought a stock for $36.48 a share. You received a dividend of $1.62 per share last month and sold the stock today for $41.18 a share. What is the capital gains yield on this investment?

Capital gains yield = ($41.18 - $36.48)/$36.48 = 12.88 percent

Suppose a stock had an initial price of $74 per share, paid a dividend of $0.80 per share during the year, and had an ending share price of $77. What was the capital gains yield?

Capital gains yield = ($77 - $74)/$74 = 4.05 percent

Kyle Electric has three positive net present value opportunities. Unfortunately, the firm has not been able to find financing for any of these projects. Which one of the following terms best describes the firm's situation?

Capital rationing

Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive?

Cost of capital

The managers of H.R Construction are considering remodeling plans for an old building the firm currently owns. The building was purchased eight years ago for $689,000. Over the past eight years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $898,000. The firm is considering remodeling the building into a conference centre and sandwich bar at an estimated cost of $1.7 million. The estimated present value of the future income from this centre is $2.9 million. Which one of the following defines the opportunity cost of the remodeling project?

Current market value of the building

The stock of Southern United is priced at $40 a share and has a dividend yield of 2.1 percent. The firm pays constant annual dividends. What is the amount of the next dividend per share?

D = 0.021 × $40 = $0.84

Cox Footwear pays a constant annual dividend. Last year, the dividend yield was 2.5 percent when the stock was selling for $26 a share. What is the current price of the stock if the current dividend yield is 3.1 percent?

D = 0.025 × $26 = $0.65 P0 = $0.65/0.031 = $20.97 dividend yield= stock price/dividend

The Bermuda Triangle Store pays a constant dividend. Last year, the dividend yield was 5.4 percent when the stock was selling for $15 a share. What must the stock price be today if the market currently requires a 3.8 percent dividend yield on this stock?

D = 0.054 × $15 = $0.81 P0 = $0.81/0.038 = $21.32

The Greasy Spoon Restaurant is considering a project with an initial cost of $525,000. The project will not produce any cash flows for the first three years. Starting in year 4, the project will produce cash inflows of $721,000 a year for three years. This project is risky, so the firm has assigned it a discount rate of 16 percent. What is the project's net present value? A) $424,591.11 B) $451,786.86 C) $492,255.56 D) $512,408.23

D) $512,408.23

You're trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12 million, which will be depreciated straight-line to zero over its 4-year life. The plant has projected net income of $1,095,000, $902,000, $1,412,000, and $1,724,000 over these 4 years. What is the average accounting return? A) 10.70 percent B) 15.63 percent C) 18.87 percent D) 21.39 percent

D) 21.39 percent

You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value. Project A Year and Cash Flow 0 -$87,000 1 $31,000 2 $37,000 3 $44,000 Project B Year and Cash Flow 0 -$85,000 1 $15,000 2 $20,000 3 $90,000 Project A Project B Required rate of return 12 percent 14 percent Required payback period 2.5 years 2.5 years Required accounting return 10 percent 11 percent Should you accept or reject these projects based on IRR analysis? A) accept Project A and reject Project B B) reject Project A and accept Project B C) reject both Projects A and B D) You cannot make this decision based on internal rate of return analysis.

D) You cannot make this decision based on internal rate of return analysis.

Greenbriar Cotton Mill is spending $330,000 to update its facility. The company estimates that this investment will improve its cash inflows by $56,500 a year for 10 years. What is the payback period? Round your answer to two decimal places. A) 4.03 years B) 4.95 years C) 5.48 years D) 5.84 years

D) 5.84 years

Diamond Enterprises is considering a project that will produce cash inflows of $238,000 a year for three years followed by $149,000 in year 4. What is the internal rate of return if the initial cost of the project is $749,000? Round your answer to two decimal places and express as a percent (example: 8.01, not 0.0801) A) 3.43 percent B) 4.29 percent C) 5.81 percent D) 6.32 percent

D) 6.32 percent

Which one of the following will decrease the net present value of a project? A) increasing the value of each of the project's discounted cash inflows B) moving each of the cash inflows forward to a sooner time period C) decreasing the required discount rate D) increasing the project's initial cost at time zero

D) increasing the project's initial cost at time zero

A project has the following cash flows. What is the internal rate of return? Year/Cash Flow 0/-89300 1/32900 2/64200 3/5800 A. 11.21 percent B. 10.47 percent C. 10.72 percent D. 8.57 percent E. 9.19 percent

D. 8.57 percent NPV = 0 = -$89,300 + $32,900 / (1 + IRR) + $64,200 / (1 + IRR)2 + $5,800 / (1 + IRR)3 IRR = 8.57%

Which one of the following statements is correct? A. The net present value is a measure of profits expressed in today's dollars. B. The net present value is positive when the required return exceeds the internal rate of return. C. If the initial cost of a project is increased, the net present value of that project will also increase. D. If the internal rate of return equals the required return, the net present value will equal zero. E. Net present value is equal to an investment's cash inflows discounted to today's dollars.

D. If the internal rate of return equals the required return, the net present value will equal zero.

Which one of the following methods of analysis ignores the time value of money? A. Net present value B. Internal rate of return C. Discounted cash flow analysis D. Payback E. Profitability index

D. Payback

Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative. A. Average accounting return that exceeds the requirement B. Payback period that is shorter than the requirement period C. Positive net present value D. Profitability index less than 1.0 E. Internal rate of return that exceeds the required return

D. Profitability index less than 1.0

Which one of the following combinations will always result in an increased dividend yield?

DECREASE in the stock price combined with a HIGHER dividend amount

Which one of the following will increase the operating cash flow as computed using the tax shield approach?

Decrease in fixed costs

Which one of the following is the best example of systematic risk?

Decrease in gross domestic product

The net present value profile illustrates how the net present value of an investment is affected by which one of the following?

Discount rate

Which one of the following defines the internal rate of return for a project?

Discount rate that results in a zero net present value for the project

Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?

Diversification

Over the past four years, large-company stocks and U.S. Treasury bills have produced the returns stated below. During this period, inflation averaged 2.8 percent. Given this information, the average real rate of return on large-company stocks was ___ percent as compared to _____ percent for Treasury bills.

Divide by inflation!!! Large-company stocks: Average nominal return = (0.15 + 0.07 + 0.04 + 0.18)/4 = 0.11 Average real rate: r = (1.11/1.028) - 1 = 7.98 percent U.S. Treasury bills: Average nominal return = (0.06 + 0.03 + 0.02 + 0.04)/4 = 0.0375 Average real rate: r = (1.0375/1.028) - 1 = 0.92 percent

Rocky Top pays a constant annual dividend. One year ago, when you purchased shares of that stock at $12 a share, the dividend yield was 2 percent. Over this past year, the inflation rate has been 2.6 percent. Today, the required return on this stock is 9 percent and you just sold all of your shares. What is your total nominal return on this investment? Round your answer to the nearest whole percentage.

Dividend = 0.02 × $12 = $0.24 P0 = $0.24/0.09 = $2.67 Nominal return = ($2.67 - $12 + $0.24)/$12 = -75.78 percent just like total return in this case

Nu Tek is comprised of four separate operating divisions. For this year, the firm has decided to allocate capital funds using a soft rationing approach. Which one of the following applies to this situation?

Divisions managers will vie with each other for additional capital allocations.

Auto Detailers is buying some new equipment at a cost of $188,900. This equipment will be depreciated on a straight-line basis to a zero book value its eight-year life. The equipment is expected to generate net income of $11,000 a year for the first four years and $24,000 a year for the last four years. What is the average accounting rate of return? A. 15.48 percent B. 17.76 percent C. 18.09 percent D. 22.68 percent E. 18.53 percent

E. 18.53 percent AAR = {[(4 ×$11,000) + (4 ×$24,000)] / 8}/{($188,900 + 0)/2} = .1853, or 18.53 percent

Which one of the following has the narrowest distribution of returns for the period 1926-2011?

Intermediate-terms government bonds

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to: A. produce a positive annual cash flow. B. produce a positive cash flow from assets. C. offset its fixed expenses. D. offset its total expenses. E. recoup its initial cost.

E. recoup its initial cost.

Which one of the following is the primary advantage of payback analysis?

Ease of use

Which one of the following is the hypothesis that securities markets are efficient?

Efficient Markets hypothesis

Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project?

Erosion

Isabella is considering three mutually exclusive options for the additional space she just added to her specialty women's store. The cost of the expansion was $127,000. She can use this additional space to add a fabric and quilting section, add an exclusive gifts department, or expand into imported decorator items for the home. She estimates the present value of these options at $114,000 for fabric and quilting, $163,000 for exclusive gifts, and $138,000 for decorator items. Which option(s), if any, should Isabella accept?

Exclusive gifts only

Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate?

Expected return

The security market line is a linear function that is graphed by plotting data points based on the relationship between which two of the following variables?

Expected return and beta

The security market line is defined as a positively sloped straight line that displays the relationship between which two of the following variables?

Expected return and beta

Which one of the following is defined as the average compound return earned per year over a multiyear period?

Geometric Average Return

Your portfolio has provided you with returns of 8.6 percent, 14.2 percent, -3.7 percent, and 12.0 percent over the past four years, respectively. What is the geometric average return for this period?

Geometric average return = (1.086 × 1.142 × 0.963 × 1.120)1/4 - 1 = 7.54 percent

The common stock of Hillshire Farms has yielded 16.3 percent, 7.2 percent, 11.8 percent, -3.6 percent, and 9.7 percent over the past five years, respectively. What is the geometric average return?

Geometric average return = (1.163 × 1.072 × 1.118 × 0.964 × 1.097)1/5 - 1 = 8.07 percent

A stock has produced returns of 16.6 percent, 3.4 percent, 11.7 percent, and -9.2 percent over the past four years, respectively. What is the geometric average return?

Geometric average return = (1.166 × 1.034 × 1.117 × 0.908)1/4 - 1 = 5.16 percent

Which one of the following best describes a portfolio?

Group of assets held by an investor

The Blackwell Group is unable to obtain financing for any new projects under any circumstances. Which term best applies to this situation?

Hard rationing

Which of the following have the potential to increase the net present value of a proposed investment? I. Ability to immediately shut down a project should the project become unprofitable II. Ability to wait until the economy improves before making the investment III. Option to place the investment on hold until a more favorable discount rate becomes available IV. Option to increase production beyond that initially projected

I, II, III, and IV

Which of the following should be included when compiling pro forma statements for a proposed investment? I. Forecasted sales II. Start-up costs III. Aftertax salvage value of any assets sold IV. Anticipated changes in net working capital

I, II, III, and IV

Steve owns a store that caters primarily to men and their hobbies. He is contemplating greatly expanding the hunting and fishing section of the store. If he does this, he expects his fishing and hunting sales will increase, his camping gear sales will increase, and his model train sales will decrease. Which of the following should Steve include in his revenue projection for the expansion project? I. Increase in fishing and hunting sales II. Increase in camping gear sales III. Decrease in model train sales

I, II, and III

Lake City Plastics currently produces plastic plates and silverware. The company is considering expanding its product offerings to include plastic serving trays. Which of the following are cash flows relevant to the new product? I. Molds needed to form the serving trays II. Projected increase in plate and silverware sales if the trays are produced III. A portion of the production manager's current annual salary of $75,000 IV. Raw materials used in the production of the serving trays

I, II, and IV only

The Shoe Box is considering adding a new line of winter footwear to its product lineup. Which of the following are relevant cash flows for this project? I. Decreased revenue from products currently being offered if this new footwear is added to the lineup II. Revenue from the new line of footwear III. Money spent to date looking for a new product line to add to the store's offerings IV. Cost of new counters to display the new line of footwear

I, II, and IV only

Which of the following should be included in the analysis of a proposed investment? I. Erosion effects II. Opportunity costs III. Sunk costs IV. Side effects

I, II, and IV only

Which of the following terms can be used to describe unsystematic risk? I. Asset-specific risk II. Diversifiable risk III. Market risk IV. Unique risk

I, II, and IV only

Based on the capital asset pricing model, investors are compensated based on which of the following? I. Market risk premium II. Portfolio standard deviation III. Portfolio beta IV. Risk-free rate

I, III, and IV only

Percentage returns

I. are easy to understand. II. relay information about a security more easily than dollar returns do. III. are not affected by the amount of the investment. IV. can be easily separated into dividend yield and capital gain yield

Lakeside Rides is adding a new roller coaster to its amusement park. The firm expects this addition to increase its overall ticket sales and increase attendance at its park. In particular, the firm expects to sell more tickets for its current roller coaster and experience extremely high demand for its new coaster. Sales for its boat ride are expected to decline but food and beverage sales are expected to increase significantly. Which of the following are considered side effects associated with the new roller coaster? I. Ticket sales for the new roller coaster II. Change in ticket sales for the existing coaster III. Change in ticket sales for the boat ride IV. Change in food and beverage sales

II, III, and IV only

Which one of the following statements is correct?

If a risky security is correctly priced, its expected risk premium will be positive.

Which one of the following statements is correct?

If the internal rate of return equals the required return, the net present value will equal zero.

Which one of the following is an example of systematic risk?

Increase in consumption created by a reduction in personal tax rates

World United stock currently plots on the security market line and has a beta of 1.04. Which one of the following will increase that stock's rate of return without affecting the risk level of the stock, all else constant?

Increase in the market risk-to-reward ratio

Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as which one of the following?

Incremental cash flows

Julie wants to create a $5,000 portfolio. She also wants to invest as much as possible in a high risk stock with the hope of earning a high rate of return. However, she wants her portfolio to have no more risk than the overall market. Which one of the following portfolios is most apt to meet all of her objectives?

Invest $2,500 in a risk-free asset and $2,500 in a stock with a beta of 2.0

In which one of the following situations would the payback method be the preferred method of analysis?

Investment funds available only for a limited period of time

Payback is best used to evaluate which type of projects?

Low-cost, short-term

Which one of the following is a correct value to use if you are conducting a best-case scenario analysis?

Lowest expected value for fixed costs

Which one of the following is specifically designed to compute the rate of return on a project that has unconventional cash flows?

Modified internal rate of return

Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of eight years.

Money spent last month repairing a damaged front fender

Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?

Mutually exclusive

Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation?

Net present value

Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities?

Net present value

Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?

Net present value

The risk-free rate is 4.2 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.2 and an expected return of 13.1 percent. Stock B has a beta of 0.75 and an expected return of 11.4 percent. Are these stocks correctly priced? Why or why not?

No, Stock A is overpriced and Stock B is underpriced.

An investment has an initial cost of $3.3 million. This investment will be depreciated by $900,000 a year over the three-year life of the project. Should this project be accepted based on the average accounting rate of return if the required rate is 10.0 percent? Why or why not?

No, because the AAR is less than 10.0 percent

An investment has an initial cost of $420,000 and will generate the net income amounts shown below. This investment will be depreciated straight-line to zero over the four-year life of the project. Should this project be accepted based on the average accounting rate of return if the required rate is 16 percent? Why or why not?

No, because the AAR is less than 16 percent

Woodcrafters requires an average accounting return (AAR) of at least 17 percent on all fixed asset purchases. Currently, it is considering some new equipment costing $178,000. This equipment will have a four-year life over which time it will be depreciated on a straight-line basis to a zero book value. The annual net income from this equipment is estimated at $10,100, $10,300, $17,900, and $19,600 for the four years. Should this purchase occur based on the accounting rate of return? Why or why not?

No, because the AAR is less than 17 percent

You are considering an investment for which you require a 14 percent rate of return. The investment costs $61,900 and will produce cash inflows of $26,000 for three years. Should you accept this project based on its internal rate of return? Why or why not?

No, because the IRR is 12.51 percent

Soft and Cuddly is considering a new toy that will produce the following cash flows. Should the company produce this toy if the firm requires a 15 percent rate of return?

No, because the project's rate of return is 10.21 percent

Boyertown Industrial Tools is considering a three-year project to improve its production efficiency. Buying a new machine press for $611,000 is estimated to result in $193,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $162,000. The press also requires an initial investment in spare parts inventory of $19,000, along with an additional $2,000 in inventory for each succeeding year of the project. If the tax rate is 35 percent and the discount rate is 12 percent, should the company buy and install the machine press? Why or why not?

No; the NPV is -$74,945

Sarah earned a 2.9 percent real rate of return on her investments for the past year. During that time, the risk-free rate was 4.1 percent and the inflation rate was 3.6 percent. What was her nominal rate of return?

Nominal rate = (1.029 × 1.036) - 1 = 6.60 percent does not account for inflation

Suppose you bought a 6 percent coupon bond one year ago for $929. The bond sells today for $933. The face value is $1,000. If the inflation rate last year was 4.3 percent, what was your total real rate of return on this investment?

Nominal return = ($933 - $929 + $60)/$929 = 0.068891 Real rate = (1.068891/1.043) - 1 = 2.48 percent

You expect the inflation rate to be 3.8 percent and the U.S. Treasury bill yield to be 3.9 percent for the next year. The risk premium on small-company stocks is 12.6 percent. What nominal rate of return do you expect to earn on small-company stocks next year?

Nominal return on small-company stocks = 3.9 percent + 12.6 percent = 16.50 percent add T-bill return to small company stock bc the expected+what you will earn

Last year, Paul invested $38,000 in Oil Town stock, $11,000 in long-term government bonds, and $8,000 in U.S. Treasury bills. Over the course of the year, he earned returns of 12.1 percent, 7.2 percent, and 4.1 percent, respectively. What was the nominal risk premium on Oil Town's stock for the year?

Nominal risk premium = 12.1 percent - 4.1 percent = 8.0 percent subtract the return of the T-Bill to get nominal PREMIUM

Assume large-company stocks returned 12.8 percent on average over the past 75 years. The risk premium on these stocks was 7.9 percent and the inflation rate was 3.6 percent. What was the average nominal risk-free rate of return for those 75 years?

Nominal risk-free rate = 12.8 percent - 7.9 percent = 4.9 percent

Which one of the following is defined as a bell-shaped frequency distribution that is defined by its average and its standard deviation?

Normal distribution

Which one of the following terms refers to the best option that was foregone when a particular investment is selected?

Opportunity cost

Turner Industries started a new project three months ago. Sales arising from this project are exceeding all expectations. Given this, which one of the following is management most apt to implement?

Option to expand

Hercules Movers pays a constant annual dividend of $1.75 per share on its stock. Last year at this time, the market rate of return on this stock was 14.8 percent. Today, the market rate has fallen to 11.2 percent. What would your capital gains yield have been if you had purchased this stock one year ago and then sold the stock today?

P-1 = $1.75/0.148 = $11.8243 P0 = $1.75/0.112 = $15.6350 Capital gains yield = ($15.6250 - $11.8243)/$11.8243 = 32.14 percent

You purchased a zero coupon bond one year ago for $291.22. The market interest rate is now 8.75 percent. If the bond had 16 years to maturity when you originally purchased it, what was your total return for the past year if the face value of the bond is $1,000?

PV = $1,000/[1 + (0.0875/2)]30 = $276.76 Total return = ($276.76 - $291.22)/$291.22 = -4.97 percent coupon bonds are always compounded semiannually

Which one of the following methods of analysis has the greatest bias toward short-term projects?

Payback

Which one of the following methods of analysis ignores the time value of money?

Payback

Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent?

Portfolio weight

Which one of the following indicators offers the best assurance that a project will produce value for its owners?

Positive NPV

You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests?

Profitability index

Which one of the following indicates that a project is definitely acceptable?

Profitability index greater than 1.0

Which one of the following indicates that a project should be rejected?

Profitability index less than 1.0

You are considering the following two mutually exclusive projects. The required return on each project is 14 percent. Which project should you accept and what is the best reason for that decision? (-46,000)

Project A, because it has the higher net present value

You are considering the following two mutually exclusive projects. The required return on each project is 14 percent. Which project should you accept and what is the best reason for that decision? (-24,000)

Project B, because it has the higher net present value

Jefferson International is trying to choose between the following two mutually exclusive design projects:

Project B; Project A; Project A

One year ago, Peyton purchased 3,600 shares of Broncos stock for $101,124. Today, he sold those shares for $26.60 a share. What is the total return on this investment if the dividend yield is 1.9 percent?

Purchase price = $101,124/3,600 shares = $28.09 a share Total return = [($26.60 - $28.09)/$28.09] + 0.019 = -3.40 percent Total return= cap gains yield+div yield

One year ago, Debra purchased 4,200 shares of KNF stock for $177,072. Today, she sold those shares for $48.50 a share. What is the capital gains yield on this investment if the dividend yield is 4.1 percent?

Purchase price = $177,072/4,200 shares = $42.16 a share Capital gains yield = ($48.50 - $42.16)/$42.16 = 15.04 percent

One year ago, LaTresa purchased 600 shares of Outland Co. stock for $3,600. The stock does not pay any regular dividends but it did pay a special dividend of $0.30 a share last week. This morning, she sold her shares for $7.25 a share. What was the total return on this investment?

Purchase price = $3,600/600 shares = $6 a share Total return = ($7.25 - $6 + $0.30)/$6 = 25.83 percent for special dividends just add to EQ

Last year, Isaac earned 10.6 percent on her investments while U.S. Treasury bills yielded 3.8 percent and the inflation rate was 3.1 percent. What real rate of return did she earn on her investments last year?

Real return = (1.106/1.031) - 1 = 7.27 percent

You earned 26.3 percent on your investments for a time period when the risk-free rate was 3.8 percent and the inflation rate was 4.0 percent. What was your real rate of return for the period?

Real return = (1.263/1.040) - 1 = 21.44 percent

Baker's Supply imposes a payback cutoff of 3.5 years for its international investment projects. If the company has the following two projects available, should it accept either of them?

Reject both Projects A and B

Which one of the following best describes an arithmetic average return?

Return earned in an AVERAGE year over a multi year period

Which one of the following is the most apt to have the largest risk premium in the future based on the historical record for 1926-2011?

Small-company stocks

Marcos Enterprises has three separate divisions. The firm allocates each division $1.5 million per year for capital purchases. Which one of the following terms applies to this allocation process?

Soft rationing

Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows?

Stand-alone principle

Which one of the following is the positive square root of the variance?

Standard deviation

Which one of the following is the best example of an announcement that is most apt to result in an unexpected return?

Statement by a firm that it has just discovered a manufacturing defect and is recalling its product

Which one of the following could cause the total return on an investment to be a NEGATIVE rate?

Stock prices that DECLINE over the investment period

A stock has a beta of 1.56 and an expected return of 17.3 percent. A risk-free asset currently earns 5.1 percent. If a portfolio of the two assets has a beta of 1.06, what are the portfolio weights?

Stock weight = 0.68; risk-free weight = 0.32

Which one of the following refers to the option to expand into related businesses in the future?

Strategic option

A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost?

Sunk

Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last year, the government changed the emission requirements and this furnace cannot meet those standards. Thus, Weston can no longer use the furnace, nor has it been able to locate anyone willing to purchase the furnace. Given the current situation, the furnace is best described as which type of cost?

Sunk

The risk premium for an individual security is based on which one of the following types of risk?

Systematic

The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash. To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land?

The current market value of the land

Which one of the following statements is correct concerning both the dollar return and the percentage return on a stock investment?

The dollar return is dependent on the size of the investment while the percentage return is not

Which one of the following statements is correct when a firm faces hard rationing?

The firm does not have funds to finance any new projects.

Which one of the following is true if the managers of a firm accept only projects that have a profitability index greater than 1.5?

The firm should increase in value each time the firm accepts a new project.

Which one of the following statements is correct?

The higher the expected rate of return, the wider the distribution of returns.

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following?

The investment is mutually exclusive with another investment under consideration.

An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true?

The net present value is equal to zero.

You are using a net present value profile to compare Project A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two?

The net present value of Project A equals that of Project B, but generally does not equal zero.

Bruce Moneybags owns several restaurants and hotels near a local interstate. One restaurant, Beef and More, needs modernized. He is trying to decide whether to accept an offer and sell Beef and More as is for the offer price of $1.1 million or renovate the restaurant himself. The projected renovation cost is $1.3 million. The restaurant would need to be shut down completely during the renovation which would cause a net operating cash flow loss of $210,000 in today's dollars. The estimated present value of the cash inflows from the renovated restaurant are $3.2 million. When analyzing the renovation project, what opportunity cost, if any, should be included for the current restaurant? Assume the restaurant is totally paid for and any future costs will be paid in cash.

The opportunity cost is the value of the current offer to buy the restaurant.

Which one of the following statements is correct?

The payback method is biased toward short-term projects.

Which one of the following statements is correct?

The payback period ignores the time value of money.

New Labs just announced that it has received a patent for a product that will eliminate all flu viruses. This news is totally unexpected and viewed as a major medical advancement. Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient?

The price of New Labs stock increases rapidly to a higher price and then remains at that price.

Assume the securities markets are strong form efficient. Given this assumption, you should expect which one of the following to occur?

The price of each security in that market will frequently fluctuate.

Which one of the following will occur when the internal rate of return equals the required return?

The profitability index will equal 1.0.

Today, Sweet Snacks is investing $491,000 in a new oven. As a result, the company expects its cash flows to increase by $64,000 a year for the next two years and by $98,000 a year for the following three years. How long must the firm wait until it recovers all of its initial investment?

The project never pays back.

You are assigned the task of computing the expected return on a portfolio containing several individual stocks. Which one of the following statements is correct concerning this task?

The summation of the return deviation from the portfolio expected return for each economic state must equal zero.

The expected rate of return on Delaware Shores, Inc. stock is based on three possible states of the economy. These states are boom, normal, and recession which have probabilities of occurrence of 20 percent, 75 percent, and 5 percent, respectively. Which one of the following statements is correct concerning the variance of the returns on this stock?

The variance must be positive provided that each state of the economy produces a different expected rate of return.

One year ago, you purchased a 5 percent coupon bond with a face value of $1,000 when it was selling for 101.2 percent of par. Today, you sold this bond for 99.8 percent of par. What is your total dollar return on this investment?

Total dollar return = (0.998 × $1,000) - (1.012 × $1,000) + (0.05 × $1,000) = $36

One year ago, you purchased 500 shares of stock for $12 a share. The stock pays $0.22 a share in dividends each year. Today, you sold your shares for $28.30 a share. What is your total dollar return on this investment

Total dollar return = 500 × ($28.30 - $12 + $0.22) = $8,260

You bought a share of 8.5 percent preferred stock for $87.40 last year. The market price for your stock is now $88.10. What is your total return for last year?

Total return = ($88.10 - $87.40 + $8.50)/$87.40 = 10.53 percent

The rate of return on which one of the following is used as the risk-free rate?

Treasury bill

For the period 1926-2011, which one of the following had the smallest risk premium?

U.S. Treasury bills

Which one of the following statements is true regarding the period 1926-2011?

U.S. Treasury bills had a positive average real rate of return.

The historical record for the period 1926-2011 shows that the annual nominal rate of return on:

U.S. Treasury bills have had a positive rate of return for every year in the period.

The modified internal rate of return is specifically designed to address the problems associated with which one of the following?

Unconventional cash flows

Which one of the following best exemplifies unsystematic risk?

Unexpected increase in the variable costs for a firm

Portfolio diversification eliminates which one of the following?

Unsystematic risk

The standard deviation measures the _____ of a security's returns over time.

Volatility

Scenario analysis asks questions such as:

What is the best outcome that should reasonably be expected?

Which one of the following statements is correct?

When the internal rate of return is greater than the required return, the net present value is positive.

An investment has an initial cost of $300,000 and a life of four years. This investment will be depreciated by $60,000 a year and will generate the net income shown below. Should this project be accepted based on the average accounting rate of return (AAR) if the required rate is 9.5 percent? Why or why not?

Yes, because the AAR is greater than 9.5 percent

The Tool Box needs to purchase a new machine costing $1.46 million. Management is estimating the machine will generate cash inflows of $223,000 the first year and $600,000 for the following three years. If management requires a minimum 12 percent rate of return, should the firm purchase this particular machine? Why or why not?

Yes, because the IRR is 12.74 percent

China Importers would like to spend $221,000 to expand its warehouse. However, the company has a loan outstanding that must be repaid in 2.5 years and thus will need the $221,000 at that time. The warehouse expansion project is expected to increase the cash inflows by $58,000 in the first year, $139,000 in the second year, and $210,000 a year for the following 2 years. Should the firm expand at this time? Why or why not?

Yes, because the money will be recovered in 2.11 years

A proposed project will increase a firm's accounts payables. This increase is generally:

a cash inflow at time zero and a cash outflow at the end of the project.

According to the efficient markets hypothesis, professional investors will earn:

a dollar return equal to the value paid for an investment.

Semistrong form market efficiency states that the value of a security is based on:

all public-ally available information

the average net income of a project divided by the projects average book value is referred to as the projects

average accounting return

which one of the analytical methods is based on net income

average accounting return

which one of the following methods of analysis ignores cash flows

average accounting return

which one of the following methods of anaylsis is most similar to computing the return on assets

average accounting return

The average net income of a project divided by the project's average book value is referred to as the project's:

average accounting return.

The ability to delay an investment:

is valuable provided there are conditions under which the investment will have a positive net present value.

The period 1926-2011 illustrates that U.S. Treasury bills:

can either outperform or underperform inflation on an annual basis.

The reinvestment approach to the modified internal rate of return:

compounds all of the cash flows, except for the initial cash flow, to the end of the project.

the reinvestment approach to the modified internal rate of return

compounds all the cash flows except for the initial cash flow to the end of the project

The net present value of an investment represents the difference between the incestment's

cost and its market value

The net present value of an investment represents the difference between the investment's:

cost and its market value.

the net present value

decreases as the required rate of return increases

The net present value:

decreases as the required rate of return increases.

the net present value profile illustrates how the net present value of an investment is affected by which one of the following

discount rate

which one of the following defines the internal rate of return for a project

discount rate which results in a zero net present value for the project

Over the period of 1926-2011:

long-term government bonds underperformed long-term corporate bonds. the risk premium on stocks exceeded the risk premium on bonds.

which one of the following is the primary advantage of payback analysis

ease of use

Forecasting risk is best defined as:

estimation risk.

discounted cash flow valuation is the process of discounting an investments

future cash flow

Discounted cash flow valuation is the process of discounting an investment's:

future cash flows.

If a project with conventional cash flows has a profitability index of 1.0, the project will:

have an internal rate of return that equals the required return.

Scenario analysis:

helps determine the reasonable range of expectations for a project's anticipated outcome.

Sensitivity analysis:

helps identify the variable within a project that presents the greatest forecasting risk.

which one of the following statements is correct

if the internal rate of return equals the required return, the net present value will equal zero

The operating cash flows of a project:

include erosion effects.

Assume a firm has positive net earnings. The operating cash flow of this firm:

increases when tax rates decrease.

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:

initial

which one of the following is most closely related to the net present value profile

internal rate of return

based on the most recent survey information presented in your textbook CFO's tend to use which 2 methods of investment analysis the most frequently

internal rate of return and net present value

the profitability index reflects the value created per dollar

invested

The profitability index reflects the value created per dollar:

invested.

in which one of the following situations would the payback method be the preferred method of analysis

investment funds available only for a limited period of time

payback is best used to evaluate which type of projects

low-cost, short-term

Firm A uses straight-line depreciation. Firm B uses MACRS depreciation. Both firms bought $60,000 worth of equipment last year. Both firms are in the 35 percent tax bracket. The operating cash flows for each firm are identical except for the depreciation effects. Given this, you know the:

operating cash flow of Firm A is less than that of Firm B for year 2.

which one of the following methods of analysis has the greatest bias towards short term projects

payback

which one of the following methods of analysis ignore the time value of money

payback

which one of the following indicates that a project is expected to create value for its owners

positive net present value

which one of the following inidators offers the best assurance that a project will produce value for its owners

positive npv

which one of the following can be defined as a benefit-cost ratio

profitability index

you were recently hired by a firm as a project analyst, the owner of the firm is unfamiliar with financial analysis

profitability index

which one of the following indicated that a project is definitely acceptable

profitability index greater than 1.0

which one of the following indicates that a project should be rejected

profitability index less than 1.0

A pro forma financial statement is a financial statement that:

projects future years' operations.

Scenario analysis is best described as the determination of the:

reasonable range of project outcomes.

The tax shield approach to computing the operating cash flow, given a tax-paying firm:

recognizes that depreciation creates a cash inflow.

the payback period is the length of time it takes an investment to generate sufficient cash flow to enable the project to

recoup its initial cost

The net working capital invested in a project is generally:

recouped at the end of the project.

Jamie is analyzing the estimated net present value of a project under various what if scenarios. The type of analysis that Jamie is doing is best described as:

scenario analysis.

Over the period of 1926-2011, which one of the following investment classes had the highest volatility of returns?

small company stocks

Which one of the following categories has the widest frequency distribution of returns for the period 1926-2011

small company stocks

If the financial markets are efficient then:

stock prices should respond only to unexpected news and events.

The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield and reported in your textbook, are based on the:

stocks of the 500 companies included in the S&P 500 index.

the payback method of analysis ignores which one of the following

time value of money

Which one of the following had the lowest standard deviation of returns for the period of 1926-2011?

treasury bill

the modified internal rate of return is specifically designed to address the problems associated with which one of the following

unconventional cash flows

Thornley Machines is considering a 3-year project with an initial cost of $870,000. The project will not directly produce any sales but will reduce operating costs by $440,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $93,000. The tax rate is 34 percent. The project will require $23,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley's requires a rate of return of 11 percent? Why or why not?

yes; The NPV is $119,302.95

If an investment is producing a return that is equal to the required return, the investment's net present value will be:

zero

if an investment is producing a return that is equal to the required return the investments net present value will be

zero