BADM 310 Final

With respect to unexpected returns, which one of the following statements is accurate? Multiple Choice Unexpected returns generally cause the actual return to vary significantly from the expected return over the long term. Unexpected returns can be either positive or negative in the short term but tend to be zero over the long term. Unexpected returns over time have a negative effect on the total return of a firm. Unexpected returns are relatively predictable in the short term. All announcements by a firm affect that firm's unexpected returns.

Unexpected returns can be either positive or negative in the short term but tend to be zero over the long term.

A project's average net income divided by its average book value is referred to as the project's average: Multiple Choice net present value. accounting return. internal rate of return. payback period. profitability index.

accounting return.

The ________ explains the relationship between the expected return on a security and the level of that security's systematic risk. Multiple Choice capital asset pricing model unsystematic risk equation market performance equation time value of money equation expected risk formula

capital asset pricing model

The most important reason to diversify a portfolio is to: Multiple Choice increase both returns and risks. lower both returns and risks. eliminate systematic risk. eliminate asset-specific risk. eliminate all risks.

eliminate asset-specific risk.

Buchi owns several financial instruments: stocks issued by seven different companies, plus bonds issued by four different companies. Her investments are best described as a(n): Multiple Choice collection. portfolio. grouping. risk-free position. index.

portfolio.

If a project has a net present value equal to zero, then: Multiple Choice a decrease in the project's initial cost will cause the project to have a negative NPV. any delay in receiving the projected cash inflows will cause the project to have a positive NPV. the project earns a return exactly equal to the discount rate. the total of the cash inflows must equal the initial cost of the project. the project's PI must also be equal to zero.

the project earns a return exactly equal to the discount rate.

The flotation cost for a company is computed as: Multiple Choice the geometric average of the flotation costs associated with each form of financing. a weighted average based on the book values of the company's outstanding securities. the weighted average of the flotation costs associated with each form of financing. the arithmetic average of the flotation costs of both debt and equity. one-half of the flotation cost of debt plus one-half of the flotation cost of equity.

the weighted average of the flotation costs associated with each form of financing.

An advantage of the average accounting return method of analysis is its: Multiple Choice use of easily obtainable information. use of real, versus nominal, average income. use of a cutoff rate as a benchmark. inclusion of time value of money considerations. use of pretax income in its computation.

use of easily obtainable information.

When determining a firm's cost of capital, the most important determinant is the: Multiple Choice pretax cost of equity. aftertax cost of equity. marginal tax rate. use of the funds raised. debt-equity ratio of any new funds raised.

use of the funds raised.

Flotation costs for a levered firm should be: Multiple Choice considered only when two projects are mutually exclusive. weighted and included in the initial cash flow. ignored when analyzing a project because they are a sunk cost. totally ignored when internal equity funding is utilized. spread over the life of a project thereby reducing the cash flows for each year of the project.

weighted and included in the initial cash flow.

Of the options listed below, which is the best measure of systematic risk? Multiple Choice Beta The weighted average standard deviation The arithmetic average The standard deviation The geometric average

Beta

Which of the following statements regarding unsystematic risk is accurate? Multiple Choice It is measured by beta. It is compensated for by the risk premium. It is measured by standard deviation. It can be effectively eliminated by portfolio diversification. It is related to the overall economy.

It can be effectively eliminated by portfolio diversification.

_______ risk is measured using the standard deviation. Multiple Choice Systematic Total Nondiversifiable Unsystematic Economic

Total

A firm's aftertax cost of debt will increase if there is a(n): Multiple Choice increase in the company's beta. decrease in the company's debt-equity ratio. decrease in the market rate of interest. decrease in the company's tax rate. increase in the credit rating of the company's bonds.

decrease in the company's tax rate.

The majority of the diversifiable risk in a portfolio can be eliminated by owning as few as ________ stocks. Multiple Choice 75 40 5 2 10

10

Of the options listed below, which is the best example of unsystematic risk? Multiple Choice An adoption of a national sales tax A national decrease in consumer spending on entertainment An across-the-board increase in income taxes A decrease in the national level of inflation

A national decrease in consumer spending on entertainment

Which of the following statements is accurate regarding the dividend growth model? Multiple Choice It considers the risk that future dividends may vary from their estimated values It can only be used if historical dividend information is available. It applies only when a company is currently paying dividends. It is only as reliable as the estimated rate of growth. It is based solely on historical dividend information.

It is only as reliable as the estimated rate of growth.

Which of the following statements regarding the weighted average cost of capital is accurate? Multiple Choice It equals the aftertax cost of the outstanding liabilities. It remains constant when the debt-equity ratio changes. It is the return investors require on the total assets of the firm. It should be used as the required return when analyzing any new project. It is unaffected by changes in corporate tax rates.

It is the return investors require on the total assets of the firm.

Which of the following are advantages of the payback method of project analysis? Multiple Choice Liquidity bias; subjective cutoff point Ease of use; subjective cutoff point Ignores time value of money; ease of use Considers time value of money; liquidity bias Liquidity bias; ease of use

Liquidity bias; ease of use

The profitability index is most closely related to which one of the following? Multiple Choice Net present value Discounted payback Modified internal rate of return Payback Average accounting return

Net present value

When evaluating two mutually exclusive projects, the final decision on which project to accept ultimately depends upon which one of the following? Multiple Choice Timing of the cash inflows Total cash inflows of each project Net present value Initial cost of each project Length of each project's life

Net present value

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? Multiple Choice Discounted payback Profitability index Payback Net present value Internal rate of return

Net present value

An investor wants to reduce the unsystematic risk in her portfolio. Which of the following actions is least likely to do so? Multiple Choice Adding bonds to her stock portfolio Adding international securities into her portfolio of U.S. stocks Reducing the number of stocks held in her stock portfolio Adding U.S. Treasury bills to her risky portfolio Adding technology stocks to her portfolio of industrial stocks

Reducing the number of stocks held in her stock portfolio

Based on the capital asset pricing model (CAPM), which of the following should earn the highest risk premium? Multiple Choice Diversified portfolio with returns similar to the overall market Portfolio with a beta of 1.12 U.S. Treasury bill Stock with a beta of .63 Stock with a beta of 1.24

Stock with a beta of 1.24

Why is payback often used as the sole method of analyzing a proposed small project? Multiple Choice Payback is the most desirable of the various financial methods of analysis. Payback considers the time value of money. The benefits of payback analysis usually outweigh the costs of the analysis. Payback is focused on the long-term impact of a project. All relevant cash flows are included in the payback analysis.

The benefits of payback analysis usually outweigh the costs of the analysis.

Which of the following is the main advantage of using the dividend growth model to estimate a firm's cost of equity? Multiple Choice The stability of the computed cost of equity over time. The model's applicability to all corporations. The model's consideration of risk. The ability to apply either current or future tax rates. The simplicity of the model.

The simplicity of the model.

A ________ is the market's measure of systematic risk. Multiple Choice beta of 0 standard deviation of 1 standard deviation of 0 variance of 1 beta of 1

beta of 1

When evaluating any capital project proposal, the cost of capital: Multiple Choice is dependent upon the source of the funds obtained to fund that project. is dependent upon the firm's overall capital structure. is determined by the overall risk level of the firm. depends upon how the funds raised for that project are going to be spent. should be applied as the discount rate for all other projects considered by the firm.

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

The internal rate of return is defined as the: Multiple Choice discount rate that equates the net cash inflows of a project to zero. discount rate which causes the net present value of a project to equal zero. maximum rate of return a firm expects to earn on a project. rate of return a project will generate if the project is financed solely with internal funds. discount rate that causes the profitability index for a project to equal zero.

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

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the: Multiple Choice net present value period. payback period. discounted profitability period. internal return period. discounted payback period.

discounted payback period.

While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 percent figure is called the: Multiple Choice expected return. historical return. required return. geometric return. arithmetic return.

expected return.

Net present value: Multiple Choice is less useful than the internal rate of return when comparing different-sized projects. is the best method of analyzing mutually exclusive projects. is the easiest method of evaluation for nonfinancial managers. is very similar in its methodology to the average accounting return. cannot be applied when comparing mutually exclusive projects.

is the best method of analyzing mutually exclusive projects.

The market risk premium equals the: Multiple Choice risk-free rate of return plus the market rate of return. market rate of return minus the risk-free rate of return. risk-free rate of return plus the inflation rate. inflation rate minus the risk-free rate of return. risk-free rate of return multiplied by the market beta.

market rate of return minus the risk-free rate of return.

When calculating the expected rate of return on a stock portfolio using a weighted average, the weights are based on the: Multiple Choice original amount invested in each stock. market price per share of each stock. number of shares owned of each stock. cost per share of each stock held. market value of the investment in each stock.

market value of the investment in each stock.

Given a well-diversified stock portfolio, the variance of the portfolio: Multiple Choice must be equal to or greater than the variance of the least risky stock in the portfolio. may be less than the variance of the least risky stock in the portfolio. will be an arithmetic average of the variances of the individual securities in the portfolio. will equal the variance of the most volatile stock in the portfolio. will be a weighted average of the variances of the individual securities in the portfolio.

may be less than the variance of the least risky stock in the portfolio.

A project has a discounted payback period that is equal to the required payback period. Given this information, the project: Multiple Choice will not be acceptable under the payback rule. must have an internal rate of return equal to the required return. must have a zero net present value. must have a profitability index that is equal to or greater than 1.0. will still be acceptable if the discount rate is increased.

must have a profitability index that is equal to or greater than 1.0.

The length of time a firm must wait to recoup the money it has invested in a project is called the: Multiple Choice valuation period. profitability period. payback period. internal return period. discounted cash period.

payback period.

To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return. Multiple Choice inflation rate risk-free rate standard deviation variance expected market rate of return

risk-free rate

For any given capital project proposal, the discount rate should be based on the: Multiple Choice risks associated with the use of the funds required by the project. company's overall weighted average cost of capital. current risk level of the overall firm. average of the company's overall cost of capital for the past five years. actual sources of funding used for the project.

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

A project has a net present value of zero. Given this information: Multiple Choice the project's cash inflows equal its cash outflows in current dollar terms. the summation of all of the project's cash flows is zero. the project requires no initial cash investment. the project has a zero percent rate of return. the project has no cash flows.

the project's cash inflows equal its cash outflows in current dollar terms.

Mutually exclusive projects are best defined as competing projects that: Multiple Choice would need to commence on the same day. both have negative cash outflows at time zero. both require the total use of the same limited resource. have the same life span. have the same initial start-up costs.

both require the total use of the same limited resource.

To determine a firm's cost of capital, one must include: Multiple Choice the company's original debt-equity ratio. the weighted costs of all future funding sources. the returns currently required by both debtholders and stockholders. only the return required by the firm's current shareholders. only the current market rate of return on equity shares.

the returns currently required by both debtholders and stockholders.