FIN 3OO FINAL EXAM
if you buy 40 shares of BP stock at $35 per share, your total investment in BP is___
$1,400
if the market value of debt is $45 million and the market value of equity is $105 million, the total firm value is _____
$150 million
what is the maximum capital loss that you can incur if you bought 200 shares of TP inc. for $32?
$6,400
what will the dividend income be on 1,000 shares of XYZ stock if XYZ distributes a $.20 per share dividend?
200 (.20 x 1,000)
the probability of an outcome being within + or - one standard deviation of the mean is a normal distribution is approximately ____ percent
68
Which one of the following statements is correct concerning market efficiency?
A firm will generally receive a fair price when it issues new shares of stock if the market is efficient.
Systematic Risk
A risk that influences a large number of assets. Also called market risk.
the CAPM formula is:
E(RE) = Rf + B(E(RM)−Rf)
generally speaking, which of the following best correspond to a wide frequency distribution?
High standard deviation, large risk premium
what is an uncertain or risky return?
It is the portion of return that depends on information that is currently unknown.
Which one of the following is an example of unsystematic risk?
National decrease in consumer spending on entertainment
the formula for calculating the cost of equity capital that is based on the dividend discount model is:
RE=D1/P0+g
geometric average return
The average compounded return earned per year over a multiyear period
which of the following statements related t unexpected return is correct?
Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.
which of the following is the best example of diversifiable risk?
a firms sale decrease
portfolio
a group of assets such as stocks and bonds held by an investor
A stock with an actual return that lies above the security market line has:
a higher return than expected for the level of risk assumed.
efficient capital market
a market in which security prices reflect available information
Security Market Line (SML)
a positively sloped straight line displaying the relationship between expected return and beta
unsystematic risk
a risk that affects at most a small number of assets. Also called unique or asset-specific risk
the best way to include flotation costs is to ___
add them to the initial investment
the discount rate for the firm's projects equals the cost of capital for the firm as a whole when ____
all projects have the same risk as the current firm
a capital gain on a stock results from___
an increase in the stock price
the dividend yield for a 1-year period is equal to the annual dividend amount divided by the ___
beginning stock price
some risk adjustment to a firm's WACC for projects of differing risk, even if it is subjective, is probably:
better than no risk adjustment
Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?
can be effectively eliminated by portfolio diversification.
unsystematic risk:
can be effectively eliminated by portfolio diversification.
the standard deviation of a portfolio:
can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.
Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk?
capital asset pricing model
When a company declares a dividend, shareholders generally receive ____.
cash
which of the following are tax-deductible to the firm?
coupon interest paid on bonds
historically, there is a ____ relationship between risk and expected return in the stock market
direct
one method for estimating the cost of equity is based on the ___ model
dividend growth
Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions?
efficient capital market
The primary purpose of portfolio diversification is to
eliminate asset-specific risks
the return an investor in a security receives is ______ the cost of the security to the company that issued it
equal to
the ___ rate of return is the difference between risky returns and risk-free returns
excess
in an efficient market, firms should expect to receive ___ value for securities they sell
fair
projects should always be discounted at the firm's overall cost of capital
false
systematic risk can be eliminated by diversification
false
the issuance cost of bonds and stocks are referred to as ____ costs
flotation
an important advantages to a firm raising equity internally is not having to pay
flotation costs
the average compound return earned per year over a multiyear period is called the ____ average return
geometric
the second lesson from studying capital market history is that risk:
handsomely rewarded
an efficient market is one in which any change in available information will be reflected in the company's stock price___
immediately
the expected return on the market will increase if the risk-free rate ____ or if the market risk premium____
increases: increases
stock prices fluctuate from day to day because of:
information flow
the capital gains yield can be found by finding the difference between the ending stock price and the initial stock price and dividing it by the ____
initial stock price
in reality, most firms cover the equity portion of their capital spending with___
internally generated cash flow
the dividend growth model:
is only as reliable as the estimated rate of growth.
what does the security market line depict?
it is a graphical depiction of the capital asset pricing model, it shows the relationship between expected return and beta
what is unsystematic risk?
it is a risk that affects a single asset or a small group of assets
Which one of the following is represented by the slope of the security market line?
market risk premium
the most appropriate weights to use in the WACC are the ____ weights
market value
the year 2008 was:
one of the worst years for stock market investors in US history
the security market line (SML) shows that the relationship between a security's expected return and its beta is____
positive
your total year-end value from a one-year investment equals the initial investment plus the total dollar return. It also equals the ___
proceeds from the stock sale plus dividends
other companies that specialize only in projects similar to the project your firm is considering are called____
pure plays
historically, the real return on Treasury bills has been:
quite low
The weighted average cost of capital for a firm with debt is the:
rate of return a company must earn on its existing assets to maintain the current value of its stock.
the weighted average cost of capital for a firm with debt is the:
rate of return a company must earn on its existing assets to maintain the current value of its stock.
the cost of preferred stock is computed the same as the:
rate of return on a perpetuity
The cost of preferred stock is computed the same as the:
rate of return on a perpetuity.
if an all-equity firm discounts a project's cash flows with the firm's overall weighted average cost of capital even though the project's beta is less than the firm's overall beta, it is possible that the project might be:
rejected, when it should be accepted
a project should only be accepted if its return is above what is___
required by investors
the CAPM can be used to estimate the ___
required return on equity
the arithmetic average rate of return measures the ____
return in an average year over a given period
Which one of the following earned the highest risk premium over the period 1926-2016?
small-company stocks
small-company stocks, as the term is used in the textbook, are best defined as the:
smallest 20 percent of the companies listed on the NYSE.
The principle of diversification tells us that:
spreading an investment across many diverse assets will eliminate some of the total risk.
the principle of diversification tells us that:
spreading an investment across many diverse assets will eliminate some of the total risk.
the standard deviation is the ___ of the variance
square root
which of the following methods for calculating the cost of equity ignores risk?
the dividend growth model
Capital Asset Pricing Model (CAPM)
the equation of the SML showing the relationship between expected return and beta
systematic risk principle
the expected return on a risky asset depends only on that asset's systematic risk
efficient markets hypothesis
the hypothesis that actual capital markets, such as the NYSE, are efficient
cost of capital
the minimum required return on a new investment
standard deviation
the positive square root of the variance
a distribution tends to have a smooth shape when the number of observations is
very large
Standard deviation is a measure of which one of the following?
volatility
what does WACC stand for
weighted average cost of capital
the efficient markets hypothesis contends that _____ capital markets such as the NASDAQ are efficient
well-organized
one of the disadvantages of using historical returns to estimate the market risk premium is that the past may not be a good guide to the future:
when economic conditions change quickly
a good source for bond quotes is:
www.finra.org/marketdata
which of the following variables is NOT required using the CAPM to compute the cost of equity capital
the rate of inflation
arithmetic average return
the return earned in an average year over a multiyear period
expected return
the return on a risky asset expected in the future
cost of equity
the return that equity investors require on their investment in the firm
cost of debt
the return that lenders require on the firm's debt
weighted average cost of capital
the weighted average of the cost of equity and the aftertax cost of debt
The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly.
risk premium
The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the:
risk premium
the cost capital is an appropriate name since a project must earn enough to pay those ____ the capital
supply
beta coefficient
the amount of systematic risk present in a particular risky asset relative to that in an average risky asset
which of the following is commonly used to measure inflation
the consumer price index (CPI)
market risk premium
the slope of the SML - the difference between the expected return on a market portfolio and the risk-free rate
finding a firm's overall cost of equity is difficult because:
there is no way of directly observing the return that the firm's equity investors require on their investment
if a firm uses its overall cost of capital to discount cash flows from higher risk projects, it will accept ___ projects
too many high-risk
a capital gain on a stock is continued as part of the total return whether or not the gain is realized from selling the stock
true
if you wish to create a portfolio of stocks, what is the required minimum number of stocks ?
you must invest in stocks of more than one corporation
Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly
reward-to-risk ratio
Assume that last year T-bills returned 2.8 percent while your investment in large-company stocks earned an average of 7.6 percent. Which one of the following terms refers to the difference between these two rates of return?
risk premium
The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than _____ form efficient.
strong
standard variance
the average squared difference between the actual return and the average return
pure play approach
the use of a WACC that is unique to a particular project, based on companies in similar lines of business
economic value added (EVA) is mean of evaluating corporate performance
true
Which one of the following risks is irrelevant to a well-diversified investor?
unsystematic risk