Fin Short Answer Exam 2

If any, which of the following does NOT have the potential to increase the net present value of a proposed investment?

All of the above have the potential to increase the NPV of a proposed investment

A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions. By doing so, the firm:

Automatically gives preferential treatment in the allocation of funds to its riskiest division

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

Average accounting return

A broker is an agent who:

Brings buyers and sellers together.

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

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

Ease of use

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

Expected return and beta

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 one of the following is an example of systematic risk?

Increase in consumption created by a reduction in personal tax rates

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

The average accounting return method of analyzing projects:

Is similar to calculating the Return on Assets.

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

Market risk premium

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

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

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

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 indicates that a project is definitely acceptable?

Profitability index greater than 1.0

What describes systemic risk?

Risk that affects a large number of assets

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 of the following should not be included in the analysis of a proposed investment?

The amount paid 4 years ago for an existing building to be used in the project.

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.

Which one of the following statements is correct?

The payback method is biased towards short-term projects.

Which one of the following best exemplifies unsystematic risk?

Unexpected increase in the variable costs for a firm

Semi-strong form market efficiency states that the value of a security is based on:

all publicly available information

Inside quotes are defined as the:

lowest asked and highest bid offers.

Ignoring the option to wait:

may underestimate the net present value of a project

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.

If the financial markets are semi-strong form efficient, then:

only individuals with private information have a marketplace advantage.

A call provision grants the bond issuer the:

option of repurchasing the bonds prior to maturity at a pre-specified price.

If the financial markets are efficient then:

stock prices should only respond to unexpected news and events.

Over the period of 1926-2008:

the risk premium on stocks exceeded the risk premium on bonds.