Final Exam- Finance

A portfolio is: any new issue of stock. an investment in a risk-free security. any security that is equally as risky as the overall market. a single risky security. a group of assets held by an investor.

a group of assets held by an investor.

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 maximizes the total value created for its shareholders. automatically gives preferential treatment in the allocation of funds to its riskiest division. maintains the current risk level and capital structure of the firm. encourages the division managers to recommend only their most conservative projects. allocates capital funds evenly among its divisions.

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

The capital asset pricing model: applies to portfolios but not to individual securities. assumes the market has a beta of zero and the risk-free rate is positive. rewards investors based on total risk assumed. considers the relationship between the fluctuations in a security's returns versus the market's returns. assumes the market risk premium is constant over time.

considers the relationship between the fluctuations in a security's returns versus the market's returns. assumes the market risk premium is constant over time.

Lester lent money to The Corner Store by purchasing bonds issued by the store. The rate of return that he and the other lenders require is referred to as the: weighted average cost of capital. pure play cost. cost of debt. subjective cost. cost of equity.

cost of debt

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

decreases as the required rate of return increases

Scenario analysis: helps determine the reasonable range of expectations for a project's anticipated outcome. determines the impact a $1 change in sales has on a project's internal rate of return. determines the absolute worst and absolute best outcome that could ever occur. determines which variable has the greatest impact on a project's net present value. evaluates a project's net present value while sensitivity analysis evaluates a project's internal rate of return.

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

Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as: eroded cash flows. deviated projections. incremental cash flows. opportunity cash flows. directly impacted flows

incremental cash flows

The cost of preferred stock: is unaffected by changes in the market price of the stock. increases as the price of the stock increases. increases when a firm's tax rate decreases. is equal to the stock's dividend yield. is constant over time.

is equal to the stock's dividend yield.

When evaluating a project, the dividend growth model: is relatively simple to use. can only be used by firms that pay increasing dividends. must be used by all dividend-paying firms. must use the growth rate of the project as the rate of growth in the formula. is only applicable when the growth rate of the project exceeds the dividend growth rate.

is relatively simple to use.

Unsystematic risk can be defined by all of the following except: unrewarded risk. asset-specific risk. unique risk. market risk. diversifiable risk.

market risk.

A pro forma financial statement is a financial statement that: compares the performance of a firm to its industry. compares actual results to the budgeted amounts. expresses all values as a percentage of either total assets or total sales. projects future years' operating results. values all assets based on their current market values.

projects future years' operating results.

The tax shield approach to computing the operating cash flow, given a tax-paying firm: ignores all noncash expenses and their effects. separates cash inflows from cash outflows. considers the changes in net working capital resulting from a new project. recognizes that depreciation creates a cash inflow. ignores both interest expense and taxes.

recognizes that depreciation creates a cash inflow.

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

recoup its initial cost

The net working capital invested in a project is generally: a sunk cost. recouped in the first year of the project. recouped at the end of the project. depreciated to a zero balance over the life of the project. an opportunity cost.

recouped at the end of the project.

For a risky security to have a positive expected return but less risk than the overall market, the security must have a beta: of zero. that is infinite. that is > 1. that is > 0 but < 1. of one.

that is > 0 but < 1

When a firm faces hard rationing,: the firm will fund only those projects that create value for its shareholders. the firm will finance only the projects that have the highest profitability index values. each division within a firm will be allocated an amount for capital expenditures that will be less than the total value of its positive net present value projects. all positive net present value projects will be accepted. there will be no available funds for capital expenditures.

there will be no available funds for capital expenditures.

Standard deviation measures ________ risk while beta measures ________ risk: total; systematic asset-specific; market total; unsystematic systematic; unsystematic unsystematic; systematic

total: systematic

Portfolio diversification eliminates: the portfolio risk premium. the reward for bearing risk. market risk. unsystematic risk. all investment risk.

unsystematic risk.

If an investment is producing a return that is equal to the required return, the investment's net present value will be: greater than the project's initial investment. zero. less than, or equal to, zero. positive. equal to the project's net profit.

zero

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? An increase in the probability of an economic boom An increase in the rate of return for a normal economy A decrease in the probability of an economic boom A decrease in the probability of a recession occurring An increase in the rate of return in a recessionary economy

A decrease in the probability of an economic boom

Which one of the following portfolios will have a beta of zero? A portfolio that consists of a single stock A portfolio comprised solely of U. S. Treasury bills A portfolio with a zero variance of returns A portfolio that is equally as risky as the overall market No portfolio can have a beta of zero.

A portfolio comprised solely of U. S. Treasury bills

Which one of the following is the best example of unsystematic risk? Increase in consumer spending A warehouse fire Inflation exceeding market expectations Decrease in the value of the dollar Decrease in corporate tax rates

A warehouse fire

Which one of the following refers to a method of increasing the rate at which an asset is depreciated? Noncash expense Accelerated cost recovery system Straight-line depreciation Market-based depreciation Depreciation tax shield

Accelerated cost recovery system

Which one of the following methods of analysis ignores cash flows? Payback Profitability index Average accounting return Internal rate of return Modified internal rate of return

Average accounting return

The amount of systematic risk present in a particularly risky asset relative to that in an average risky asset is measured by the: beta coefficient. mean. standard deviation. variance. squared deviation.

Beta coefficient

Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive? Market risk premium Market rate of return Risk-free rate Expected return minus the risk-free rate Cost of capital

Cost of capital

Katie owns 100 shares of ABC stock. Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC? Weighted average cost of capital Cost of equity Subjective cost Cost of debt Pure play cost

Costs of equity

Which one of these is the best example of systematic risk? Decrease in management bonuses for banking executives Increase in agricultural exports Decrease in gross domestic product Discovery of a major gas field Decrease in textile imports

Decrease in gross domestic product

Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk? Unsystematic Capital asset pricing model Diversification Systematic Security market line

Diversification

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 Replicated flows Pirated flows Sunk cost Opportunity cost

Erosion

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? Real return Risk premium Market rate Systematic return Expected return

Expected return

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

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

Which of the following create cash inflows from net working capital? Increase in accounts payable and decrease in inventory Decrease in both accounts receivable and accounts payable Decrease in accounts payable and increase in accounts receivable Increase in both accounts receivable and inventory Increase in inventory and decrease in cash

Increase in accounts payable and decrease in inventory

Which one of these represents systematic risk? Increase in consumption created by a reduction in personal tax rates Surprise firing of a firm's chief financial officer Major layoff by a regional manufacturer of power boats Product recall by one manufacturer Closure of a major retail chain of stores

Increase in consumption created by a reduction in personal tax rates

Which one of the following will increase the cost of equity, all else held constant? Decrease in market risk premium Increase in stock price Increase in the dividend growth rate Decrease in future dividends Decrease in beta

Increase in the dividend growth rate

Which one of the following will affect the capital structure weights used to compute a firm's weighted average cost of capital? Decrease in the book value of a firm's equity Increase in the firm's beta Increase in the market value of the firm's common stock Decrease in a firm's tax rate Increase in the market risk premium

Increase in the market value of the firm's common stock

Generally speaking, payback is best used to evaluate which type of projects? Any size of long-term project Low-cost, short-term High-cost, short-term High-cost, long-term Low-cost, long-term

Low cost- short term

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? Accounting rate of return Net present value Profitability index Payback Internal rate of return

Net Present Value

Which one of the following terms refers to the best option that was foregone when a particular investment is selected? Opportunity cost Marginal cost Sunk cost Side effect Erosion

Opportunity cost

Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent? Portfolio beta Portfolio variance Portfolio expected return Portfolio standard deviation Portfolio weight

Portfolio weight

Which one of the following indicates that a project is expected to create value for its owners? Profitability index less than 1.0 Positive average accounting rate of return Internal rate of return that is less than the requirement Payback period greater than the requirement Positive net present value

Positive net present value

Farmer's Supply is considering opening a clothing store, which would be a new line of business for the firm. Management has decided to use the cost of capital of a similar clothing store as the discount rate to evaluate this proposed expansion. Which one of the following terms describes this evaluation approach? Market play Pure play approach Equity approach Subjective approach Aftertax approach

Pure play approach

Which one of the following is most apt to cause a wise manager to increase a project's cost of capital? Assume the firm is levered Management decides to issue new stock to finance the project. The project's life is shortened. She learns the project is riskier than previously believed. The aftertax cost of debt just decreased. The initial cash outlay requirement is reduced.

She learns the project is riskier than previously believed.

The analysis of a new project should exclude: side effects. tax effects. opportunity costs. erosion effects. sunk costs.

Sunk cost

The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation: adjustment. credit. tax shield. opportunity cost. erosion.

Tax shield

Which one of the following statements is correct related to the dividend growth model approach to computing the cost of equity? The annual dividend used in the computation must be for Year 1 if you are Time 0's stock price to compute the return. The cost of equity is equal to the return on the stock multiplied by the stock's beta. The rate of return must be adjusted for taxes. The cost of equity is equal to the return on the stock plus the risk-free rate. The rate of growth must exceed the required rate of return

The annual dividend used in the computation must be for Year 1 if you are Time 0's stock price to compute the return.

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 initial cash flow is negative. The cash flows are conventional. The investment has cash inflows that occur after the required payback period. The investment is mutually exclusive with another investment of a different size. One of the time periods within the investment period has a cash flow equal to zero.

The investment is mutually exclusive with another investment of a different size.

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

The payback period ignores the time value of money.