Finance Final homework/quiz questions

d. A decrease in the risk-free rate

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $3.36 per share and has a beta of 1.38, all else constant, which of the following actions will increase the firm's cost of equity? a. An increase in the dividend amount b. A decrease in the firm's beta c. A decrease in the dividend amount d. A decrease in the risk-free rate

d. pure play

Assume a manager determines the cost of capital for a specific project based on the cost of capital at another firm with a line of business that is similar to the project. Accordingly, the manager is using the ________ approach. a. divisional cost of capital b. security market line c. capital adjustment d. pure play

c. discount rate

A decrease in which of the following will increase the current value of a stock according to the dividend growth model? a. dividend amount b. dividend growth rate c. discount rate d. both the discount rate and the dividend growth rate

discount rate

A decrease in which of the following will increase the current value of a stock according to the dividend growth model? a. dividend amount b. number of future dividends c. dividend growth rate d. discount rate

d. decrease in the company's tax rate.

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

d. the projects cash inflows equal its cash outflows in current dollar terms

A project has a net present value of zero. Given this information: a. the project has a zero percent rate of return b. the summation of all of the projects cash flows is zero c. the project has no cash flows d. the projects cash inflows equal its cash outflows in current dollar terms

c. decrease in all stock values

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect: a. all stock values to remain constant b. increase in all stock values c. decrease in all stock values d. dividend paying stocks to maintain a constant price

rate of return a company must earn on its existing assets to maintain the current value of its stock.

Assume a firm has a debt-equity ratio of .62. The firm's weighted average cost of capital is the: a. coupon rate the firm should expect to pay on its next bond issue. b. rate of return debtholders should expect to earn on their investment in this firm. c. discount rate that the firm should apply to all of the projects it undertakes. d. rate of return a company must earn on its existing assets to maintain the current value of its stock.

b. overestimate; underestimate

Estimates of the rate of return on a security based on the historical arithmetic average will probably tend to _____ the expected return for the long-term and estimates using the historical geometric average will probably tend to _____ the expected return for the short-term. a. underestimate; underestimate b. overestimate; underestimate c. overestimate; overestimate d. underestimate; overestimate

d. is the best method of analyzing mutually exclusive projects.

Net present value: a. is very similar in its methodology to the average accounting return. b. is less useful than the internal rate of return when comparing different-sized projects. c. is the easiest method of evaluation for nonfinancial managers. d. is the best method of analyzing mutually exclusive projects.

d. volatility

Standard deviation is a measure of which one of the following? a. real returns b. risk premium c. probability d. volatility

b. geometric

The average compound return earned per year over a multiyear period is called the _____ average return. a. real b. geometric c. standard d. variant

d. rate of return on a perpetuity.

The cost of preferred stock is equivalent to the: a. pretax cost of debt. b. rate of return on an annuity. c. aftertax cost of debt. d. rate of return on a perpetuity.

d. incremental cash flows

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's: a. internal cash flows b. external cash flows c. financing cash flows d. incremental cash flows

c. requires the growth rate to be less than the required return

The dividend growth model: a. cannot be used to value constant dividend stocks b. can be used to value both dividend-paying and non dividend paying c. requires the growth rate to be less than the required return d. only values stocks at time 0

c. return on a risky security minus the risk-free rate.

The excess return is computed as the: a. risk-free rate minus the inflation rate. b. risk-free rate plus the inflation rate. c. return on a risky security minus the risk-free rate. d. return on a security minus the inflation rate.

d. stand alone principle

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles? a. salvage principle b. underlying value principle c. fundamental principle d. stand alone principle

d. discounted payback period

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: a. net present value period b. payback period c. discounted profitability period d. discounted payback period

a. eliminate asset specific risk

The most important reason to diversify a portfolio is to: a. eliminate asset specific risk b. eliminate all risks c. eliminate systematic risk d. increase both returns and risks

d. treasury bills

The rate of return on which type of security is normally used as the risk-free rate of return? a. long term corporate bonds b. long term treasury bonds c. intermediate corporate bonds d. treasury bills

d. incremental

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs? a. sunk b. total c. fixed d. incremental

d. risk free rate

To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return. a. inflation rate b. standard deviation c. expected market rate of return d. risk free rate

d. right to share in company profits prior to other shareholders

Valenica Corporation has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most apt to be granted to the preferred shareholders? a. right to a permanent seat on the board of directors b. right to elect the corporate directors c. right to all residual income after the common dividends have been paid d. right to share in company profits prior to other shareholders

b. assigns discount rates to projects based on the discretion of the senior managers of a firm.

When using the subjective approach to project analysis, a firm: a. uses the WACC of Firm X as the basis for the discount rate for a project under consideration by Firm Y. b. assigns discount rates to projects based on the discretion of the senior managers of a firm. c. applies a lower discount rate to projects that are financed totally with equity as compared to those that are partially financed with debt. d. must have an all-equity capital structure.

d. I, II, III, and IV

Which of the following items are included when calculating the expected return on a portfolio? I. Percentage of the portfolio invested in each individual security II. Projected states of the economy III. The performance of each security given various economic states IV. Probability of occurrence for each state of the economy a. I, III, and IV only b. II and IV only c. I and III only d. I, II, III, and IV

d. It can be effectively eliminated by portfolio diversification.

Which of the following statements regarding unsystematic risk is accurate? a. It is related to the overall economy. b. It is measured by standard deviation. c. It is measured by beta. d. It can be effectively eliminated by portfolio diversification.

a. capital gains yield

Which one of following is the rate at which a stock's price is expected to appreciate? a. capital gains yield b. total return c. dividend yield d. current yield

a. Selling fewer cookies because ice cream was added to the menu

Which one of the following best illustrates erosion as it relates to a snack stand located on the beach? a. Selling fewer cookies because ice cream was added to the menu b. Repairing the canopy over the snack stand because of wind damage c. Offering french fries but not onion rings d. Providing free ice and condiments for customers

a. Next year's annual dividend divided by today's stock price

Which one of the following correctly describes the dividend yield? a. Next year's annual dividend divided by today's stock price b. The increase in next year's dividend over this year's dividend divided by this year's dividend c. This year's annual dividend divided by next year's expected stock price d. Next year's annual dividend divided by this year's annual dividend

a. $2,000 paid last year to rent equipment

Which one of the following is an example of a sunk cost? a. $2,000 paid last year to rent equipment b. $2,000 in lost sales because an item was out of stock c. $2,000 project that must be forfeited if another project is accepted d. $2,000 increase in comic book sales if a store ceases selling puzzles

c. discounted cash flow valuation

Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows? a. internal rate of return b. constant dividend growth model c. discounted cash flow valuation d. expected earnings model

b. 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? a. internal rate of return b. net present value c. profitability index d. payback

Money already spent for research and development of the new product

Which one of the following should not be included in the analysis of a new product? a. Increase in accounts payable related to purchasing inventory of the new product b. Reduction in sales for a current product once the new product is introduced c. Market value of a machine owned by the firm which will be used to produce the new product d. Money already spent for research and development of the new product

a. stocks can have negative growth rates

Which one of the following statements is correct? a. stocks can have negative growth rates b. dividend growth rates must be either zero or positive c. preferred stocks generally have variable growth rates d. all stocks can be valued using the dividend discount models

b. sunk

Which one of the following types of costs was incurred in the past and cannot be recouped? a. erosion b. sunk c. side d. incremental

a. Increasing the project's initial cost at Time 0

Which one of the following will decrease the net present value of a project? a. Increasing the project's initial cost at Time 0 b. Moving each cash inflow forward one time period, such as from Year 3 to Year 2 c. Increasing the value of each of the project's discounted cash inflows d. Increasing the amount of the final cash inflow

d. sunk

Cerda Diagnostics spent $5,000 last week repairing equipment. This week the company is trying to decide whether the equipment could be better utilized by assigning it to a proposed project. When analyzing the proposed project, the $5,000 should be treated as which type of cost? a. erosion b. opportunity c. fixed d. sunk

a. Investors panic causing security prices around the globe to fall precipitously.

Of the options listed below, which is the best example of systematic risk? a. Investors panic causing security prices around the globe to fall precipitously. b. A flood washes away a firm's warehouse. c. Corn prices increase due to increased demand for alternative fuels. d. A city imposes an additional one percent sales tax on all products.

d. portfolio weight

Rafia owns stocks of 15 different companies. Together, the stocks have a value of $78,640. Twelve percent of that total value is from one company, Gambrell & Valdez. The twelve percent figure is called a(n): a. price earnings ratio b. index value c. portfolio return d. portfolio weight

b. incremental cash flows

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's: a. external cash flows b. incremental cash flows c. erosion effects d. internal cash flows

d. payback period

The length of time a firm must wait to recoup the money it has invested in a project is called the: a. discounted cash period b. profitability period c. valuation period d. payback period