Finance Final
The majority of the diversifiable risk in a portfolio can be eliminated by owning as few as ________ stocks.
10
Of the options listed below, which is the best example of unsystematic risk?
A national decrease in consumer spending on entertainment
Of the options listed below, which is the best measure of systematic risk?
Beta
Which of the following statements regarding unsystematic risk is accurate?
It can be effectively eliminated by portfolio diversification.
Which of the following statements is accurate regarding the dividend growth model?
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?
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?
Liquidity bias; ease of use
The profitability index is most closely related to which one of the following?
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?
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?
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?
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?
Stock with a beta of 1.24
Why is payback often used as the sole method of analyzing a proposed small project?
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?
The simplicity of the model.
________ risk is measured using the standard deviation.
Total
With respect to unexpected returns, which one of the following statements is accurate?
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:
accounting return.
A ________ is the market's measure of systematic risk.
beta of 1
Mutually exclusive projects are best defined as competing projects that:
both require the total use of the same limited resource.
The ________ explains the relationship between the expected return on a security and the level of that security's systematic risk.
capital asset pricing model
A firm's aftertax cost of debt will increase if there is a(n):
decrease in the company's tax rate.
When evaluating any capital project proposal, the cost of capital:
depends upon how the funds raised for that project are going to be spent.
The internal rate of return is defined as the:
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:
discounted payback period.
The most important reason to diversify a portfolio is to:
eliminate asset-specific risk.
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:
expected return.
Net present value:
is the best method of analyzing mutually exclusive projects.
The market risk premium equals the:
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:
market value of the investment in each stock.
Given a well-diversified stock portfolio, the variance of 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:
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:
payback period.
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):
portfolio.
To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return.
risk-free rate
For any given capital project proposal, the discount rate should be based on the:
risks associated with the use of the funds required by the project.
If a project has a net present value equal to zero, then:
the project earns a return exactly equal to the discount rate.
A project has a net present value of zero. Given this information:
the project's cash inflows equal its cash outflows in current dollar terms.
To determine a firm's cost of capital, one must include:
the returns currently required by both debtholders and stockholders.
The flotation cost for a company is computed as:
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:
use of easily obtainable information.
When determining a firm's cost of capital, the most important determinant is the:
use of the funds raised.
Flotation costs for a levered firm should be:
weighted and included in the initial cash flow.