KU Fin 310 Exam 2

Beta measures __________ risk, while volatility measures ______ risk. a. asset-specific; market wide b. market-wide; total c. total; market wide d. total; asset specific

b. market-wide; total

Which of the following statements is FALSE? a. asset-specific risks can be easily diversified with highly correlated assets in a portfolio b. asset-specific risks can be easily diversified with numerous assets in a portfolio c. bearing risk is rewarded with higher expected returns d. only market-wide risks, not asset-specific risks, should earn rewards

a. asset-specific risks can be easily diversified with highly correlated assets in a portfolio

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

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

Which one of the following methods of analysis is most similar to computing the return on assets (ROA)? a. average accounting return b. payback c. internal rate of return d. profitability index

a. average accounting return

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

a. helps determine the reasonable range of expectations for a projects anticipated outcome

Which of the following statements is TRUE? a. if a portfolio has a positive investment in every asset, the standard deviation on the portfolio can be less than that on every asset in the portfolio b. labor strikes and part shortages are examples of market-wide systematic risks c. market-wide systematic risks can be significantly reduced by diversification d. asset-specific unsystematic risks can be substantially reduced with less numbers and less correlated assets in a portfolio

a. if a portfolio has a positive investment in every asset, the standard deviation on the portfolio can be less than that on every asset in the portfolio

Which of the following statements is TRUE? a. it is better to use geometric return than average return to forecast what the stock market over the next 50 years b. the return earned in an average year over a multiyear period is known as the geometric return c. the compound return earned per year over a multiyear period is known as the arithmetic average return d. the average return is always smaller than the geometric return

a. it is better to use geometric return than average return to forecast what the stock market over the next 50 years

If the financial markets are semi-strong form efficient, then: a. only the most talented analysts can determine the true value of a security b. only individuals with private information have a marketplace advantage c. technical analysis provides the best tool to use to gain a marketplace advantage d. no one individual has an advantage in the marketplace

b. only individuals with private information have a marketplace advantage

Which of the following statements is FALSE? a. one reason why the average accounting return is a flawed measure in making business decisions is that it is based on cash flows b. IRR measures the dollar-weighted return on an investment c. in order to use the payback rule as a tool to determine if an investment is acceptable, a manager needs to provide a pre-specified limit of time for recouping investment costs d. the profitability index measures the value created per dollar invested, based on the time value of money

a. one reason why the average accounting return is a flawed measure in making business decisions is that it is based on cash flows

Mark is analyzing a proposed project to determine how changes in the variable costs per unit would affect the project's net present value. What type of analysis is mark conducting? a. sensitivity analysis b. erosion planning c. scenario analysis d. cost-benefit analysis

a. sensitivity analysis

Which of the following statements is FALSE? a. sensitivity analysis helps determine the reasonable range of expectations for a projects outcome b. the impacts of estimation errors and forecasting risks are small when NPVs are large and negative c. under intense competition, positive NPV project are rare d. the error of commission, or type 1 error NPV estimation, is the risk that a project will be accepted when its true NPV is negative

a. sensitivity analysis helps determine the reasonable range of expectations for a projects outcome

Which of the following statements is FALSE? a. the cost to a firm for capital funding equals the expected return on the providers of those funds b. a firm's cost of capital depends primarily on the source of the funds, not the use c. WACC is affected by market conditions including interest rates, tax rates, and the market risk premium d. a firm's WACC reflects the average risk of the existing projects undertaken by the firm

b. a firm's cost of capital depends primarily on the source of the funds, not the use

Which of the follow statements is TRUE? a. the gordon growth model assumes constant dividend growth but implies that stock prices grow at a different rate b. a stock's price is the present value of its future cash flows, namely, its expected capital gains and dividends c. brokers buy and sell securities from their own inventory, while dealers bring buyers and sellers together to complete transactions d. holders of common stock have greater voting rights in corporate decisions than holders of preferred stock, but they have less voting rights than creditors of the corporation

b. a stock's price is the present value of its future cash flows, namely, its expected capital gains and dividends

Which of the following statements is FALSE? a. the bid price is the price that a dealer is willing to pay for a security and is lower than the ask price b. compared to corporate bonds, stocks trade far less frequently and with a much larger percentage bid-ask spread c. in the stock market, the primary market is the market where new securities are originally sold to investors by the issuing company d. dividends received by corporations have a 70% to 100% exclusion from taxable income

b. compared to corporate bonds, stocks trade far less frequently and with a much larger percentage bid-ask spread

An agent who buys and sells securities from inventory is called a: a. specialist b. dealer c. broker

b. dealer

Which of the following defines the internal rate of return for a project? a. discount rate that creates a zero cash flow from assets b. discount rate which results in a zero net present value for the project c. discount rate which results in a net present value equal to the project's initial cost d. rate of return required by the projects investors

b. discount rate which results in a zero net present value for the project

Sensitivity analysis: a. looks at the most reasonably optimistic and pessimistic results for a project b. helps identify the variable within a project that present the greatest forecasting risk c. is used for projects that cannot be analyzed be scenario analysis bc the cash flows are unconventional d. is generally conducted prior to scenario analysis just to determine if the range of potential outcomes is acceptable

b. helps identify the variable within a project that present the greatest forecasting risk

The average accounting return method of analyzing projects: a. incorporate cash flows b. is similar to calculating the return on assets c. is difficult to estimate using information from accounting statements d. should accept all projects with positive AAR

b. is similar to calculating the return on assets

The average accounting return method of analyzing projects: a. incorporates cash flows b. is similar to calculating the return on assets c. is difficult to estimate using information from accounting statements d. should accept all projects with positive AAR

b. is similar to calculating the return on assets

If the financial markets are semi-strong form efficient, then: a. only the most talented analysts can determine the true value of a security b. only the individuals with private information have a marketplace advantage c. technical analysis provides the best tool to use to gain a marketplace advantage d. no one individual has an advantage in the marketplace

b. only the individuals with private information have a marketplace advantage

Which of the following statements is TRUE? a. when a yields increase, bonds with shorter maturities tend to decrease in value more than bonds with longer maturities b. over time, if yields do not change, the values of premium bonds decrease toward par smoothly c. a "call provision" allows the bond holder the option to determine when they want to company to buy back the bond d. treasury bonds are pure discount loans sold by the US government as a means to borrow money for less than one year

b. over time, if yields do not change, the values of premium bonds decrease toward par smoothly

Which of the following should not be included in the analysis of a proposed investment? a. the current market value of an existing building to be used in the project b. the amount paid 4 years ago for an existing building to be used in the project c. the expected after-tax salvage value at the end of a project of an existing building to be used in the project d. the net working capital balance remaining at the end of the project

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

Which of the following statements is FALSE? a. over the long run, investments in small-company stocks have had the largest return but also the most risk, when compared with large company stocks, bonds, and T-bills b. the average return is always less than the geometric return c. investors who hold bonds instead of stocks over long horizons can be rational and relatively averse to risk d. unlike the capital gains yield, the dividend yield can never be negative

b. the average return is always less than the geometric return

Which of the following statements is FALSE? a. the internal rate of return is defined as the discount rate which results in a zero net present value for the project b. the primary advantage to payback analysis is the it biases companies to invest in long-term projects that require large current expenditures on research and development c. the average accounting return ignores cash flows is most similar to computing the return on assets (ROA) d. the profitability index reflects the value created per dollar invested

b. the primary advantage to payback analysis is the it biases companies to invest in long-term projects that require large current expenditures on research and development

Which of the following statements is FALSE? a. the impacts of estimation error and forecasting risks are small when NPVs are large and positive b. under intense competition, positive NPV projects are as common as negative NPV projects c. scenario analysis helps determine the reasonable range of expectations for a projects outcome d. sensitivity analysis helps identify the variable within a project that presents the greatest forecasting risk

b. under intense competition, positive NPV projects are as common as negative NPV projects

If any, which of the following statements is FALSE? a. NPV measures the value created by taking on an investment b. NPV indicates how much a project will improve owner wealth c. NPV is the discounted present value of a project's expected future accounting net income at the required return, subtracting the initial investment d. none of the above

c. NPV is the discounted present value of a project's expected future accounting net income at the required return, subtracting the initial investment

Which of the following statements is FALSE? a. the gordon growth model assumes constant dividend growth and implies that stock prices grow at thesame rate b. a stock's price is the present value of the expected dividends and capital gains c. brokers buy and sell securities from their own inventory, while dealers bring buyers and sellers together to complete transactions d. holders of common stock have greater voting rights in corporate decisions than holders of preferred stock

c. brokers buy and sell securities from their own inventory, while dealers bring buyers and sellers together to complete transactions

Which of the following statements is TRUE? a. efficient markets will protect investors from wrong choices if they do not diversify b. consistent with efficient markets, stock prices reach equilibrium several times per week c. efficient markets react to new information by instantly adjusting the price of a stock to its new fair market value without any delay or overreaction d. weak form efficiency implies that all information is reflected in stock prices

c. efficient markets react to new information by instantly adjusting the price of a stock to its new fair market value without any delay or overreaction

Which term 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? a. opportunity cost b. sunk cost c. erosion d. replicated flows

c. erosion

Which of the following statements is FALSE? a. the bid price is the price that a dealer is willing to pay for a security and is lower than the ask price b. bonds trade less frequently than stocks c. in the stock market, the secondary market is the market where new securities are originally sold to investors by the issuing company d. dividends received by corporations have a 70% to 100% exclusion from taxable income

c. in the stock market, the secondary market is the market where new securities are originally sold to investors by the issuing company

Which of the following statements is FLASE? a. the bid price is the price that a dealer is willing to pay for a security and is lower than the ask price b. bonds trade less frequently than stocks c. in the stock market, the secondary market is the market where new securities are originally sold to investors by the issuing company d. dividends received by corporations have a 70% to 100% exclusion from a taxable income

c. in the stock market, the secondary market is the market where new securities are originally sold to investors by the issuing company

Stock prices fall if investors either expect _________ growth rate or require ________ rates a. higher, higher b. higher, lower c. lower, higher d. lower, lower

c. lower, higher

Which of the following statements is TRUE? a. opportunity costs are those values that have been incurred, cannot be recouped, and should not be considered in an investment decision b. under hard capital rationing, a business enforces limits on investment budgets because it prefers not to raise financing from the capital markets c. managerial real options can be very valuable but difficult to measure, and ignoring them will underestimate a projects NPV d. forecasting risk is more troublesome when NPV estimates are particularly large

c. managerial real options can be very valuable but difficult to measure, and ignoring them will underestimate a projects NPV

Which of the following statements is TRUE? a. opportunity costs are those values that have already been incurred, cannot be recouped, and should not be considered in an investment decision b. under hard capital rationing, a business enforces limits on investment budgets because it prefers not to raise financing from the capital markets c. managerial real options can be very valuable but difficult to measure, and ignoring them will underestimate a projects true net present value d. forecasting risk is more troublesome when NPV estimates are particularly large

c. managerial real options can be very valuable but difficult to measure, and ignoring them will underestimate a projects true net present value

A call provision grants the bond issuer the: a. option to exchange the bonds for equity securities b. right to automatically extend the bond's maturity date c. option of repurchasing the bonds prior to maturity at a pre-specified price d. right to repurchase the bonds on the open market prior to maturity

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

Under Munich, a footwear manufacturer, recently announced that they have just designed a new footwear product which includes the latest technology. This news is totally unexpected and viewed as a major advancement in the footwear industry. Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient? a. the price of Under Munich doesn't change, but then it increases one week after the announcement b. the price of all stocks quickly increase in value and then all but Under Munich stock fall back to their original values c. the price of Under Munich's stock suddenly increases, and then remains at that price d. the price of Under Munich's stock increases rapidly, and then settles back to its pre-announcement level

c. the price of Under Munich's stock suddenly increases, and then remains at that price

Standard deviation measures ________ risk, while beta measures _____ risk. a. asset-specific; market-wide b. market-wide; total c. total; market wide d. total; asset-specific

c. total; market wide

If any, which of the following does NOT have the potential to increase the net present value of a proposed investment? a. the ability to immediately shut down a project should the project become unprofitable b. the ability to wait until the economy improves before making the investment c. the option to increase production beyond that initially projected d. all of the above have the potential to increase the NPV

d. all of the above have the potential to increase the NPV

A broker is an agent who: a. trades on the floor of an exchange for himself or herself b. buys and sells from inventory c. offers new securities for sale to dealers only d. brings buyers and sellers together

d. brings buyers and sellers together

Which of the following statements if FALSE? a. the cost of debt for bonds is the same as the yield implied by their market quoted prices, expect when that promised yield is too high due, for example, to the high default probabilities for junk bonds b. the cost of preferred stock equals its dividend yield as a percent of the current price, rather than the preferred dividend as a percent of its stated liquidating value, which is usually $100 c. judgement is typically required when estimating the cost of equity, particularly when a company pays no dividends and when its beta estimate is imprecise d. due to its lower priority and greater risk, a firm's cost of equity can sometimes be, and often is, less that its after-tax cost of debt

d. due to its lower priority and greater risk, a firm's cost of equity can sometimes be, and often is, less that its after-tax cost of debt

Which of the following statements is FALSE? a. the gordon growth model assumes constant dividend growth and implies that stock prices grow at the same rate b. a stocks price is the present value of the expected dividends and capital gains c. dealers buy and sell securities from their own inventory, while brokers bring buyers and sellers together to complete transactions d. holders of preferred stock have greater voting rights in corporate decisions than holders of common stock

d. holders of preferred stock have greater voting rights in corporate decisions than holders of common stock

Which of the following statements is TRUE? a. efficient markets protect investors from wrong choices even if they do not diversify b. consistent with effect markets, stock prices reach equilibrium several times per hour c. effect markets react to new information by partially and slowly adjusting the price of a stock to its new fiat market value with a delay since it takes a while for everyone to agree d. if markets are semi-strong form efficient, then all publicly available information is reflected in stock prices and fundamental analysis is useless

d. if markets are semi-strong form efficient, then all publicly available information is reflected in stock prices and fundamental analysis is useless

Which of the following statements is FALSE? a. over the long run, investments in small-company stocks have had the largest return but also the most risk, when compared with large company stocks, bonds, and t-bills b. the average return is always greater than the geometric return c. investors who hold bonds instead of stocks over long horizons van be rational and relatively averse to risk d. like the dividend yield, the capital gains yield can never be negative

d. like the dividend yield, the capital gains yield can never be negative

Which of the following statements is TRUE? a. opportunity costs are those that have already been incurred, cannot be recouped, and should not be considered in an investment decision b. the stand-alone principle requires analysts to evaluate a project based on its stand-alone cash flows without reference to how it might impact the firm's incremental cash flows c. under hard capital rationing, a business enforces limits on investment budgets because it prefers not to raise financing from the capital markets d. managerial real options can be very valuable but difficult to measure, and ignoring them will underestimate a projects true NPV

d. managerial real options can be very valuable but difficult to measure, and ignoring them will underestimate a projects true NPV

Ignoring the option to wait: a. may overestimate the internal rate of return on a project b. is the same as ignoring all strategic options c. ignores the value of discontinuing a project early d. may underestimate the net present value of a project

d. may underestimate the net present value of a project

Which of the following statement is FALSE? a. asset-specific risks can be diversified in a portfolio of imperfectly correlated assets b. asset-specific risks can be diversified with numerous assets in a portfolio c. bearing risk is rewarded with higher expected returns d. only asset-specific risks, not market-wide risks, should earn rewards

d. only asset-specific risks, not market-wide risks, should earn rewards

Which of the following statements is FALSE? a. asset-specific risks can be diversified in a portfolio of imperfectly correlated assets b. asset-specific risks can be diversified with numbers assets in a portfolio c. bearing risk is rewarded with higher expected returns d. only asset-specific risks, not market-wide risks, should earn rewards

d. only asset-specific risks, not market-wide risks, should earn rewards

Which one of the following terms refers to the best option that was foregone when a particular investment is selected? a. side effect b. erosion c. sunk cost d. opportunity cost

d. opportunity cost

Newly issued securities are sold to investors in which one of the following markets? a. proxy b. inside c. secondary d. primary

d. primary

A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as what type of cost? a. fixed b. forgotten c. variable d. sunk

d. sunk

Which of the following statements is FALSE? a. scenario analysis helps determine the reasonable range of expectations for a projects outcome b. the impacts of estimation errors and forecasting risks are small when NPVs are large and negative c. under intense competition, positive NPV projects are rare d. the error of omission, or Type 1 error NPV estimation, is the risk that a project will be accepted when its true NPV is negative

d. the error of omission, or Type 1 error NPV estimation, is the risk that a project will be accepted when its true NPV is negative

Portfolio diversification eliminates which of the following? a. total investment risk b. reward for bearing risk c. market-wide risk d. unsystematic risk

d. unsystematic risk