Mid term 3
True or false: The profitability index (PI) is calculated by dividing the present value of an investment's future cash flows by its future cost.
False
True or false: The profitability index rule for an independent project states that, if a project has a positive NPV, then the present value of the future cash flows must be smaller than the initial investment.
False
True or false: The surprise part of any announcement is the information the market uses to form the expectation of the return on the stock.
False
______ is a situation that arises when a business cannot raise capital for a project under any circumstances.
Hard rationing
Which of the following is true relative to capital rationing?
Hard rationing implies the firm is unable to raise funds for projects. Soft rationing is typically internal in that the firm allocates funds to divisions for capital projects.
What is the primary concern of the payback period rule?
How long it takes to recover the initial investment
Which of the following is a disadvantage of the profitability index?
It cannot rank mutually exclusive projects.
Arrange the following investments starting from lowest historical risk premium to highest historical risk premium.
us treasury bills long term corporate bonds large company stocks small company stocks
Capital Blank______ is the decision-making process for accepting and rejecting projects.
budgeting
Which of the following are examples of systematic risk?
future rates of inflation regulatory changes in tax rates
In 2008, the prices on long-term U.S. Treasury bonds
gained 40%
The second lesson from studying capital market history states that the Blank______ the potential reward, the Blank______ the risk.
greater; greater lower; lower
The second lesson from studying capital market history is that risk is
handsomely rewarded
A situation when a business cannot raise capital for a project under any circumstances is called
hard rationing
Sunk costs are costs that
have already occurred and are not affected by accepting or rejecting a project
An efficient market is one in which any change in available information will be reflected in the company's stock price
immediately
Dividends are the Blank______ component of the total return from investing in a stock.
income
An increase in depreciation expense will Blank______ cash flows from operations.
increase
Synergy will Blank______ the sales of existing products.
increase
Which of the following are examples of a portfolio?
investing $100,000 in the stocks of 50 publicly traded corporations investing $100,000 in a combination of U.S. and Asian stocks
Which of the following are examples of a portfolio?
investing $100,000 in the stocks of 50 publicly traded corporations investing $100,000 in a combination of U.S. and Asian stocks investing $100,000 in a combination of stocks and bonds
Capital budgeting is probably the most important of the three key areas of concern to the financial manager because
it defines the business of the firm
The payback period can lead to foolish decisions if it is used too literally because:
it ignores cash flows after the cutoff date.
An investment will have a negative NPV when its expected return is Blank______ what the financial markets offer for the same risk.
less than
According to the Blank______ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "minifirm."
stand-alone
The variance and its square root, the , are the most commonly used measures of volatility.
standard deviation
Options for future, related business products or strategies are called options.
strategic
Which option should be chosen if a project does not break even on a cash flow basis?
the option to abandon
True or false: Investment in net working capital may arise from the need to cover credit sales.
true
The square of the standard deviation is equal to the
variance
The multiple rates of return problem is the possibility that more than one discount rate may make the net present value of an investment equal to
zero
The total dollar return is the sum of dividends and
capital gains or losses
A(n) Blank______ project does not rely on the acceptance or rejection of another project.
independent
An efficient market is one that fully reflects all available
information
The primary risk in estimation errors is the potential to
make incorrect capital budgeting decisions
What is the definition of expected return?
It is the return that an investor expects to earn on a risky asset in the future.
True or false: In the Ibbotson-Sinquefield studies, U.S. Treasury bill data is based on T-bills with a maturity of one year.
false
True or false: Long-term U.S. government bonds used in the Ibbotson-Sinquefield studies had 15 years to maturity.
false
True or false: Operating cash flow is based on the salvage value of equipment.
false
True or false: The expected return of a portfolio is a combination of the weights of each asset in a portfolio.
false
True or false: The smaller the variance or standard deviation is, the more spread out the returns will be.
false
Interest expenses incurred on debt financing are Blank______ when computing cash flows from a project.
ignored
The capital gains yield can be found by finding the difference between the ending stock price and the initial stock price and dividing it by the
initial stock price
If the dispersion of returns on a particular security is very spread out from the security's mean return, the security
is highly risky
The Blank______ is best suited for decisions on relatively small, minor projects, while Blank______ is more appropriate for large, complex projects.
payback period; NPV
If investors are risk averse, it is reasonable to assume that the risk premium for the stock market will be
positive
The security market line (SML) shows that the relationship between a security's expected return and its beta is
positive
The NPV is Blank______ if the required return is less than the IRR, and it is Blank______ if the required return is greater than the IRR.
positive; negative
The risk can be interpreted as the reward for bearing risk.
premium
Which of the following is an example of a sunk cost?
project consultation fee
When we estimate the best-case, worst-case, and base-case cash flows and calculate the corresponding NPVs, we are engaging in
scenario analysis asking what-if questions
If a study of a firm's financial information will not lead to gains in the market, then the market must be at least Blank______ efficient. Multiple choice question.
semistrong
Scenario analysis considers a combination of factors for each scenario, while analysis focuses on only one variable at a time.
sensitivity
analysis is useful in pinpointing variables that deserve the most attention
sensitivity
To investigate the impact on NPV of a change in one variable, you would employ
sensitivity analysis
Which of the following types of risk is not reduced by diversification?
systematic, or market risk
Beta tells us the amount of Blank______ risk of an asset or portfolio relative to Blank______.
systematic; an average risky asset
The systematic risk principle argues that the market does not reward risks
that are diversifiable that are borne unnecessarily
The IRR is the discount rate that makes NPV equal to
zero
The dividend yield for a one-year period is equal to the annual dividend amount divided by the
beginning stock price
Some important characteristics of the normal distribution are that it is
bell-shaped symmetrical
Side effects from investing in a project refer to cash flows from:
beneficial spillover effects. erosion effects.
The profitability index is also called the Blank______ ratio.
benefit-cost
The internal rate of return is a function of
a project's cash flows
Unsystematic risk will affect Blank______.
a specific firm firms in a single industry
A project should be Blank______ if its NPV is greater than zero.
accepted
The payback period rule Blank______ a project if it has a payback period that is less than or equal to a particular cutoff date.
accepts
Cash flows should always be considered on a(n) Blank______ basis.
aftertax
Cash flows used in project estimation should always reflect:
aftertax cash flows. cash flows when they occur.
In an efficient market Blank______ investments have a Blank______ NPV.
all; zero
Percentage returns are more convenient than dollar returns because they
allow comparison against other investments apply to any amount invested
When a dollar in the future is discounted to the present, it is worth less because of the time value of money, but when a news item is discounted, it means that the market Blank______.
already knew about most of the news item
If the market changes and stock prices instantly and fully reflect new information, which time path does such a change exhibit?
an efficient market reaction
A positive capital gain on a stock results from
an increase in price
One of the weaknesses of the payback period is that the cutoff date is a(n) Blank______ standard.
arbitrary
The goals of risk analysis in capital budgeting include
assessing the degree of forecasting risk identifying critical components
To compute the return, the yearly returns are summed and then divided by the number of returns.
average
Opportunity costs are
benefits lost due to taking on a particular project
The CAPM can also be used for a portfolio by first determining the portfolio's
beta
What is the intercept of the security market line (SML)?
the risk-free rate
According to the capital asset pricing model (CAPM), what is the expected return on a security with a beta of zero?
the risk-free rate of return
To determine the appropriate required return for an investment, we can use
the security market line
The standard deviation is
the square root of the variance
The standard deviation of a portfolio is
the square root of the variance
What two factors determine a stock's total return?
expected return unexpected return
True or false: The payback period takes into consideration the time value of money.
False
Which of the following are fixed costs?
-cost of equipment -rent on a production facility
Treasury bills yielded a nominal average return over 95 years of 3.3% versus an average inflation rate of 2.9% over the same period. This makes the real return on Treasury bills approximately equal to
.4%
By definition, what is the beta of the average asset equal to?
1
If a firm's sales estimate used in its base-case analysis is 1,000 units per year and they anticipate the upper and lower bounds to be ± 15 percent, What is the "best case" for units sold per year?
1,150
Roger Ibbotson and Rex Sinquefield presented year-to-year historical rates of return on. types of financial investments
5
If a firm's variable cost per unit estimate used in its base-case analysis is $50 per unit and they anticipate the upper and lower bounds to be ± 10 percent, what is the "worst case" for variable cost per unit?
55
The probability of a return being within ± one standard deviation of the mean in a normal distribution is approximately Blank______ percent.
68
With a normal distribution, the probability that we end up within two standard deviations is about
95%
Which of the following correctly describes the relationship between depreciation, income, taxes, and investment cash flows?
As depreciation expense increases, net income and taxes will decrease, while investment cash flows will increase.
were a bright spot for U.S. investors during 2008.
Bonds
______ risk is reduced as more securities are added to the portfolio.
Company-specific Diversifiable Unsystematic
What is the equation for the capital asset pricing model?
Expected return on security = Risk-free rate + Beta × (Return on market − Risk-free rate)
True or false: In calculating cash flows, you should consider all financing costs.
False
True or false: Sensitivity analysis is helpful because it indicates what we should do regarding forecasting errors.
False
True or false: Taxes are based on the difference between the initial cost and the sales price.
False
True or false: The depreciation tax shield is the depreciation deduction divided by the tax rate.
False
True or false: The discounted cash flow (DCF) valuation estimates future value as the difference between the market price and the cost of the investment.
False
True or false: The dividend yield minus the capital gains yield is the total return percentage.
False
True or false: The expected return of a portfolio is a combination of the weights of each asset in a portfolio.
False
True or false: The number of positive NPV projects is unlimited for any given firm.
False
Which of the following are reasons why NPV is considered a superior capital budgeting technique?
It considers time value of money. It considers all the cash flows. It properly chooses among mutually exclusive projects. It considers the riskiness of the project.
What are the two main drawbacks of sensitivity analysis?
It does not consider interaction among variables. It may increase the false sense of security among managers if all pessimistic estimates of NPV are positive.
In the context of capital budgeting, what does sensitivity analysis do?
It examines how sensitive a particular NPV calculation is to changes in underlying assumptions.
What are the two main benefits of performing sensitivity analysis?What are the two components of risky return (U) in the total return equation?
It identifies the variable that has the most effect on NPV. It reduces a false sense of security by giving a range of values for NPV instead of a single value.
What is an important drawback of traditional NPV analysis?
It ignores managerial options in investment decisions.
What is unsystematic risk?
It is a risk that affects a single asset or a small group of assets.
What is systematic risk?
It is a risk that pertains to a large number of assets.
What is a risk premium?
It is additional compensation for taking risk, over and above the risk-free rate
Which of the following statements is (are) true about variance?
Standard deviation is the square root of variance. Variance is a measure of the squared deviations of a security's return from its expected return.
Which of the following are true based on the year-to-year returns from 1926 to 2021?
T-bills sometimes outperform common stocks. Common stocks frequently experience negative returns.
The Ibbotson SBBI data show that over the long-term,
T-bills, which had the lowest risk, generated the lowest return small-company stocks generated the highest average return small-company stocks had the highest risk level
Which of the following statements regarding the relationship between book value, sales price, and taxes are true when a firm sells a fixed asset?
Taxes are based on the difference between the book value and the sales price. Book value represents the purchase price minus the accumulated depreciation. There will be a tax savings if the book value exceeds the sales price.
What are the advantages of the payback period method for management?
The payback period method is ideal for minor projects. The payback period method is easy to use. It allows lower-level managers to make small decisions effectively.
How are the unsystematic risks of two different companies in two different industries related?
There is no relationship.
The profitability index (PI) rule for an independent project is to Blank______ the project if the PI is greater than 1.
accept
The basic NPV investment rule is:
accept a project if the NPV is greater than zero. if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference. reject a project if its NPV is less than zero.
The computation of variance requires four steps. Place the steps in the correct order from the first step to the last step.
calculate expended return calculate the deviation of return from the expected return square the deviation calculate the average squared deviation
A positive NPV exists when the market value of a project exceeds its cost. Unfortunately, most of the time the market value of a project:
cannot be observed.
Which of the following present problems when using the IRR method?
nonconventional cash flows mutually exclusive projects
Systematic risk will Blank______ when securities are added to a portfolio.
not change
Systematic risk will Blank______ when securities are added to a portfolio. Multiple choice question.
not change
In the Ibbotson-Sinquefield studies, U.S. Treasury bill data is based on T-bills with a maturity of Blank______ month(s).
one
The year 2008 was
one of the worst years for stock market investors in US history
The most valuable alternative that is given up if an investment is undertaken is called what?
opportunity cost
Which type of stock price adjustment time path occurs when there is a bubble (price run up) in the path followed by a decline after the market receives information about the stock?
overreaction and correction
According to the basic IRR rule, we should:
reject a project if the IRR is less than the required return
One of the most important steps in estimating cash flow is to determine the Blank______ cash flows.
relevant
Opportunity costs are classified as Blank______ costs in project analysis.
relevant
The first step in estimating cash flow is to determine the Blank______ cash flows.
relevant
Which of the following is an example of an opportunity cost?
rental income likely to be lost by using a vacant building for an upcoming project
Investment in net working capital arises when
1. cash is kept for unexpected expenditures 2. credit sales are made 3. inventory is purchased
A dividend yield of 10 percent says that, for each dollar we invest, we get cents in dividends.
10
The arithmetic mean for large-company stock returns from 1926 to 2021 is
12.2%
Which of the following are reasons why IRR continues to be used in practice?
It is easier to communicate information about a proposal with an IRR. The IRR of a proposal can be calculated without knowing the appropriate discount rate. Businesspeople prefer to talk about rates of return.
As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk?
It is likely to decrease. It may eventually be almost totally eliminated.
What is an uncertain or risky return?
It is the portion of return that depends on information that is currently unknown.
A positive NPV exists when the market value of a project exceeds its cost. Which of these two values is the most difficult to establish?
Market value
Once cash flows have been estimated, which of the following investment criteria can be applied to them?
NPV IRR payback period
______ is a measure of how much value is created or added by undertaking an investment.
Net present value
Which of the following is the equation for estimating operating cash flows using the tax-shield approach?
OCF = (Sales - Costs) × (1 − Tax rate) + Depreciation × Tax rate
In general, NPV is
Positive for discount rates below the IRR. Negative for Discount rates above the IRR Equal to zero when the discount rate equals the IRR.
A manager has estimated a positive NPV for a project. What could drive this result?
The project is a good investment. The cash flow estimations are inaccurate. Management rationality could drive this result.
Which of the following are weaknesses of the payback method?
Time value of money principles is ignored. Cash flows received after the payback period are ignored. The cutoff date is arbitrary.
What is the equation for total return?
Total return = Expected return + Unexpected return
True or false: A capital loss is the same thing as a negative capital gain.
True
True or false: A project with nonconventional cash flows will produce two or more IRRs.
True
What will the dividend income be on W number of shares of XYZ stock if XYZ distributes a $Y per share dividend?
W × $Y
Which of the following are components of project cash flow?
change in net working capital capital spending operating cash flow
Which of the following are examples of unsystematic risk?
changes in management labor strikes
The average return on the stock market can be used to
compare stock returns with the returns on other securities
The price index is a commonly used measure of inflation.
consumer
In an efficient market, firms should expect to receive Blank______ value for securities they sell. Multiple choice question.
fair
If a firm is evaluating two possible projects, both of which require the use of the same production facilities, and taking one project means that we cannot take the other, these projects would be considered
mutually exclusive
In capital budgeting, Blank______ determines the dollar value of a project to the company.
net present value
Which of the following techniques will provide the most consistently correct result?
net present value
According to Graham and Harvey's 1999 survey of 392 CFOs (published in 2001), which of the following two capital budgeting methods are widely used by firms in the United States and Canada?
net present value internal rate of return
Historically, the real return on Treasury bills has been
quite low
Given a level of investment in net working capital, that same investment must be at some time in the future.
recovered
Erosion will Blank______ the sales of existing products.
reduce
West Corporation estimated cash flows for a project, evaluated those cash flows using NPV, and determined that the project was acceptable. Unfortunately, West Corporation lost money on the project. This may have been avoided had they assessed the Blank______ of the cash flow estimates.
reliability
If the IRR is greater than the Blank______, we should accept the project.
required return
Internal rate of return (IRR) must be compared to the Blank______ in order to determine the acceptability of a project.
required return
An unrealized gain is treated the same as a realized gain when computing the total
return
if an asset has a reward-to-risk ratio of 6.0%, that means it has a Blank______ of 6.0% per unit of Blank______.
risk premium; systematic risk
The excess return is the difference between the rate of return on a risky asset and the Blank______ rate. Multiple choice question.
risk-free
Estimates of which of the following are needed to prepare pro forma income statements?
selling price per unit unit sales variable costs
The standard deviation is the Blank______ of the variance. Multiple choice question.
square root
Options for future, related business moves are called
strategic options
If you receive a $2 dividend per share on your 100 shares, your total dividend income is
$2 × 100
Broadband, Inc., has estimated preliminary cash flows for a project and found that the NPV for those cash flows is $400,000. The company now plans to perform a scenario analysis on the cash flow and NPV estimates. It will use an NPV of Blank______ as the base case.
$400,000
The Ibbotson-Sinquefield data show that
*long-term corporate bonds had less risk or variability than stocks *U.S. T-bills had the lowest risk or variability
If a new project requires an investment in net working capital when it is launched, then at the end of the project, NWC will be:
100 percent reversed.
The standard deviation for large-company stock returns from 1926 to 2021 is
19.7%
The rules for depreciating assets for tax purposes are based upon provisions in the:
1986 Tax Reform Act.
The probability of an outcome being at least 2 standard deviations below the mean in a normal distribution is approximately:
2.5%
Bonds used in Ibbotson SBBI long-term U.S. government bond portfolio had maturities of Blank______ years.
20
In 2008, the S&P 500 plunged
37%
What is the difference between scenario analysis and sensitivity analysis?
Scenario analysis considers a combination of factors for each scenario, while sensitivity analysis focuses on only one variable at a time.
What is scenario analysis?
Scenario analysis determines the impact on NPV of a set of events relating to a specific scenario.
If you wish to create a portfolio of stocks, what is the required minimum number of stocks?
You must invest in stocks of more than one corporation.
What is the reward-to-risk ratio?
[E(RA) - Rf]/βA
The calculation of a portfolio beta is similar to the calculation of
a portfolio's expected return
Though depreciation is a noncash expense, it is important to capital budgeting for these reasons:
it affects a firm's annual tax liability it determines taxes owed on fixed assets when they are sold it determines the book value of assets which affects net salvage value
An option on a real asset rather than a financial asset is known as a
managerial option real option
Systematic risk is also called Blank______ risk.
market
What are the two components of risky return (U) in the total return equation?
market risk unsystematic risk
The project cash flow equals the project operating cash flow project change in NWC minus project capital spending
minus
The discounted cash flow valuation shows that higher cash flows earlier in a project's life are Blank______ valuable than higher cash flows later on
more
Accounts receivable and accounts payable are included in project cash flow estimation as part of changes in
net working capital
The difference between a firm's current assets and its current liabilities is known as the
net working capital
The Blank______ method evaluates a project by determining the time needed to recoup the initial investment
payback
When using Blank______, all of the variables except one are frozen in order to determine how sensitive the NPV estimate is to changes in that particular variable.
sensitivity analysis
The depreciation tax is the tax savings that results from the depreciation deduction.
shield
Arrange the following investments from highest to lowest risk (standard deviation) based on what our study of capital market history from 1926 to 2014 has revealed as shown in Table 10.3.
small company stocks large company stocks long term corporate bonds long term government bonds us treasury bills
Using capital market history as a guide, it would appear the greatest reward would come from investing in
small-company common stock
A situation when different units in a business are allocated some fixed amount of money each year for capital spending is called
soft rationing
The Blank______ is the news that influences the unanticipated return on the stock.
surprise
The true risk of any investment comes from Blank______.
surprises unanticipated events
Even if the portfolio is well diversified, the investor is still exposed to Blank______ risk.
systematic
The return expected on an investment depends only on the asset's Blank______ risk.
systematic
True or false: According to Graham and Harvey's 1999 survey of 392 CFOs (published in 2001), the internal rate of return and the NPV are the two most popular capital budgeting methods used by firms in the United States and Canada.
true
True or false: It is possible for the unsystematic risk of a portfolio to be reduced almost to zero.
true
Incremental cash flows come about as a(n) Blank______ consequence of taking a project under consideration.
direct
The total return percentage is the. yield plus the capital gains yield.
dividend
The two potential ways to make money as a stockholder are through Blank______ and capital appreciation.
dividends
Which of the following are ways to make money by investing in stocks?
dividends capital gains
The total dollar return on a stock is the sum of the Blank______ and the Blank______.
dividends; capital gains
The possibility that errors in projected cash flows will lead to incorrect decisions is known as
estimation risk forecasting risk
The Blank______ rate of return is the difference between the rate of return on a risky asset and the risk-free rate of return. Multiple choice question.
excess
We underestimate NPV because of the option(s) to
expand abandon
The_____________ return on a portfolio is a combination of the expected returns on the assets in the portfolio.
expected
the. return on a portfolio is a combination of the expected returns on the assets in the portfolio.
expected
What two factors determine a stock's total return?
expected return and unexpected return
True or false: A well-diversified portfolio will eliminate all risks.
false
True or false: Because T-bills have low risk relative to common stocks, T-bills cannot outperform common stocks.
false
True or false: Calculating the expected return is the last step in the computation of variance.
false
True or false: Discounting a news item is the same as taking the present value of that item.
false
True or false: Discounting a news item is the same as taking the present value of that item. True false question.
false
True or false: Expected return and inflation are the two components of risky return in the total return equation.
false
True or false: Fixed costs cannot be changed over the life of the investment.
false
True or false: Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio increases.
false
True or false: Percentage returns are difficult to use for comparisons because they depend on the dollar amount invested.
false
True or false: Portfolio weights can be defined as the dollars invested in each asset.
false
True or false: Since the CAPM equation can be used only for individual securities, it cannot be used with portfolios.
false
True or false: The IRR is easy to use because you only need to know the appropriate discount rate.
false
True or false: The PI always results in correct decisions in comparisons of mutually exclusive investments.
false
True or false: The average return of a given period is typically not a good estimate of the returns over that same period.
false
True or false: The calculation of the portfolio beta is similar to the calculation of the portfolio weights.
false
True or false: The capital gains yield = (Pt+1 − Pt)/Dt.
false
True or false: The value of managerial options is taken into account when performing conventional NPV analysis.
false
True or false: To get the average return, the yearly returns are summed and then multiplied by the number of returns.
false
The risk-return relationship states that a riskier investment should demand a Blank______ return. Multiple choice question.
higher
The stand-alone principle assumes that evaluation of a project may be based on the project's Blank______ cash flows
incremental
The difference between a firm's cash flows with a project versus without the project is called
incremental cash flows
Stock prices fluctuate from day to day because of
information flow
The profitability index (PI) is calculated by dividing the present value of an investment's future cash flows by its
initial cost
The present value of the future cash inflows are divided by the Blank______ to calculate the profitability index.
initial investment
What is the expected return of a security with a beta of 1.2 if the risk-free rate is 4% and the expected return on the market is 12%?
4% + 1.2(12% − 4%) = 13.6%
Operating cash flow is a function of _________.
Taxes, Earnings Before Interest and Taxes (EBIT), Depreciation
True or false: Some projects, such as mines, have cash outflows followed by cash inflows and cash outflows again, giving the project multiple internal rates of return.
True
True or false: To prepare proforma financial statements, estimates of quantities such as unit sales, selling price per unit, variable cost per unit, and total fixed costs are required.
True
The percentage change in the price of a stock over a period of time is called its
capital gain yield
When a company declares a dividend, shareholders generally receive
cash
Which of the following are considered relevant cash flows?
cash flows from external costs cash flows from beneficial spillover effects cash flows from erosion effects
Managerial options are taken into consideration in planning.
contingency
The appropriate discount rate to use to evaluate a new project is the
cost of capital
The minimum required return on a new project is known as the
cost of capital
What is net working capital?
current assets - current liabilities
Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio
declines
Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio Blank______.
declines
Historically, there is a(n) Blank______ relationship between risk and expected return in the financial markets.
direct
Which of the following are examples of information that may impact the risky return of a stock?
the Fed's decision on interest rates at their meeting next week , the outcome of an application currently pending with the Food and Drug Administration
Which of the following is commonly used to measure inflation?
the consumer price index (CPI)
When calculating NPV, the present value of the nth cash flow is found by dividing the nth cash flow by 1 plus Blank______ rate raised to the nth power.
the discount
Studying market history can reward us by demonstrating that
the greater the potential reward is, the greater the risk there is a reward for bearing risk
What is the slope of the security market line (SML)?
the market-risk premium
Which of the following are needed to describe the distribution of stock returns?
the mean return the standard deviation of returns
Capital rationing exists when a company has identified positive NPV projects but cannot (or will not) find
the necessary financing
Which option should be chosen if the sales demand for a particular product were to greatly exceed expectations?
the option to expand
Which of the following qualify as "managerial options"?
the option to wait the option to expand the option to abandon
Which of the following are examples of information that may impact the risky return of a stock?
the outcome of an application currently pending with the Food and Drug Administration the Fed's decision on interest rates at their meeting next week
A portfolio can be described by its portfolio weights which are defined as
the percentage of dollars invested in each asset
The CAPM shows that the expected return for an asset depends on which three things?
the pure time value of money the amount of systematic risk the reward for bearing systematic risk
What approach does the following formula describe? OCF = (Sales − Costs) × (1 − TC) + Depreciation × TC
the tax-shield approach
True or false: A capital gain on a stock is counted as part of the total return whether or not the gain is realized from selling the stock.
true
True or false: According to the capital asset pricing model (CAPM), the risk-free rate of return is the expected return on a security with a beta of zero.
true
True or false: Adding securities will reduce unsystematic risk only. Systematic risk is unaffected by diversification.
true
True or false: If analysts are overly optimistic about the future, then they may accept a project that realistically has a negative NPV.
true
True or false: Labor strikes are an example of unsystematic risk.
true
True or false: Net working capital will be recovered at the end of a project.
true
True or false: Roger Ibbotson and Rex Sinquefield conducted a famous set of studies dealing with rates of return in U.S. financial markets.
true
True or false: The dividend yield = Dt+1/Pt
true
True or false: The expected return is the return that an investor expects to earn on a risky asset in the future.
true
True or false: The normal distribution is completely described by the average and standard deviation.
true
True or false: The risk premium can be interpreted as a reward for bearing risk.
true
True or false: Unsystematic risk is specific only to a single company or industry.true
true
True or false: When calculating NPV, the present value of the nth cash flow is found by dividing the nth cash flow by 1 plus the discount rate raised to the nth power.
true
Average returns can be calculated
two different ways: arithmetic & geometric
In a competitive market, positive NPV projects are
uncommon
In order to analyze the risk of a project's NPV estimate, we should establish Blank______ for each important estimate variable.
upper and lower bounds
The normal distribution is completely described by the Blank______ and Blank______. Multiple select question.
variance or standard deviation mean
If a study of past stock prices and volume to find mispriced securities will not lead to gains in the market, then the market must be at least Blank______ efficient.
weak form
The efficient markets hypothesis contends that Blank______ capital markets such as the NYSE are efficient.
well-organized
The basic approach to evaluating cash flow and NPV estimates involves asking
what-if questions
Soft rationing is a type of capital rationing that occurs
when units in a business are allocated a certain amount of financing for capital budgeting
