Principles of Finance Unit 3- Milestone 3

A security that falls above the security market line is _____.

attractive for an investor

Curtis purchased stock with an initial share price of $140, and sold it when the share price was $119. While he owned the stock, he earned $10 in dividends. What was his total percentage return on the investment?

-7.86%

Calculate a company's total leverage given the following information: Change in sales = 5.5% Change in earnings = 7%

1.27

The discounted cash flow approach is useful for ____.

determining the value of future profits (or losses) in today's terms

You own a small manufacturing business that produces widgets. You have spent $150,000 acquiring the fixed assets you need to produce widgets. Each widget costs you $2 to make and they sell for $15 each, so your variable cost is 13.3% of the overall revenue. At your current level of operating leverage, how many widgets must you sell to break even?

11,539

Using the following variables, calculate an organization's cost of common equity. Rf: 1.5% βs: 1.4 (Rm - Rf): 8%

12.7%

You invest $1,000 in a stock that has a 15% chance of a 1% return, a 60% chance of a 5% return and a 25% chance of a 7% return. What is your expected return after one year?

4.9%

Which of the following credit ratings would make a country or company have the easiest time raising capital?

AAA

Why is an investment portfolio containing a mix of stocks and bonds less risky than one containing a single asset class?

Because stocks and bonds are negatively correlated.

Company A Company B Market Value of Equity $250,000 $200,000 Market Value of Debt $600,000 $500,000 Cost of Equity 8% 10% Cost of Debt 2% 2% Tax Rate 35% 30% Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 5%?

Both Company A and Company B

What is the combination of debt and equity used by a company to finance its activities known as?

Capital structure

Select the true statement about the bankruptcy process.

Companies that cannot meet their debts can try to reduce their debt obligations before filing for bankruptcy.

Which of the following is true of unsystematic risk?

It can be diversified away by relying on the lack of a tight positive relationship among the returns of a set of individual assets.

A social media start-up wants to raise funds to support growth by offering shares to a select group of investors. What type of market transaction should they pursue?

Private placement

Before selling bonds to investors, Matteo's company must provide audited financial statements and a detailed description of the terms of the bonds. By doing so, which federal regulation is he complying with?

Securities Act of 1933

Which of the following is a tenet of strong-form efficiency?

Share prices respond immediately to all information, whether public or private.

A company is considering a new plan for its capital structure. Which of the following is true if, under the new plan, the company's weighted average cost of capital exceeds the expected return?

The company's proposed capital structure may put it at risk for bankruptcy.

If you invest in two stocks, and their values both rise on one day and then fall on the next day, they have ____.

a large covariance

The risk that a bank will receive less interest from a lending product than it originally anticipated is known as _____.

prepayment risk