TRUE OR FALSE

If projects are contingent, what decision rule do you use?

- Contingent projects are "bundled" - You add the two NPVs together, if it is positive, the summation, you pursue the projects together, if negative, you reject the projects.

T/F: Liquidity ratios directly measure the default risk of the firm.

False

T/F: Robinhood generates most of its revenues from charging commissions to the retail investor?

False

T/F: An apartment rental agreement is typically treated as an ordinary annuity.

False Example of an annuity due

If projects are independent, what decision rule do you use?

For independent projects you can take all projects that have positive NPVs. (you can take both, none, or one)

T/F: A firm is considering a new capital budgeting project that will be outside their normal business activities. The project is believed to have more systematic risk than the firm's normal business. If the firm uses its firm beta, there is a chance that the firm could reject a project that should possibly be accepted.

RESPOND

T//F: A "large Beta" indicates that the stock changes a lot in accordance to market changes.

True

T/F: A dollar today is worth more than a dollar tomorrow

True

T/F: CAPM follows from what is known as the security market line.

True

T/F: During the financial crisis, credit agencies often rated the CDOs as AA or AAA even when they were subprime.

True

T/F: a bond is a TVM concept that is a debt instrument for a company.

True

T/F:If the number of compound periods is greater than 1, the EAR of an account is always greater than the APR of an account.

True

T/F: If your market value is work more than your book value, the government takes a percentage of the gain on your sale.

True When market value is above book value in terms of net salvage value, the government taxes the gain made on the sale.

T/F: The current yield of a bond will equal its coupon rate when the bond is selling at par value.

- True - the current yield operates like this (annual coupon/price), so to translate to the calculator the (annual PMT/PV) -When bonds are selling at "par value" their PV (price) equals the FV (face/par value), the ratios would be equivalent, and therefore the same percentage of current yield.

Which of the following statements is true regarding bonds? a. if a bond is a discount bond, then its current price is above its face value. b. zero coupon bonds always sell at par. c. All else held constant, as the number of years to maturity increase, the price of a bond (today) decreases. d. bonds are a type of equity security issued by a firm. e. all else held constant, if the interest rates were to increase, the number of bonds needed to raise funding would increase.

A. FALSE; Discount bonds are sold below its face value. B. FALSE; zero coupon bonds cannot sell at par, this is because they sell at a discount and therefore will be priced less than the par/face value. C. FALSE; all else held constant, as the number of years to maturity rises, the PV/price of the bond decreases. D. FALSE; Bonds are a type of DEBT financing security issued by a firm. * E. TRUE, if interest rates rise, prices will fall. With prices falling, there will need to be an increase in the number of bonds issued to raise funding (debt financing).

T/F: NPV and IRR will always agree when it is a single project case.

True. - the NPV project decision rule states that if NPV is positive, you accept the project. - the IRR states that if IRR> Cost of Capital, to accept the project

T/F: a firm's total yield is synonymous with the capital gains yield.

False - the total yield is equal to the total return on equity capital. - capital gains yield is one part of the total yield, a major one, however, it is only when the dividend yield is added to it that it becomes a total yield.

T/F: All else equal, a firm with lower operating leverage would have a higher beta than a firm with higher operating leverage.

FALSE - firms with lower operating leverage are less risky, and therefore less sensitive in the market. -Less sensitivity means a lower Beta. - firms with higher operating leverage are more risky, and therefore more sensitive in the market. - more sensitivity means a higher beta.

T/F: If the book value of an asset is substantially greater than its market value, then the net salvage value can be negative.

FALSE Counter intuitive, you don't walk away with negative money, you can walk away with 0, not (-) money. =MV - (T)(MV-BV) According to this equation that is important.

T/F: If a newly proposed project requires the use of existing equipment that could others be sold, then the net salvage value of this equipment will be added to the cash flow in Year 0 as an opportunity cost.

FALSE opportunity costs are SUBTRACTED from the cash flow equation. We do not add the value of the cash flow in year zero as an opportunity cost.

T/F: Firms with a higher operating leverage have a greater market risk premium when compared to firms with a lower operating leverage.

FALSE - Firms with higher operating leverage mean there are a lot of fixed costs, not a lot of variable costs, like airlines, therefore they are more risky. - Firms with lower operating leverage have less fixed costs and more variable costs, they are less risky as their risk is predictable based upon volume. - What does risk do to market risk premium? Riskier stocks have greater Beta, however the market risk premium STAYS THE SAME REGARDLESS OF HIGH OPERATING LEVERAGE.

T/F: A bond is considered to be sold at a "discount" if the coupon rate % is greater than the yield-to-maturity %.

False - A bond is sold at a discount when the coupon rate is LESS than the YTM (a PV will be less than the FV). - A bond is sold at a "premium" when the coupon rate is MORE than the YTM (a PV (price) will be more than the FV (par/face value)). - A bond sold at "par" is when the coupon rate is EQUAL to the YTM (the price and par value are equal)

T/F: Preferred stock, by definition, is considered to be a "growing perpetuity".

False - They are non-growing dividends. - you receive a consistent, unchanging check in the mail, predicated upon the par value. - Dividend amount x Par Value = Preferred Stock Dividend

T/F: Projects that are mutually exclusive mean that you can accept both projects.

False Mutually exclusive projects mean that you can only select one project. However, you still reserve the right to reject both. When you can only pick one, you use the NPV rule.

T/F: Both payback period and net present value concern time value of money calculations.

False Payback period is not concerned with time value of money criteria. - even when two projects have positive NPVs in a contingent project, they could still be rejected because of the payback rule.

T/F: The lower the net profit margin, the greater the profitability of the firm.

False Think about this, the lower the net profit margin, the less profits the firm is experiencing.

T/F: If a firm is analyzing several projects with the conventional cash flows, then the NPV and IRR rule will always agree

False When you are looking across projects there are issues with IRR and NPV reflecting one another. This is because there is a "mismatch" and the two will not always agree.

T/F: If the YTM>coupon rate, we are selling at a premium.

False, this is a discount.

T/f: A rental agreement would likely be valued as an ordinary annuity.

False. - an ordinary annuity does not make payments at the beginning of the month, instead payments are made at the end of the month (like mortgages, car payments). - an annuity due has payments at the end of the month. - rental agreements, leases on equipment, are "annuities due".

T/F: Beta measures a stock's unsystematic risk.

False. - Beta measures SYSTEMATIC or marketwise risk, that everybody shares unequally. - Beta shows how a stock reacts after a market change.

T/F: While total return can be positive or negative, capital gains can only be greater than 0.

False. - Capital gains yield can be positive, negative, or 0. - Capital gains yield = (P1-P0)/(P0), assuming that P0 will never be 0, we know that if P1 and P0 equal, that there is no growth or shrinkage in dividends price, that the gains yield will result in a 0. -If P1>P0, there will be a positive capital gains yield (you gained capital). -If P1<P0, there will be a negative capital gains yield (you lost capital). -If P1=P0, there were no capital gains made on the stock.

T/F: A well-diversified portfolio will eliminate all risks.

False. - Including multiple other stocks in a portfolio (20-30) does limit and decrease unsystematic/diversifiable risk. - However, even when unsystematic risk is 0, there is still market-wide/systematic risk that sticks around.

T/F: The PV of a bond serves as the "face value/par value"

False. - The PV of a bond is the price you are willing to pay for a particular bond. - In the calculator, the PV will be entered as a (-), the FV and PMT will be entered as a (+).

T/F: A stock with a beta of 1.47 is believed to go down 1% when the market decreases by 14.7%.

False. - a beta measures a stock's sensitivity to changes in the market. - a 10% increase in the market would see a 14.7% increase increase in the stock itself. - additionally, the ratio goes from M:B in a 1:1 ratio, meaning that for this situation it is 1:1.47. - if the market decreased or increased by 1%, the Beta indicates that this stock will fluctuate by 1.47%

T/F: Generally, an investor's required return on firm's bonds is greater than their required return on the same firm's common stock.

False. - there is more risk associated with common stock because there are no guarantees in terms of repayment. - as discussed in this class, the greater the risk, the greater the required rate of return. - Common stock investment has more risk so it demands a higher rate of return than bonds.

T/F: A firm's dividend yield (over the course of ONE year) is 2% and their total return on equity is 8%, therefore the capital gains yield must be 10%.

False. - total return on equity = capital gains + dividend yield * 8 = 2 +x, so cap gains would equal 6%

T/F: If we increase leverage for a firm, the result will be increased expected return for the shareholder and increased risk.

IDK

T/F: Market risk premium is equal for all firms regardless of operating leverage size.

True

T/F: Suppose that academy sports decides to open a smoothie bar within their retain stores, this would likely create a positive side effect for the existing stores.

True

T/F: We can use TVM of calculate bond amounts (the price

True

T/F: A firm's beta measures their systematic risk

True "My sister's such a beta" This measures the risk that sticks around after you try to diversify your portfolio.

T/F: In the world of stocks, the cash flows are dividends.

True - Dividends are cash flows for investors because they are a check in the mail.

T/F: If the CAPM equation, or the security market line, if a portfolio is expected to yield 11.74%, but actually yields 17%, the stock is undervalued and the stock lies above the security market line.

True - If the CAPM rate of return is less than the actual yield of the stock, the stock is considered to be undervalued. Its actual place would be above the security market line. - If the CAPM rate of return is more than the actual yield of the stock, the stock is considered to be overvalued. The stocks actual place would be bellow the security market line.

T/F: The "EAR" can equal the APR if there is annual compounding.

True - The EAR is the effective interest rate that measures the impacts of compounding. - with annual compounding, the APR is only compounded one time, and therefore is taken to the ^1 power and remains the same.

T/F: If the ViX gains in value, this indicates greater fear among investors.

True

T/F: In terms of bonds, "face value" is synonymous with "par value".

True

T/F: Lululemon revised their guidance for the fourth quarter and let the company know that they were going to have sales below expectations.

True

T/F: To find the intrinsic (PV) of a preferred stock, I would take the Dividend (1) and divide it by the rate of return on investments of preferred stocks.

True - The equation for preferred stock's present value is as follows (same as a regular perpetuity) * PV = (DIV1)/(r-g) - since there is no growth for the preferred stock, it will end up being (DIV1)/(r) - the R in question is the return on investments that are required by an investor.

T/F: When attempted to determine whether a bond is being sold at a premium, discount, or at par, we can look at the PV or compare the coupon rate to the APR or YTM.

True - we have two options to determine the status of a bond. - if the present value, the price of the bond currenty, is more than the face value or the future value of the bond, we know that this bond is being sold at a premium. - if the present value, the price of the bond currently, is less than the face value or future value of the bond, we know that this bond is being sold at a discount.

T/F: While a firm's beta measures systematic risk, their standard deviation measures the overall risk.

True -Standard deviation is comprised of both firm specific and marketwise risk. - the idea there is that firm specific risk will somewhat cancel out, but risk still exists.

T/F: If a firm is analyzing a single project with conventional cash flows then the NPV rule and IRR rule will always agree.

True Conventional cash flows just means this is the normal world where you pay money now and get some more in return. Looking at a single project is a key term here.

T/F: An investment in NWC decreases a firm's FCF.

True FCF = (S-D-)... -NWC If there is an investment in NWC your cash flows decrease.

T/F: Beta is multiplied by the "market risk premium" before being added to risk free rate to determine the required rate of return for investors.

True Rr(CAPM)= Rr=Rf+B1(E(rm)-(rf)) where Rr = required rate of return, where Rf = risk free rate B1 = ((Pi,m)(STDDEVi))/STDDEVm and E(rm)-r(f) is called the MARKET RISK PREMIUM.

T/F: If projects are mutually exclusive, we favor the NPV rule over the IRR rule.

True You evaluate which project has the highest NPV (this is where your preference lies).

T/F: The "EAR" tells you effectively how much interest, expressed in a rate, that you will earn while accounting for

True - "The interest on interest" - "With all the extra compounding considered, here is the interest rate that you actually will earn" - It will always be more than the APR with compounding so long as it is not annually compounding (to the ^1 power)

T/F: Dividends can take the form of regular perpetuities and growing perpetuities.

True - A preferred stock dividend is an example of a regular perpetuity because, by definition, it is the receiver of the same amount of money every period. - A common stock dividend is an example of a growing perpetuity. We use the (DIV1, the dividend of the first PAYMENT TO HAPPEN) divided by the (r-g) where there is both a rate of return/discount rate and an annual growth rate.

T/F: In stock pricing, we do not include the CF0 (the initial dividend paid out) because we are looking for the present value of all future cash flows.

True - CF0 in the cash flows register should be 0 when solving for the PV of future payments in the case of dividends. - CF0 should be used to "get the ball rolling" in terms of uncovering future dividend amounts.

T/F: Positively correlated stocks indicate that as Stock A increases, Stock B increases, and vice versa.

True - a positive correlation (where rho>0) indicates a positive relationship between stocks. - this is very important when evaluating returns from multiple assets/stocks. - a negative correlation is where rho < 0, which indicates that there is an inverse relationship between stocks.

T/F: Un-systematic risk is diversifiable

True can be mitigated by including different stocks in your portfolio. - this is why we look for the non-diversifiable, systematic risk, because un-systematic risk eventually goes away, but systematic risk stays and applies to everybody in the market.

T/F: New working capital is found by taking the sum of current assets minus the current liabilities.

True.

T/F: All else equal, a growing perpetuity is more valuable than a growing annuity.

True. - a growing perpetuity continues to grow infinitely, conceptually, this has a higher present value. - a growing annuity may continue to grow at a higher growth rate, but eventually, the payments stop (they are finite). - all else equal, a growing perpetuity is more valuable.

T/F: As the risk of an investment increases, its present value decreases (all else held constant)

True. - as risk increases, we know that the investors want higher returns through increased interest rates to compensate for their time and risk associated with the investment. - when interest rates increase, present values decrease (this is a discounting concept) - however, the FV increases because it is growing at a greater rate (compounding concept)

T/F: One drawback fo the dividend discount model is the difficult associated with estimating future dividends.

True. - giving a consistent growth rate to a dividend is complicated because dividends are based on earnings, which cannot be predicted. -conceptualize this, you have genuine difficult discounting cash flows of dividends because you have to shift their growth rates around.

T/F: Preferred stock dividends most closely resemble our TVM perpetuity formula.

True. - preferred stocks are regular perpetuities meaning they do not experience any growth. - preferred stocks are synonymous with having streamlined cash flows as the dividend payments are all equal. -preferred stock PV (the intrinsic price of the stock) is found by dividing the PMT (Div1) by (r-g) where the g is 0 due to no growth.

T/F: For the standard mortgage, the amount of principal paid increases with each subsequent payment.

True. - standard mortgages start off with awful payments where the majority is paid towards interest and very little goes towards reducing the principal/balance. -however, with time, each payment begins to increasingly the amount of principal paid once enough interest has been paid off. - from the consumer/borrower's perspective, the payments are ALWAYS consistent.

T/F: When I am responsible for forecasting potential returns and the subsequent standard deviations, I use the variance and variance squared to find my responses.

True. -When forecasting potential returns you are not given probabilities from which you can determine a mean and standard deviation using the DATA and STAT functions. - Instead, you would find the expected average return and include that information in the variance equation. - After getting the variance of the portfolio, you take the square root of the variance to find the standard error.

T/F: The book value of equipment is the depreciable basis - accumulated depreciation.

True. Book value = depreciable basis (which is the purchase price of the equipment + installation fees and such) - accumulated depreciation for that period. For straight line depreciation, it would look something like (sales price/no. years) would be the accumulated depreciation for the book value equation. For a MACRs schedule depreciation, you would see the depreciable basis subtract the accumulated percentage from MACRS, which is contingent upon years times the depreciable basis (selling price).