AGB 308- Intro to Ag Finance

We know that the lower the correlation coefficient 𝜌, the lower the risk of the portfolio. So for a portfolio with two assets, the risk will be the lowest if the correlation coefficient 𝜌 between the two assets' returns is:

-1

What is the market's beta?

1

What is the best way to reduce the existing portfolio's overall risk (standard deviation)?

Adding a stock with returns that have a low correlation with our existing portfolio's returns.

Indicate which of the following is true about annuities.

An annuity due is an equal payment paid or received at the beginning of each period

Which of the following is FALSE about net working capital?

An increase in inventory will not affect net working capital.

Which of the following statements is true?

An increase in risk will result in an increase in the standard deviation.

As the discount rate increases without limit, the present value of the future cash inflows:

Approaches zero

If we graph one asset's returns on y-axis and market returns (S&P500) on x-axis, the slope of the trend line is called:

Beta

________ is the process of deciding which long-term investments or projects a firm will acquire using the long-term funds a firm has available.

Capital budgeting

When the amount earned on a deposit has become part of the principal at the end of a specified time period the concept is called:

Compound interest

The primary difference between simple and compound interest is that:

Compound interest entails receiving interest payments on previously earned interest

If the present value of a perpetual income stream is increasing, the discount rate must be:

Decreasing

Which of the following is not one of the financial statements critical to financial statement analysis?

Disclosure

________ is the act of giving something variety.

Diversification

How do you calculate NOPAT?

EBIT-tax

The shipping and installation costs should not be considered part of the depreciable basis of the asset purchased.

False

When calculating the cash flows for a project, you should include financing costs.

False

Your broker tells you that it is important to diversify because doing so will increase your expected returns.

False

________ ratios measure the degree to which a firm is leveraged.

Financing

How would you describe the risk of a company's CEO having contracted Covid-19?

Firm specific

If the ________ is greater than or equal to the ________, the project should be accepted.

IRR; cost of capital

When the number of compounding period (m) increases, what will happen to EAR?

Increase

The IRR method assumes that cash inflows are reinvested at the:

Internal rate of return

The modified internal rate of return (MIRR) corrects which problem inherent in IRR?

It allows for reinvestment of cash inflows from the project at the firm's cost of capital

Which of the following statements concerning beta is correct?

It measures the level of systematic risk possessed by an individual asset.

Which of the following is the correct statement about the profitability index?

It should be used in conjunction with NPV

Which one of the following is not a practical example of perpetuities?

Mortgage loans

House prices rise when interest rates fall. These two variables (house prices and interest rates) are:

Negatively correlated

________ is an annuity with an infinite life making continual annual payments.

Perpetuity

What does PVIFA stand for?

Present Value Interest Factor for an Annuity

What are the solutions for evaluating projects with different lives?

Replacement chain approach, Equivalent annual annuity method

Which of the following statements is false?

Systematic risk may be eliminated through diversification.

The discount rate we use for capital budgeting depends on:

The "pure time preference", A "risk premium, The rate of inflation

Which statistical measure adjusts standard deviation for the "scale of the variable"?

The Coefficient of Variation

Which type of average is a more accurate portrayal of investment return over time?

The geometric average

Each of the following is a ratio category EXCEPT

productivity ratios

The book value of an asset is equal to the

purchase price minus accumulated depreciation

Balance sheets

show how the firm raised funds to purchase assets.

The quick ratio improves upon the current ratio by

subtracting inventory from current asset.

One of the problems with the NPV technique of capital budgeting is:

that many people without a background in financial theory may not understand it.

All of the following are steps in the capital budgeting process EXCEPT:

the pre-audit

When financial ratios are compared to financial ratios from previous years, a ________ is conducted.

time series

Which of the following most closely defines the term risk in finance?

A measure of the variability of cash flows

An ordinary annuity may be defined as:

A series of equal payments made at regular intervals that are received at the end of each period.

We can "price" potential investments by

converting payments that we occur in the future to "today's dollars".

In the amortized loan payment schedule, interest payment is _________ as one approaches the end of the loan term?

decreasing

The interest rate that you actually earn after you take into account the non-annual compounding is called_____interest rate.

effective

The risk of the portfolio does not depend on:

expected return of individual assets

Using financial information to aid in decision making is called

financial analysis

An NPV profile:

graphs the NPV at a variety of discount rates.

To earn a ________ return, you must incur ________ risk.

higher; higher

If the number of compounding period (m) increases, the future value will________ and the present value will_________.

increase; decrease

The future value of a dollar ________ as the interest rate increases and ________ the farther in the future an initial deposit is to be received.

increases; increases

The DuPont analysis calculates ROE as the product of

margin, turnover, and leverage

The sale of an ordinary asset for its book value results in

no tax due

The interest rate typically reported or advertised by lenders is the ________ interest rate.

nominal

The ________ is the exact amount of time it takes the firm to recover its initial investment.

payback period

The amount of loan is the

present value

Compute the simple interest earned on a 1-year $200 deposit that earns 6% per year.

12

An annuity would be considered as a deferred annuity if it begins in year

4

What is the present value of a $50 perpetuity if interest rates are 7%? (Round to two decimal places)

714.29

Analysts at Tabby Fur Storage predict that the net present value of a proposed new $10 million warehouse is $1 million. How should these findings be interpreted?

The project should be accepted because it will add value to the firm.

All of the following statements are true EXCEPT:

The standard deviation of a portfolio of assets is the weighted average of the standard deviations of the assets in the portfolio.

What are operating cash flows?

The sum of NOPAT and the depreciation expense.

Which ratio below measures how much in sales is generated for every dollar of assets?

Total asset turnover.

Which one of the following is the systematic risk in Agriculture?

Trade Wars

Projects will usually have initial cash flows, operating cash inflows, and terminal cash flows.

True

Tom wishes to calculate the riskiness of his portfolio, which is comprised of equal amounts of two stocks. Which of the following measures would you recommend?

Weighted average betas of the two individual stocks

Correlation

a measure of the relationship between two random variables.

The ________ is a snapshot of the firm at a particular point in time.

balance sheet