CF exam 4

Which one of the following will decrease the net present value of a project? -Increasing the value of each of the project's discounted cash inflows -Decreasing the required discount rate - Moving each cash inflow forward one time period, such as from Year 3 to Year 2 - Increasing the project's initial cost at Time 0

Increasing the project's initial cost at Time 0

Which of the following statements regarding unsystematic risk is accurate? It can be effectively reduced or even eliminated by portfolio diversification. It is measured by beta. It is compensated for by the risk premium. It is related to the overall economy.

It can be effectively reduced or even eliminated by portfolio diversification.

As long as the returns are not all identical, the arithmetic average return is ____ the geometric average return larger than smaller than always the same as

Larger than

When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods? Profitability index Payback Net present value Internal rate of return

Net present value

Bui Bakery has a required payback period of two years for all of its projects. Currently, the firm is analyzing two independent projects. Project X has an expected payback period of 1.4 years and a net present value of $6,100. Project Z has an expected payback period of 2.6 years with a net present value of $18,600. Which project(s) should be accepted based on the payback decision rule? Both X and Z Project Z only Neither X nor Z Project X only

Project X only

________ measures total risk, and ________ measures systematic risk. Beta; standard deviation Standard deviation; variance Alpha; beta Standard deviation; beta

Standard deviation; beta

You are considering a project with conventional cash flows, an IRR of 13.28 percent, a PI of 1.16, an NPV of $1,408, and a payback period of 2.76 years. Which one of the following statements is correct given this information? The discount rate used in computing the net present value was less than 13.28 percent. The discounted payback period must be greater than 2.76 years. The project should be rejected based on its PI value.

The discount rate used in computing the net present value was less than 13.28 percent.

Company A is considering a project whose internal rate of return is 7%. If the company's required return is 7%, the project's NPV is: Positive Zero Negative

Zero

If financial markets are efficient then: -an increase in the value of one security should be offset by a decrease in the value of another security. -stock prices should increase or decrease quickly as new events are analyzed and the information is absorbed by the markets. -stock prices should increase or decrease slowly as new events are analyzed and the information is absorbed by the markets. -stock prices will change only when an event actually occurs, not at the time the event is anticipated.

stock prices should increase or decrease quickly as new events are analyzed and the information is absorbed by the markets.

An investor who owns a well-diversified portfolio would consider ________ to be irrelevant. market risk systematic risk unsystematic risk nondiversifiable risk

unsystematic risk

A project has cash flows of −$152,000, $60,800, $62,300, and $75,000 for Years 0 to 3, respectively. The required rate of return is 13 percent. The profitability index is ____. (Please round your answers to 2 decimal places)

1.04

The risk-free rate is 4.3 percent and the market expected return is 11 percent. If the stock has a beta of 1.28, the expected rate of return on the stock is ___ percent. (Please round your answers to 2 decimal places)

12.86%

The risk-free rate of return is 4.8 percent, and the market risk premium is 15 percent. If the beta is 1.8, the expected rate of return on a stock is ____ percent. (Please round your answers to 2 decimal places)

31.8 %

You own a stock that had returns of 11.87 percent, −16.04 percent, 21.06 percent, and 19.59 percent over the past four years. The arithmetic average return for this stock is ____ percent. (Please round your answers to 2 decimal places)

9.12 %

Which one of these projects should definitely be rejected? A project with a payback period less than the firm's accepted benchmark period. A project with a positive net present value (NPV), but a payback period less than the firm's benchmark payback period. A project with an internal rate of return (IRR) less than the firm's required return A project with a net present value (NPV) equal to zero.

A project with an internal rate of return (IRR) less than the firm's required return

If the dispersion of return on an security is very spread out from its mean return, the security _____ has a low level of risk is highly risky is risk-free

is highly risky

For the same project (same CFs and timeline), higher discount rate will lead to _____ NPV higher the Same lower

lower

The total risk of a stock consists of market (or systematic) risk which is _______________ and company (or unsystematic or idiosyncratic) risk which is ___________________. diversifiable; diversifiable diversifiable; not diversifiable not diversifiable; diversifiable not diversifiable; not diversifiable

not diversifiable ; diversifiable;

For a project with conventional cash flows, the NPV is ______ if the required return is less than the IRR, and it is ______ if the required return is greater than the IRR. negative, negative positive, positive negative, positive positive, negative

positive, negative