FIN 3403 Exam 3

Based on the period 1926-2013, the actual real return on large-company stocks has been around: A. 8.3 percent B. 8.7 percent C. 10.4 percent D. 12.3 percent E. 14.8 percent

A. 8.3 percent

The systematic risk of the market is measured by: A. A beta of 1.0. B. A beta of 0.0. C. A standard deviation of 1.0. D. A standard deviation of 0.0. E. A variance of 1.0.

A. A beta of 1.0.

The return earned in an average year over a multiyear period is called the _____ average return. A. Arithmetic B. Standard C. Variant D. Geometric E. Real

A. Arithmetic

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset? A. Beta B. Reward-to-risk ratio C. Risk ratio D. Standard deviation E. Price-earnings ratio

A. Beta

Changes in the net working capital requirements: A. Can affect the cash flows of a project every year of the project's life. B. Only affect the initial cash flows of a project. C. Only affect the initial and final cash flows of a project. D. Are generally excluded from project analysis due to their irrelevance to the total project. E. Are excluded from the analysis as long as they are recovered when the project ends.

A. Can affect the cash flows of a project every year of the project's life.

Unsystematic risk: A. Can be effectively eliminated by portfolio diversification. B. Is compensated for by the risk premium. C. Is measured by beta. D. Is measured by standard deviation. E. Is related to the overall economy.

A. Can be effectively eliminated by portfolio diversification.

Which of the following statements concerning risk are correct? I. Non diversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for non diversifiable risk. IV. Diversifiable risks are market risks you cannot avoid. A. I and III only. B. II and IV only. C. I and II only. D. III and IV only. E. I, II, and III only.

A. I and III only.

Which one of the following correctly describes the dividend yield? A. Next year's annual dividend divided by today's stock price. B. This year's annual dividend divided by today's stock price. C. This year's annual dividend divided by next year's expected stock price. D. Next year's annual dividend divided by this year's annual dividend. E. The increase in next year's dividend over this year's dividend divided by this year's dividend.

A. Next year's annual dividend divided by today's stock price.

Standard deviation measures which type of risk? A. Total B. Non diversifiable C. Unsystematic D. Systematic E. Economic

A. Total

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst? A. Weak B. Semi weak C. Semi strong D. Strong E. Perfect

A. Weak

Which one of the following is an example of a sunk cost? A. $1,500 of lost sales because an item was out of stock. B. $1,200 paid to repair a machine last year. C. $20,000 project that must be forfeited if another project is accepted. D. $4,500 reduction in current shoe sales if a store commences selling sandals. E. $1,800 increase in comic book sales if a store ceases selling puzzles.

B. $1,200 paid to repair a machine last year.

How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio? A. 5 B. 10 C. 25 D. 50 E. 75

B. 10

Which one of the following statements is correct concerning bid prices? A. The bid price is the maximum price that a firm should bid. B. A firm can submit a bid that is higher than the computed bid price and still break even. C. A bid price ignores taxes. D. A bid price should be computed based solely on the operating cash flows of the project. E. A bid price should be computed based on a zero percent required rate of return.

B. A firm can submit a bid that is higher than the computed bid price and still break even.

Which one of the following statements is correct? A. Project analysis should only include the cash flows that affect the income statement. B. A project can create a positive operating cash flow without affecting sales. C. The depreciation tax shield creates a cash outflow for a project. D. Interest expense should always be included as a cash outflow when analyzing a project. E. The opportunity cost of a company-owned building that is going to be used in a new project should be included as a cash inflow to the project.

B. A project can create a positive operating cash flow without affecting sales.

Which one of the following is the depreciation method that allows accelerated write-offs of property under various lifetime classifications? A. IRR. B. ACRS. C. AAR. D. Straight-line to zero. E. Straight-line with salvage.

B. ACRS.

Which one of the following statements related to capital gains is correct? A. The capital gains yield includes only realized capital gains. B. An increase in an unrealized capital gain will increase the capital gains yield. C. The capital gains yield must be either positive or zero. D. The capital gains yield is expressed as a percentage of a security's total return. E. The capital gains yield represents the total return earned by an investor.

B. An increase in an unrealized capital gain will increase the capital gains yield.

Systematic risk is measured by: A. The mean. B. Beta. C. The geometric average. D. The standard deviation. E. The arithmetic average.

B. Beta.

Assume you are considering two mutually exclusive machines and need to select one for a cost-cutting project. Which one of these sets of characteristics best indicates the use of the equivalent annual cost method of analysis? A. Differing costs with no replacement at end of life. B. Differing lives and planned replacement at end of life. C. Differing lives with no replacement at end of life. D. Differing manufacturers and differing operating costs. E. Differing required returns with no replacement at end of life.

B. Differing lives and planned replacement at end of life.

At a minimum, which of the following would you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset? I. Asset's standard deviation. II. Asset's beta. III. Risk-free rate of return. IV. Market risk premium. A. I and III only. B. II and IV only. C. III and IV only. D. I, III, and IV only. E. I, II, III, and IV.

B. II and IV only.

To convince investors to accept greater volatility, you must: A. Decrease the risk premium. B. Increase the risk premium. C. Decrease the real return. D. Decrease the risk-free rate. E. Increase the risk-free rate.

B. Increase the risk premium.

All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0? A. Loan obtained to finance the project B. Initial investment in inventory to support the project C. Annual depreciation tax shield D. Aftertax salvage value E. Net working capital recovery

B. Initial investment in inventory to support the project

Individual investors who continually monitor the financial markets seeking mispriced securities: A. Earn excess profits on all of their investments. B. Make the markets increasingly more efficient. C. Are never able to find a security that is temporarily mispriced. D. Are overwhelmingly successful in earning abnormal profits. E. Are always quite successful using only historical price information as their basis of evaluation.

B. Make the markets increasingly more efficient.

Estimates of the rate of return on a security based on the historical arithmetic average will probably tend to _____ the expected return for the long-term and estimates using the historical geometric average will probably tend to _____ the expected return for the short-term. A. Overestimate; overestimate B. Overestimate; underestimate C. Underestimate; overestimate D. Underestimate; underestimate E. Accurately; accurately

B. Overestimate; underestimate

Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total. Which one of the following terms most applies to Suzie's investments? A. Index B. Portfolio C. Collection D. Grouping E. Risk-free

B. Portfolio

Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following? A. Portfolio return B. Portfolio weight C. Degree of risk D. Price-earnings ratio E. Index value

B. Portfolio weight

Which one of the following should earn the most risk premium based on CAPM? A. Diversified portfolio with returns similar to the overall market. B. Stock with a beta of 1.38. C. Stock with a beta of 0.74. D. U.S. Treasury bill. E. Portfolio with a beta of 1.01.

B. Stock with a beta of 1.38.

Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage? A. Hiring additional employees rather than using temporary outside contractors. B. Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house. C. Buying equipment rather than leasing it short-term. D. Lowering the projected selling price per unit. E. Changing the proposed labor-intensive production method to a more capital intensive method.

B. Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house.

Which one of the following statements is a correct reflection of the U.S. markets for the period 1926-2013? A. U.S. Treasury bill returns never exceeded a 9 percent return in any one year during the period. B. U.S. Treasury bills provided a positive rate of return each and every year during the period. C. Inflation equaled or exceeded the return on U.S. Treasury bills every year during the period. D. Long-term government bonds outperformed U.S. Treasury bills every year during the period. E. National deflation occurred at least once every decade during the period.

B. U.S. Treasury bills provided a positive rate of return each and every year during the period.

Which one of the following risks is irrelevant to a well-diversified investor? A. Systematic risk. B. Unsystematic risk. C. Market risk. D. Non diversifiable risk. E. Systematic portion of a surprise

B. Unsystematic risk.

Standard deviation is a measure of which one of the following? A. Average rate of return B. Volatility C. Probability D. Risk premium E. Real returns

B. Volatility

A company that utilizes the MACRS system of depreciation: A. Will have equal depreciation costs each year of an asset's life. B. Will have a greater depreciation tax shield in year 2 than in year 1. C. Can depreciate the cost of land. D. Will expense less than the entire cost of an asset. E. Will fully depreciate a MACRS 5-year asset within 5 years.

B. Will have a greater depreciation tax shield in year 2 than in year 1.

The degree of operating leverage is equal to: A. 1 + OCF / (FC + VC). B. 1 + OCF / FC. C. 1 + FC/OCF. D. 1 + VC/OCF. E. 1 - (FC + VC)/OCF.

C. 1 + FC/OCF.

Which one of the following time periods is associated with low rates of inflation? A. 1941-1942 B. 1974-1976 C. 2010-2013 D. 1980-1984 E. 1988-1990

C. 2010-2013

A stock with an actual return that lies above the security market line has: A. More systematic risk than the overall market. B. More risk than that warranted by CAPM. C. A higher return than expected for the level of risk assumed. D. Less systematic risk than the overall market. E. A return equivalent to the level of risk assumed.

C. A higher return than expected for the level of risk assumed.

Which one of the following would make a mutually exclusive project unacceptable? A. Cash inflow for net working capital at time zero. B. Requiring fixed assets that would have no salvage value. C. An equivalent annual cost that exceeds that of an alternative project. D. Lack of revenue generation. E. A depreciation tax shield that exceeds the value of the interest expense.

C. An equivalent annual cost that exceeds that of an alternative project.

Assume you invest in a portfolio of U. S. Treasury bills and that the portfolio will earn a rate of return similar to the average return on U.S. Treasury bills for the period 1926-2013. What rate of return should you expect to earn? A. Less than 2 percent B. Between 2 and 3 percent C. Between 3 and 4 percent D. Between 4 and 5 percent E. More than 5 percent

C. Between 3 and 4 percent

Given the following, which feature identifies the most desirable level of output for a project? A. Operating cash flow equal to the depreciation expense. B. Payback period equal to the project's life. C. Discounted payback period equal to the project's life. D. Zero IRR. E. Zero operating cash flow.

C. Discounted payback period equal to the project's life.

The primary purpose of portfolio diversification is to: A. Increase returns and risks. B. Eliminate all risks. C. Eliminate asset-specific risk. D. Eliminate systematic risk. E. Lower both returns and risks.

C. Eliminate asset-specific risk.

Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs and machine lives, and will be replaced when worn out. Which one of the following computational methods should Dan use as the basis for his decision? A. Internal rate of return. B. Net present value. C. Equivalent annual cost. D. Depreciation tax shield. E. Bottom-up operating cash flow.

C. Equivalent annual cost.

Which one of the following is most directly affected by the level of systematic risk in a security? A. Variance of the returns. B. Standard deviation of the returns. C. Expected rate of return. D. Risk-free rate. E. Market risk premium.

C. Expected rate of return.

The capital asset pricing model (CAPM) assumes which of the following? I. A risk-free asset has no systematic risk. II. Beta is a reliable estimate of total risk. III. The reward-to-risk ratio is constant. IV. The market rate of return can be approximated. A. I and III only. B. II and IV only. C. I, III, and IV only. D. II, III, and IV only. E. I, II, III, and IV.

C. I, III, and IV only.

Which of the following values will be equal to zero when a firm is operating at the accounting break-even level of output? A. IRR and OCF. B. Net income and contribution margin. C. IRR and net income. D. OCF and NPV. E. Net income and NPV.

C. IRR and net income.

Forecasting risk is defined as the possibility that: A. Some proposed projects will be rejected. B. Some proposed projects will be temporarily delayed. C. Incorrect decisions will be made due to erroneous cash flow projections. D. Some projects will be mutually exclusive. E. Tax rates could change over the life of a project.

C. Incorrect decisions will be made due to erroneous cash flow projections.

As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return. A. Greater than. B. Equal to. C. Less than. D. Greater than or equal to. E. Unrelated to.

C. Less than.

The expected rate of return on a stock portfolio is a weighted average where the weights are based on the: A. Number of shares owned of each stock. B. Market price per share of each stock. C. Market value of the investment in each stock. D. Original amount invested in each stock. E. Cost per share of each stock held.

C. Market value of the investment in each stock.

Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero? A. EBIT + Depreciation B. EBIT - Taxes C. Net income + Depreciation D. (Sales - Costs) ×(1 - Depreciation) ×(1- Taxes) E. (Sales - Costs) ×(1 - Taxes)

C. Net income + Depreciation

The contribution margin per unit is equal to the: A. Sales price per unit minus the total costs per unit. B. Variable cost per unit minus the fixed cost per unit. C. Sales price per unit minus the variable cost per unit. D. Pretax profit per unit. E. Aftertax profit per unit.

C. Sales price per unit minus the variable cost per unit.

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? A. Providing both ketchup and mustard for customers' use. B. Repairing the roof of the hot dog stand because of water damage. C. Selling fewer hot dogs because hamburgers were added to the menu. D. Offering French fries but not onion rings. E. Losing sales due to bad weather.

C. Selling fewer hot dogs because hamburgers were added to the menu.

Which one of the following earned the highest risk premium over the period 1926-2013? A. Long-term corporate bonds B. U.S. Treasury bills C. Small-company stocks D. Large-company stocks E. Long-term government bonds

C. Small-company stocks

The procedure of allocating a fixed amount of funds for capital spending to each business unit is called: A. Marginal spending. B. Capital preservation. C. Soft rationing. D. Hard rationing. E. Marginal rationing.

C. Soft rationing.

Which one of the following costs was incurred in the past and cannot be recouped? A. Incremental. B. Side. C. Sunk. D. Opportunity. E. Erosion.

C. Sunk.

Which one of the following is a risk that applies to most securities? A. Unsystematic B. Diversifiable C. Systematic D. Asset-specific E. Total

C. Systematic

Which one of the following best describes the concept of erosion? A. Expenses that have already been incurred and cannot be recovered. B. Change in net working capital related to implementing a new project. C. The cash flows of a new project that come at the expense of a firm's existing cash flows. D. The alternative that is forfeited when a fixed asset is utilized by a project. E. The differences in a firm's cash flows with and without a particular project.

C. The cash flows of a new project that come at the expense of a firm's existing cash flows.

The bid price always assumes which one of the following? A. A project has a one-year life. B. The aftertax net income of the project is zero. C. The net present value of the project is zero. D. Any assets purchased will have a positive salvage value at the end of the project. E. Assets will be depreciated based on MACRS.

C. The net present value of the project is zero.

Which one of the following is most indicative of a totally efficient stock market? A. Extraordinary returns earned on a routine basis B. Positive net present values on stock investments over the long-term C. Zero net present values for all stock investments D. Arbitrage opportunities which develop on a routine basis E. Realizing negative returns on a routine basis

C. Zero net present values for all stock investments

What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average? A. 1.0 percent B. 2.5 percent C. 5.0 percent D. 16 percent E. 32 percent

D. 16 percent

Which one of the following is the best example of a diversifiable risk? A. Interest rates increase. B. Energy costs increase. C. Core inflation increases. D. A firm's sales decrease. E. Taxes decrease.

D. A firm's sales decrease.

What was the average rate of inflation over the period of 1926-2013? A. Less than 2.0 percent B. Between 2.0 and 2.4 percent C. Between 2.4 and 2.8 percent D. Between 2.8 and 3.2 percent E. Greater than 3.2 percent

D. Between 2.8 and 3.2 percent

Net working capital: A. Can be ignored in project analysis because any expenditure is normally recouped at the end of the project. B. Requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project. C. Is rarely affected when a new product is introduced. D. Can create either an initial cash inflow or outflow. E. Is the only expenditure where at least a partial recovery can be made at the end of a project.

D. Can create either an initial cash inflow or outflow.

Which of the following variables will be forecast at their highest expected level under a worst case scenario? A. Fixed costs and salvage value. B. Variable costs and sales price. C. Fixed costs and sales price. D. Fixed and variable costs. E. Initial cost and salvage value.

D. Fixed and variable costs.

The average compound return earned per year over a multiyear period is called the _____ average return. A. Arithmetic B. Standard C. Variant D. Geometric E. Real

D. Geometric

Which one of the following is an example of diversifiable risk? I Earthquake damages an entire town. II Federal government imposes a $100 fee on all business entities III Employment taxes increase nationally. IV Toymakers are required to improve their safety standards. A. I and III only. B. II and IV only. C. II and III only D. I and IV only. E. I, III, and IV only

D. I and IV only.

By definition, which one of the following must equal zero at the accounting break-even point? A. Net present value. B. Internal rate of return. C. Contribution margin. D. Net income. E. Operating cash flow.

D. Net income.

Uptown Promotions has three divisions. As part of the planning process, the CFO requested that each division submit its capital budgeting proposals for next year. These proposals represent positive net present value projects that fall within the long-range plans of the firm. The requests from the divisions are $4.2 million, $3.1 million, and $6.8 million. For the firm as a whole, management has limited spending to $10 million for new projects next year even though the firm could afford additional investments. This is an example of: A. Scenario analysis. B. Sensitivity analysis. C. An operating leverage application. D. Soft rationing. E. Hard rationing.

D. Soft rationing.

Simulation analysis is based on assigning a _____ and analyzing the results. A. Narrow range of values to a single variable. B. Narrow range of values to multiple variables simultaneously. C. Wide range of values to a single variable. D. Wide range of values to multiple variables simultaneously. E. Single value to each of the variables.

D. Wide range of values to multiple variables simultaneously.

When you assign the highest anticipated sales price and the lowest anticipated costs to a project, you are analyzing the project under the condition known as: A. Best case sensitivity analysis. B. Worst case sensitivity analysis. C. Best case scenario analysis. D. Worst case scenario analysis. E. Base case scenario analysis.

D. Worst case scenario analysis.

P.A. Petroleum just purchased some equipment at a cost of $67,000. The equipment is classified as MACRS 5-year property. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for years 1 to 6, respectively. What is the proper methodology for computing the depreciation expense for year 2? A. $67,000 ×(1 - .20) ×.32 B. $67,000 / (1 - .20 - .32) C. $67,000 ×(1 + .32) D. $67,000 ×(1 - .32) E. $67,000 ×.32

E. $67,000 ×.32

Which one of the following indicates a portfolio is being effectively diversified? A. An increase in the portfolio beta. B. A decrease in the portfolio beta. C. An increase in the portfolio rate of return. D. An increase in the portfolio standard deviation. E. A decrease in the portfolio standard deviation.

E. A decrease in the portfolio standard deviation.

Which one of the following will increase a bid price? A. A decrease in the fixed costs. B. A reduction in the net working capital requirement. C. A reduction in the firm's tax rate. D. An increase in the salvage value. E. An increase in the required rate of return.

E. An increase in the required rate of return.

Which one of these is most associated with an IRR of -100 percent? A. Degree of operating leverage. B. Accounting break-even point. C. Contribution margin. D. Simulation analysis. E. Cash break-even point.

E. Cash break-even point.

Which one of the following is an example of unsystematic risk? A. Income taxes are increased across the board. . B. A national sales tax is adopted. C. Inflation decreases at the national level. D. An increased feeling of prosperity is felt around the globe. E. Consumer spending on entertainment decreased nationally.

E. Consumer spending on entertainment decreased nationally.

Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the: A. Average arithmetic return. B. Expected return. C. Market rate of return. D. Internal rate of return. E. Cost of capital.

E. Cost of capital

The equivalent annual cost considers all of the following except the: A. Required rate of return. B. Operating costs. C. Need for replacement. D. Economic life. E. Costs of research conducted to identify equipment choices.

E. Costs of research conducted to identify equipment choices.

PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing: A. Financial deferral. B. Financial allocation. C. Capital allocation. D. Marginal rationing. E. Hard rationing.

E. Hard rationing.

The expected return on a portfolio considers which of the following factors? I Percentage of the portfolio invested in each individual security. II Projected states of the economy. III The performance of each security given various economic states. IV Probability of occurrence for each state of the economy. A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

E. I, II, III, and IV

Assume both the discount and tax rates are positive values. At the financial break-even point, the: A. Payback period equals the project life. B. NPV is negative. C. OCF is zero. D. Contribution margin per unit equals the fixed costs per unit. E. IRR equals the required return.

E. IRR equals the required return.

Pro forma statements for a proposed project should generally do all of the following except: A. Be compiled on a stand-alone basis. B. Include all project-related fixed asset acquisitions and disposals. C. Include all the incremental cash flows related to the project. D. Include taxes. E. Include interest expense.

E. Include interest expense.

Which one of the following statements related to market efficiency tends to be supported by current evidence? A. It is easy for investors to earn abnormal returns. B. Short-run price movements are easy to predict. C. Markets are most likely only weak-form efficient. D. Mispriced stocks are easy to identify. E. Markets tend to respond quickly to new information.

E. Markets tend to respond quickly to new information.

Which one of the following best defines the variance of an investment's annual returns over a number of years? A. The average squared difference between the arithmetic and the geometric average annual returns. B. The squared summation of the differences between the actual returns and the average geometric return. C. The average difference between the annual returns and the average return for the period. D. The difference between the arithmetic average and the geometric average return for the period. E. The average squared difference between the actual returns and the arithmetic average return.

E. The average squared difference between the actual returns and the arithmetic average return.

Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semi strong form efficient. A. Company insiders were aware of the information prior to the announcement B. Investors do not pay attention to daily news C. Investors tend to overreact D. The news was positive E. The information was expected

E. The information was expected

The equivalent annual cost method is useful in determining: A. Which one of two machines to purchase if the machines are mutually exclusive, have differing lives, and are a one-time purchase. B. The operating cash flow for mutually exclusive projects ignoring any fixed asset acquisitions or dispositions. C. The minimum price that should be bid to earn a specified rate of return. D. Which one of two investments to accept when the investments have different required rates of return, different costs, and will not be replaced once they wear out. E. Which one of two machines should be purchased when the machines are mutually exclusive, have different lives, and will be replaced at the end of their lives.

E. Which one of two machines should be purchased when the machines are mutually exclusive, have different lives, and will be replaced at the end of their lives.

The change in revenue that occurs when one more unit of output is sold is referred to as: A. Marginal revenue. B. Average revenue. C. Total revenue. D. Erosion. E. Scenario revenue.

A. Marginal revenue.

Total risk is measured by _____ and systematic risk is measured by _____. A. Beta; alpha. B. Beta; standard deviation. C. Alpha; beta. D. Standard deviation; beta. E. Standard deviation; variance.

D. Standard deviation; beta.

Which one of the following is least apt to reduce the unsystematic risk of a portfolio? A. Reducing the number of stocks held in the portfolio. B. Adding bonds to a stock portfolio. C. Adding international securities into a portfolio of U.S. stocks. D. Adding U.S. treasury bills to a risky portfolio. E. Adding technology stocks to a portfolio of industrial stocks.

A. Reducing the number of stocks held in the portfolio.

Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return? A. Risk premium B. Geometric return C. Arithmetic D. Standard deviation E. Variance

A. Risk premium

Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk? A. Capital asset pricing model B. Time value of money equation C. Unsystematic risk equation D. Market performance equation E. Expected risk formula

A. Capital asset pricing model

Which one of the following characteristics best describes a project that has a low degree of operating leverage? A. High variable costs relative to the fixed costs. B. Relatively high initial cash outlay. C. OCF that is highly sensitive to the sales quantity. D. High level of forecasting risk. E. High depreciation expense.

A. High variable costs relative to the fixed costs.

The top-down approach to computing the operating cash flow: A. Ignores noncash expenses. B. Applies only if a project affects sales. C. Applies only to cost cutting projects. D. Is equal to sales - costs - taxes + depreciation. E. Is used solely to compute a bid price.

A. Ignores noncash expenses.

The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's: A. Incremental cash flows. B. Internal cash flows. C. External cash flows. D. Erosion effects. E. Financing cash flows.

A. Incremental cash flows.

Which one of the following is an example of systematic risk? A. Investors panic causing security prices around the globe to fall precipitously. B. A flood washes away a firm's warehouse. C. A city imposes an additional one percent sales tax on all products. D. A toymaker has to recall its top-selling toy. E. Corn prices increase due to increased demand for alternative fuels.

A. Investors panic causing security prices around the globe to fall precipitously.

The market rate of return is 11 percent and the risk-free rate of return is 3 percent. Lexant stock has 3 percent less systematic risk than the market and has an actual return of 12 percent. This stock: A. Is underpriced. B. Is correctly priced. C. Will plot below the security market line. D. Will plot on the security market line. E. Will plot to the right of the overall market on a security market line graph.

A. Is underpriced.

Which one of the following statements is correct based on the period 1926-2013? A. Long-term government bonds had more volatile annual returns than did the long-term corporate bonds. B. The standard deviation of the annual rate of inflation was less than 3 percent. C. The geometric average annual return on large-company stocks was higher than the average arithmetic return on those same stocks. D. The risk premium on small-company stocks was less than 10 percent. E. The risk Premium on all U.S. government securities is 0 percent. Refer to sections 12.3 and 12.4.

A. Long-term government bonds had more volatile annual returns than did the long-term corporate bonds.

You are considering a project and are concerned about the reliability of the cash flow forecasts. To reduce any potentially harmful results from accepting this project, you should consider: A. Lowering the degree of operating leverage. B. Lowering the contribution margin per unit. C. Increasing the initial cash outlay. D. Increasing the fixed costs per unit. E. Lowering the operating cash flow.

A. Lowering the degree of operating leverage.

The change in variable costs that occurs when production is increased by one unit is referred to as the: A. Marginal cost. B. Average cost. C. Total cost. D. Scenario cost. E. Net cost.

A. Marginal cost.

Three years ago, Knox Glass purchased a machine for a three-year project. The machine is being depreciated straight-line to zero over a five-year period. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate) A. Sale price + (Sale price - Book value) ×T B. Sale price + (Sale price - Book value) ×(1 - T) C. Sale price + (Book value - Sale price) ×T D. Sale price + (Book value - Sale price) ×(1 - T) E. Sale price ×(1 - T)

A. Sale price + (Sale price - Book value) ×T

A decrease in which one of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used and ignore taxes. A. Sales price per unit. B. Management salaries. C. Variable labor costs per unit. D. Initial fixed asset purchases. E. Fixed costs.

A. Sales price per unit.

A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the key aspect of each project in an attempt to maximize their firm's value. Given this specific desire, which type of analysis should they require for each project and why? A. Sensitivity analysis; to identify the key variable that affects a project's profitability. B. Scenario analysis; to guarantee each project will be profitable. C. Cash breakeven; to ensure the firm recoups its initial investment. D. Accounting breakeven; to ensure each project earns its required rate of return. E. Financial breakeven; to ensure each project has a positive NPV.

A. Sensitivity analysis; to identify the key variable that affects a project's profitability.

Which one of the following characteristics relates to the cash break-even point for a given project? I. The project never pays back. II. The IRR equals the required rate of return. III. The NPV is equal to zero. IV. The operating cash flow is equal to the depreciation expense. A. The project never pays back. B. The discounted payback period equals the project's life. C. The NPV is equal to zero. D. The IRR equals the required rate of return. E. The OCF is equal to the depreciation expense.

A. The project never pays back.

The intercept point of the security market line is the rate of return which corresponds to: A. The risk-free rate. B. The market rate. C. A return of zero. D. A return of 1.0 percent. E. The market risk premium.

A. The risk-free rate.

28. Dependable Motors just purchased some MACRS 5-year property at a cost of $216,000. The MACRS rates are .2, .32, and .192 for years 1 to 3, respectively. Which one of the following will correctly give you the book value of this equipment at the end of year 2? A. $216,000 / (1 + .2 + .32) B. $216,000 ×(1 - .2 - .32) C. $216,000 ×(.20 + .32) D. [$216,000 ×(1 - .20)] ×(1 - .32) E. $216,000 / [(1 + .20)(1 + .32)]

B. $216,000 ×(1 - .2 - .32)

The average annual return on small-company stocks was about _____ percent greater than the average annual return on large-company stocks over the period 1926-2013. A. 3 B. 5 C. 7 D. 9 E. 11

B. 5

Which one of the following statements is correct concerning a portfolio beta? A. Portfolio betas range between -1.0 and +1.0. B. A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio. C. A portfolio beta cannot be computed from the betas of the individual securities comprising the portfolio because some risk is eliminated via diversification. D. A portfolio of U.S. Treasury bills will have a beta of +1.0. E. The beta of a market portfolio is equal to zero.

B. A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio.

Fixed costs: A. Change as a small quantity of output produced changes. B. Are constant over the short-run regardless of the quantity of output produced. C. Are defined as the change in total costs when one more unit of output is produced. D. Are subtracted from sales to compute the contribution margin. E. Can be ignored in scenario analysis since they are constant over the life of a project.

B. Are constant over the short-run regardless of the quantity of output produced.

Which of the following statements are true based on the historical record for 1926-2013? A. Risk-free securities produce a positive real rate of return each year. B. Bonds are generally a safer investment than are stocks. C. Risk and potential reward are inversely related. D. The normal distribution curve for large-company stocks is narrower than the curve for small-company stocks. E. Returns are more predictable over the short term than they are over the long term.

B. Bonds are generally a safer investment than are stocks.

Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold? A. Degree of sensitivity. B. Degree of operating leverage. C. Accounting break-even. D. Cash break-even. E. Contribution margin.

B. Degree of operating leverage.

Sensitivity analysis determines the: A. Range of possible outcomes given that most variables are reliable only within a stated range. B. Degree to which the net present value reacts to changes in a single variable. C. Net present value range that can be realized from a proposed project. D. Degree to which a project relies on its fixed costs. E. Ideal ratio of variable costs to fixed costs for profit maximization.

B. Degree to which the net present value reacts to changes in a single variable.

Scenario analysis is defined as the: A. Determination of the initial cash outlay required to implement a project. B. Determination of changes in NPV estimates when what-if questions are posed. C. Isolation of the effect that a single variable has on the NPV of a project. D. Separation of a project's sunk costs from its opportunity costs. E. Analysis of the effects that a project's terminal cash flows has on the project's NPV.

B. Determination of changes in NPV estimates when what-if questions are posed.

Which one of the following statements is correct concerning unsystematic risk? A. An investor is rewarded for assuming unsystematic risk. B. Eliminating unsystematic risk is the responsibility of the individual investor. C. Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk. D. Beta measures the level of unsystematic risk inherent in an individual security. E. Standard deviation is a measure of unsystematic risk.

B. Eliminating unsystematic risk is the responsibility of the individual investor.

Operating leverage is the degree of dependence a firm places on its: A. Variable costs. B. Fixed costs. C. Sales. D. Operating cash flows. E. Depreciation tax shield.

B. Fixed costs.

According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the: A. Amount of total risk assumed and the market risk premium. B. Market risk premium and the amount of systematic risk inherent in the security. C. Risk free rate, the market rate of return, and the standard deviation of the security. D. Beta of the security and the market rate of return. E. Standard deviation of the security and the risk-free rate of return.

B. Market risk premium and the amount of systematic risk inherent in the security.

If a stock portfolio is well diversified, then the portfolio variance: A. Will equal the variance of the most volatile stock in the portfolio. B. May be less than the variance of the least risky stock in the portfolio. C. Must be equal to or greater than the variance of the least risky stock in the portfolio. D. Will be a weighted average of the variances of the individual securities in the portfolio. E. Will be an arithmetic average of the variances of the individual securities in the portfolio.

B. May be less than the variance of the least risky stock in the portfolio.

The excess return is computed as the: A. Return on a security minus the inflation rate. B. Return on a risky security minus the risk-free rate. C. Risk premium on a risky security minus the risk-free rate. D. Risk-free rate plus the inflation rate. E. Risk-free rate minus the inflation rate.

B. Return on a risky security minus the risk-free rate.

The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the: A. Market risk premium. B. Risk premium. C. Systematic return. D. Total return. E. Real rate of return.

B. Risk premium.

The expected risk premium on a stock is equal to the expected return on the stock minus the: A. Expected market rate of return. B. Risk-free rate. C. Inflation rate. D. Standard deviation. E. Variance

B. Risk-free rate.

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles? A. Underlying value principle. B. Stand-alone principle. C. Equivalent cost principle. D. Salvage principle. E. Fundamental principle.

B. Stand-alone principle.

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk. A. Efficient markets hypothesis B. Systematic risk principle C. Open markets theorem D. Law of one price E. Principle of diversification

B. Systematic risk principle

The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following? A. Depreciation tax shield. B. Tax due on the salvage value of that asset. C. Current year's operating cash flow. D. Change in net working capital. E. MACRS depreciation for the current year.

B. Tax due on the salvage value of that asset.

The bottom-up approach to computing the operating cash flow applies only when: A. Both the depreciation expense and the interest expense are equal to zero. B. The interest expense is equal to zero. C. The project is a cost-cutting project. D. No fixed assets are required for a project. E. Both taxes and the interest expense are equal to zero.

B. The interest expense is equal to zero.

Efficient financial markets fluctuate continuously because: A. The markets are continually reacting to old information as that information is absorbed. B. The markets are continually reacting to new information. C. Arbitrage trading is limited. D. Current trading systems require human intervention. E. Investments produce varying levels of net present values.

B. The markets are continually reacting to new information.

Which of the following yields on a stock can be negative? A. Dividend yield B. Capital gains yield C. Capital gains yield and total return D. Dividend, capital gains, and total return E. Dividend yield and total return

C. Capital gains yield and total return

Which one of the following is a project cash inflow? Ignore any tax effects. A. Decrease in accounts payable. B. Increase in inventory. C. Decrease in accounts receivable. D. Depreciation expense based on MACRS. E. Equipment acquisition.

C. Decrease in accounts receivable.

If the variability of the returns on large-company stocks were to decrease over the long-term, you would expect which one of the following to occur as a result? A. Increase in the risk premium B. Increase in the average long-term rate of return C. Decrease in the 68 percent probability range of returns D. Increase in the standard deviation E. Increase in the geometric average rate of return

C. Decrease in the 68 percent probability range of returns

Theresa is analyzing a project that currently has a projected NPV of zero. Which one of the following changes that she is considering is most apt to cause that project to produce a positive NPV instead? Consider each change independently. A. Decrease the sales price. B. Increase the materials cost per unit. C. Decrease the labor hours per unit produced. D. Decrease the sales quantity. E. Increase the amount of the initial investment in net working capital.

C. Decrease the labor hours per unit produced.

Bayside Marina just announced it is decreasing its annual dividend from $1.64 per share to $1.50 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price: A. Was unaffected by the announcement. B. Increased proportionately with the dividend decrease. C. Decreased proportionately with the dividend decrease. D. Decreased by $.14 per share. E. Increased by $.14 per share.

C. Decreased proportionately with the dividend decrease.

You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent? A. Arithmetic return B. Historical return C. Expected return D. Geometric return E. Required return

C. Expected return

The CFO of Edward's Food Distributors is continually receiving capital funding requests from its division managers. These requests are seeking funding for positive net present value projects. The CFO continues to deny all funding requests due to the financial situation of the company. Apparently, the company is: A. Operating at the accounting break-even point. B. Operating at the financial break-even point. C. Facing hard rationing. D. Operating with zero leverage. E. Operating at maximum capacity.

C. Facing hard rationing.

Which one of the following best describes pro forma financial statements? A. Financial statements expressed in a foreign currency. B. Financial statements where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales. C. Financial statements showing projected values for future time periods. D. Financial statements expressed in real dollars, given a stated base year. E. Financial statements where all accounts are expressed as a percentage of last year's values.

C. Financial statements showing projected values for future time periods.

As the degree of sensitivity of a project to a single variable rises, the: A. Less important the variable is to the final outcome of the project. B. Less volatile the project's net present value is to that variable. C. Greater is the importance of accurately predicting the value of that variable. D. Greater is the sensitivity of the project to the other variable inputs. E. Less volatile is the project's outcome.

C. Greater is the importance of accurately predicting the value of that variable.

Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The firm is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project? A. Storing supplies in the same space currently used for materials storage. B. Utilizing the basket manager to oversee wreath production. C. Hiring additional employees to handle the increased workload should the firm accept the wreath project. D. Researching the market to determine if wreath sales might be profitable before deciding to proceed. E. Planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt.

C. Hiring additional employees to handle the increased workload should the firm accept the wreath project.

Scenario analysis is best suited to accomplishing which one of the following when analyzing a project? A. Determining how fixed costs affect NPV. B. Estimating the residual value of fixed assets. C. Identifying the potential range of reasonable outcomes. D. Determining the minimal level of sales required to breakeven on an accounting basis. E. Determining the minimal level of sales required to breakeven on a financial basis.

C. Identifying the potential range of reasonable outcomes.

Evidence seems to support the view that studying public information to identify mispriced stocks is: A. Effective as long as the market is only semi strong form efficient. B. Effective provided the market is only weak form efficient. C. Ineffective . D. Effective only in strong form efficient markets. E. Ineffective only in strong form efficient markets.

C. Ineffective .

Webster Iron Works started a new project last year. As it turns out, the project has been operating at its accounting break-even level of output and is now expected to continue at that level over its lifetime. Given this, you know that the project: A. Will never pay back. B. Has a zero net present value. C. Is operating at a higher level than if it were operating at its cash break-even level. D. Is operating at a higher level than if it were operating at its financial break-even level. E. Is lowering the total net income of the firm.

C. Is operating at a higher level than if it were operating at its cash break-even level.

Which one of the following statements is correct based on the historical record for the period 1926-2013? A. The standard deviation of returns for small-company stocks was double that of large-company stocks. B. U.S. Treasury bills had a zero standard deviation of returns because they are considered to be risk-free. C. Long-term government bonds had a lower return but a higher standard deviation on average than did long-term corporate bonds. D. Inflation was less volatile than the returns on U.S. Treasury bills. E. Long-term government bonds underperformed intermediate-term government bonds.

C. Long-term government bonds had a lower return but a higher standard deviation on average than did long-term corporate bonds.

Which one of the following is a correct ranking of securities based on the volatility of their annual returns over the period of 1926-2013? Rank from highest to lowest. A. Large-company stocks, U.S. Treasury bills, long-term government bonds B. Small-company stocks, long-term corporate bonds, large-company stocks C. Long-term government bonds, long-term corporate bonds, intermediate-term government bonds D. Large-company stocks, small-company stocks, long-term government bonds E. Intermediate-term government bonds, long-term corporate bonds, U.S. Treasury bills

C. Long-term government bonds, long-term corporate bonds, intermediate-term government bonds

The real rate of return on a stock is approximately equal to the nominal rate of return: A. Multiplied by (1 + inflation rate). B. Plus the inflation rate. C. Minus the inflation rate. D. Divided by (1 + inflation rate). E. Divided by (1 - inflation rate).

C. Minus the inflation rate.

Which one of the following is defined by its mean and its standard deviation? A. Arithmetic nominal return B. Geometric real return C. Normal distribution D. Variance E. Risk premium

C. Normal distribution

Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly? A. Variance B. Standard deviation C. Reward-to-risk ratio D. Beta E. Risk premium

C. Reward-to-risk ratio

Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances? A. Moving furniture to provide floor space for the appliances. B. Paying the rent for the store. C. Selling furniture to appliance customers. D. Having the current store manager oversee appliance sales. E. Using the store's billing system for appliance sales.

C. Selling furniture to appliance customers.

You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor continually brags to you about the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best _____ form efficient. A. Weak B. Semi weak C. Semi strong D. Strong E. Perfect

C. Semi strong

An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis. A. Forecasting B. Scenario C. Sensitivity D. Simulation E. Break-even

C. Sensitivity

Which one of the following categories of securities had the highest average return for the period 1926-2013? A. U.S. Treasury bills B. Large-company stocks C. Small company stocks D. Long-term corporate bonds E. Long-term government bonds

C. Small company stocks

Small-company stocks, as the term is used in the textbook, are best defined as the: A. 500 newest corporations in the U.S. B. Firms whose stock trades otc. C. Smallest twenty percent of the firms listed on the NYSE. D. Smallest twenty-five percent of the firms listed on NASDAQ. E. Firms whose stock is listed on NASDAQ.

C. Smallest twenty percent of the firms listed on the NYSE.

Which one of the following statements concerning U.S. Treasury bills is correct for the period 1926- 2013? A. The annual rate of return always exceeded the annual inflation rate. B. The average risk premium was .2 percent. C. The annual rate of return was always positive. D. The average excess return was 1.1 percent. E. The average real rate of return was zero.

C. The annual rate of return was always positive.

A project has a projected IRR of negative 100 percent. Which one of the following statements must also be true concerning this project? A. The discounted payback period equals the life of the project. B. The operating cash flow is positive and equal to the depreciation. C. The net present value of the project is negative and equal to the initial investment. D. The payback period is exactly equal to the life of the project. E. The net present value of the project is equal to zero.

C. The net present value of the project is negative and equal to the initial investment.

Dexter Smith & Co. is replacing a machine simply because it has worn out. The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its five-year life. The firm has a 34 percent tax rate, uses straight-line depreciation over an asset's life, and has a positive net income. Given this, which one of the following statements is correct? A. As a project, the new machine has a net present value equal to minus one times the machine's purchase price. B. The new machine will have a zero rate of return. C. The new machine will generate positive operating cash flows. D. The new machine will create a cash outflow when the firm disposes of it at the end of its life. E. The new machine creates erosion effects.

C. The new machine will generate positive operating cash flows.

Which one of the following statements related to risk is correct? A. The beta of a portfolio must increase when a stock with a high standard deviation is added to the portfolio. B. Every portfolio that contains 25 or more securities is free of unsystematic risk. C. The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio. D. Adding five additional stocks to a diversified portfolio will lower the portfolio's beta. E. Stocks that move in tandem with the overall market have zero betas.

C. The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio.

What was the highest annual rate of inflation during the period 1926-2013? A. Between 0 and 3 percent B. Between 3 and 5 percent C. Between 5 and 10 percent D. Between 10 and 15 percent E. Between 15 and 20 percent

E. Between 15 and 20 percent

Which one of the following events would be included in the expected return on Sussex stock? A. The chief financial officer of Sussex unexpectedly resigned. B. The labor union representing Sussex's employees unexpectedly called a strike. C. This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated. D. The price of Sussex stock suddenly declined in value because researchers accidentally discovered that one of the firm's products can be toxic to household pets. E. The board of directors made an unprecedented decision to give sizeable bonuses to the firm's internal auditors for their efforts in uncovering wasteful spending.

C. This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated.

Variable costs can be defined as the costs that: A. Remain constant for all time periods. B. Remain constant over the short run. C. Vary directly with sales. D. Are classified as noncash expenses. E. Are inversely related to the number of units sold.

C. Vary directly with sales.

Which one of the following statements is correct concerning market efficiency? A. Real asset markets are more efficient than financial markets. B. If a market is efficient, arbitrage opportunities should be common. C. In an efficient market, some market participants will have an advantage over others. D. A firm will generally receive a fair price when it issues new shares of stock if the market is efficient. E. New information will gradually be reflected in a stock's price to avoid any sudden change in the price of the stock if the market is efficient.

D. A firm will generally receive a fair price when it issues new shares of stock if the market is efficient.

The expected return on a stock computed using economic probabilities is: A. Guaranteed to equal the actual average return on the stock for the next five years. B. Guaranteed to be the minimal rate of return on the stock over the next two years. C. Guaranteed to equal the actual return for the immediate twelve month period. D. A mathematical expectation based on a weighted average and not an actual anticipated outcome. E. The actual return you should anticipate as long as the economic forecast remains constant.

D. A mathematical expectation based on a weighted average and not an actual anticipated outcome.

Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the: A. Method of analysis used to make the decision. B. Initial cash outflow. C. Ability to recoup any investment in net working capital. D. Accuracy of the projected cash flows. E. Length of the project.

D. Accuracy of the projected cash flows.

Which one of the following statements best defines the efficient market hypothesis? A. Efficient markets limit competition. B. Security prices in efficient markets remain steady as new information becomes available. C. Mispriced securities are common in efficient markets. D. All securities in an efficient market are zero net present value investments. E. Profits are removed as a market incentive when markets become efficient.

D. All securities in an efficient market are zero net present value investments.

The depreciation tax shield is best defined as the: A. Amount of tax that is saved when an asset is purchased. B. Tax that is avoided when an asset is sold as salvage. C. Amount of tax that is due when an asset is sold. D. Amount of tax that is saved because of the depreciation expense. E. Amount by which the aftertax depreciation expense lowers net income.

D. Amount of tax that is saved because of the depreciation expense.

The reward-to-risk ratio for stock A is less than the reward-to-risk ratio of stock B. Stock A has a beta of 0.82 and stock B has a beta of 1.29. This information implies that: A. Stock A is riskier than stock B and both stocks are fairly priced. B. Stock A is less risky than stock B and both stocks are fairly priced. C. Either stock A is underpriced or stock B is overpriced or both. D. Either stock A is overpriced or stock B is underpriced or both. E. Both stock A and stock B are correctly priced since stock A is riskier than stock B.

D. Either stock A is overpriced or stock B is underpriced or both.

Decreasing which one of the following will increase the acceptability of a project? A. Sunk costs. B. Salvage value. C. Depreciation tax shield. D. Equivalent annual cost. E. Accounts payable requirement.

D. Equivalent annual cost.

Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement? A. Capital break-even. B. Cash break-even. C. Accounting break-even. D. Financial break-even. E. Internal break-even.

D. Financial break-even.

Which of the following statements are correct concerning diversifiable risks? I. Diversifiable risks can be essentially eliminated by investing in 30 unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk. A. I and III only. B. II and IV only. C. I and IV only. D. I, II and III only. E. I, II, III, and IV.

D. I, II and III only.

The expected return on a portfolio: I Can never exceed the expected return of the best performing security in the portfolio. II Must be equal to or greater than the expected return of the worst performing security in the portfolio. III Is independent of the unsystematic risks of the individual securities held in the portfolio. IV Is independent of the allocation of the portfolio amongst individual securities. A. I and III only. B. II and IV only C. I and II only. D. I, II, and III only. E. I, II, III, and IV.

D. I, II, and III only.

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs? A. Sunk. B. Total. C. Variable. D. Incremental. E. Fixed.

D. Incremental.

The operating cash flow for a project should exclude which one of the following? A. Taxes. B. Variable costs. C. Fixed costs. D. Interest expense. E. Depreciation tax shield.

D. Interest expense.

Which one of the following should not be included in the analysis of a new product? A. Increase in accounts payable for new product inventory purchases. B. Reduction in sales for a current product once the new product is introduced. C. Market value of a machine owned by the firm which will be used to produce the new product. D. Money already spent for research and development of the new product. E. Increase in accounts receivable needed to finance sales of the new product.

D. Money already spent for research and development of the new product.

Which of the following are inversely related to variable costs per unit? A. Sales quantity and sales price. B. Net profit per unit and sales quantity. C. Operating cash flow and sales quantity. D. Operating cash flow per unit and contribution margin per unit. E. Contribution margin per unit and marginal costs.

D. Operating cash flow per unit and contribution margin per unit.

The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following? A. Salvage value. B. Wasted value. C. Sunk cost. D. Opportunity cost. E. Erosion.

D. Opportunity cost.

The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly. A. Real return B. Actual return C. Nominal return D. Risk premium E. Expected return

D. Risk premium

Which one of the following statements concerning scenario analysis is correct? A. The pessimistic case scenario determines the maximum loss, in current dollars, that a firm could possibly incur from a given project. B. Scenario analysis defines the entire range of results that could be realized from a proposed investment project. C. Scenario analysis determines which variable has the greatest impact on a project's final outcome. D. Scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions. E. Management is guaranteed a positive outcome for a project when the worst- case scenario produces a positive NPV.

D. Scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions.

Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas? A. Reward-to-risk matrix B. Portfolio weight graph C. Normal distribution D. Security market line E. Market real returns

D. Security market line

Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project? A. Scenario B. Simulation C. Break-even D. Sensitivity E. Cash flow

D. Sensitivity

An analysis that combines scenario analysis with sensitivity analysis is called _____ analysis. A. Forecasting B. Combined C. Complex D. Simulation E. Break-even

D. Simulation

The historical record for the period 1926-2013 supports which one of the following statements? A. When large-company stocks have a negative return, they will have a negative return for at least two consecutive years. B. The return on U.S. Treasury bills exceeds the inflation rate by at least .5 percent each year. C. There was only one year during the period when double-digit inflation occurred. D. Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year. E. The inflation rate was positive each year throughout the period.

D. Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year.

The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than _____ form efficient. A. Weak B. Semi weak C. Semi strong D. Strong E. Perfect

D. Strong

Inside information has the least value when financial markets are: A. Weak form efficient. B. Semi weak form efficient. C. Semi strong form efficient. D. Strong form efficient. E. Inefficient.

D. Strong form efficient.

The market risk premium is computed by: A. Adding the risk-free rate of return to the inflation rate. B. Adding the risk-free rate of return to the market rate of return. C. Subtracting the risk-free rate of return from the inflation rate. D. Subtracting the risk-free rate of return from the market rate of return. E. Multiplying the risk-free rate of return by a beta of 1.0.

D. Subtracting the risk-free rate of return from the market rate of return.

A project has a payback period that exactly equals the project's life. The project is operating at: A. Its maximum capacity. B. The financial break-even point. C. The cash break-even point. D. The accounting break-even point. E. A zero level of output.

D. The accounting break-even point.

Stacy purchased a stock last year and sold it today for $3 a share more than her purchase price. She received a total of $.75 in dividends. Which one of the following statements is correct in relation to this investment? A. The dividend yield is expressed as a percentage of the selling price. B. The capital gain would have been less had Stacy not received the dividends. C. The total dollar return per share is $3. D. The capital gains yield is positive. E. The dividend yield is greater than the capital gains yield.

D. The capital gains yield is positive.

Which one of the following will be used in the computation of the best-case analysis of a proposed project? A. Minimal number of units that are expected to be produced and sold. B. The lowest expected salvage value that can be obtained for a project's fixed assets. C. The most anticipated sales price per unit. D. The lowest variable cost per unit that can reasonably be expected. E. The highest level of fixed costs that is actually anticipated.

D. The lowest variable cost per unit that can reasonably be expected.

Which one of the following had the least volatile annual returns over the period of 1926-2013? A. Large-company stocks B. Inflation C. Long-term corporate bonds D. U.S. Treasury bills E. Intermediate-term government bonds

D. U.S. Treasury bills

A news flash just appeared that caused about a dozen stocks to suddenly drop in value by 20 percent. What type of risk does this news flash best represent? A. Portfolio B. Non diversifiable C. Market D. Unsystematic E. Total

D. Unsystematic

The expected return on a stock given various states of the economy is equal to the: A. Highest expected return given any economic state. B. Arithmetic average of the returns for each economic state. C. Summation of the individual expected rates of return. D. Weighted average of the returns for each economic state. E. Return for the economic state with the highest probability of occurrence.

D. Weighted average of the returns for each economic state.

The standard deviation of a portfolio: A. Is a weighted average of the standard deviations of the individual securities held in the portfolio. B. Can never be less than the standard deviation of the most risky security in the portfolio. C. Must be equal to or greater than the lowest standard deviation of any single security held in the portfolio. D. Is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio. E. Can be less than the standard deviation of the least risky security in the portfolio.

E. Can be less than the standard deviation of the least risky security in the portfolio.

The standard deviation of a portfolio: A. Is a measure of that portfolio's systematic risk. B. Is a weighted average of the standard deviations of the individual securities held in that portfolio. C. Measures the amount of diversifiable risk inherent in the portfolio. D. Serves as the basis for computing the appropriate risk premium for that portfolio. E. Can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

E. Can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

The operating cash flow of a cost-cutting project: A. Is equal to the depreciation tax shield. B. Is equal to zero because there is no incremental sales. C. Can only be analyzed by projecting the sales and costs for a firm's entire operations. D. Includes any changes that occur in the current accounts. E. Can be positive even though there are no sales.

E. Can be positive even though there are no sales.

Bell Weather Goods has several proposed independent projects that have positive NPVs. However, the firm cannot initiate any of the projects due to a lack of financing. This situation is referred to as: A. Financial rejection. B. Project rejection. C. Soft rationing. D. Marginal rationing. E. Capital rationing.

E. Capital rationing.

Valerie just completed analyzing a project. Her analysis indicates that the project will have a six-year life and require an initial cash outlay of $320,000. Annual sales are estimated at $589,000 and the tax rate is 34 percent. The net present value is a negative $320,000. Based on this analysis, the project is expected to operate at the: A. Maximum possible level of production. B. Minimum possible level of production. C. Financial break-even point. D. Accounting break-even point. E. Cash break-even point.

E. Cash break-even point.

When the operating cash flow of a project is equal to zero, the project is operating at the: A. Maximum possible level of production. B. Minimum possible level of production. C. Financial break-even point. D. Accounting break-even point. E. Cash break-even point.

E. Cash break-even point.

The net book value of equipment will: A. Remain constant over the life of the equipment. B. Vary in response to changes in the market value. C. Decrease at a constant rate when MACRS depreciation is used. D. Increase over the taxable life of an asset. E. Decrease slower under straight-line depreciation than under MACRS.

E. Decrease slower under straight-line depreciation than under MACRS.

Increasing which one of the following will increase the operating cash flow assuming that the bottom-up approach is used to compute the operating cash flow? A. Erosion effects. B. Taxes. C. Fixed expenses. D. Salaries. E. Depreciation expense.

E. Depreciation expense.

Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions? A. Riskless market B. Evenly distributed market C. Zero volatility market D. Blume's market E. Efficient capital market

E. Efficient capital market

The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following? A. Yearly incremental costs. B. Sunk costs. C. Opportunity costs. D. Erosion cost. E. Equivalent annual cost.

E. Equivalent annual cost.

Assume a project has a discounted payback that equals the project's life. The project's sales quantity must be at which one of these break-even points? A. Accounting B. Leveraged C. Marginal D. Cash E. Financial

E. Financial

You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value. To determine that sales level you should compute the: A. Contribution margin per unit and set that margin equal to the fixed costs per unit. B. Degree of operating leverage at the current sales level. C. Accounting break-even point. D. Cash break-even point. E. Financial break-even point.

E. Financial break-even point.

Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights? A. Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market. B. The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved. C. Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio. D. The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified. E. Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.

E. Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.

Generally speaking, which of the following most correspond to a wide frequency distribution? I. relatively low risk II. relatively low rate of return III. relatively high standard deviation IV. relatively large risk premium A. High standard deviation, low rate of return B. Low rate of return, large risk premium C. Small risk premium, high rate of return D. Small risk premium, low standard deviation E. High standard deviation, large risk premium

E. High standard deviation, large risk premium

Which one of these combinations must increase the contribution margin? A. Increasing both the sales price and the variable cost per unit B. Increasing the sales quantity and decreasing the variable cost per unit. C. Decreasing the sales price and increasing the sales quantity. D. Decreasing both fixed costs and depreciation expense. E. Increasing the sales price and decreasing the variable cost per unit.

E. Increasing the sales price and decreasing the variable cost per unit.

The base case values used in scenario analysis are the values considered to be the most: A. Optimistic. B. Desired by management. C. Pessimistic. D. Likely to create a positive net present value. E. Likely to occur.

E. Likely to occur.

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine that has the: A. Longest life. B. Highest annual operating cost. C. Lowest annual operating cost. D. Highest equivalent annual cost. E. Lowest equivalent annual cost.

E. Lowest equivalent annual cost.

The president of Global Wholesalers would like to offer special sale prices to the firm's best customers under the following terms: 1. The prices will apply only to units purchased in excess of the quantity normally purchased by a customer. 2. The units purchased must be paid for in cash at the time of sale. 3. The total quantity sold under these terms cannot exceed the excess capacity of the firm. 4. The net profit of the firm should not be affected. 5. The prices will be in effect for one week only. Given these conditions, the special sale price should be set equal to the: A. Average variable cost of materials only. B. Average cost of all variable inputs. C. Sensitivity value of the variable costs. D. Marginal cost of materials only. E. Marginal cost of all variable inputs.

E. Marginal cost of all variable inputs.

Steve, the sales manager for TL Products, wants to sponsor a one-week "Customer Appreciation Sale" where the firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits. Which one of the following represents the price that should be charged for the additional units during this sale? A. Average variable cost. B. Average total cost. C. Average total revenue. D. Marginal revenue. E. Marginal cost.

E. Marginal cost.

Which one of the following is represented by the slope of the security market line? A. Reward-to-risk ratio B. Market standard deviation C. Beta coefficient D. Risk-free interest rate E. Market risk premium

E. Market risk premium

By definition, which one of the following must equal zero at the cash break-even point? A. Net present value. B. Internal rate of return. C. Contribution margin. D. Net income. E. Operating cash flow.

E. Operating cash flow.

Which one of the following statements is correct? A. The unexpected return is always negative. B. The expected return minus the unexpected return is equal to the total return. C. Over time, the average return is equal to the unexpected return. D. The expected return includes the surprise portion of news announcements. E. Over time, the average unexpected return will be zero.

E. Over time, the average unexpected return will be zero.

The primary purpose of Blume's formula is to: A. Compute an accurate historical rate of return. B. Determine a stock's true current value. C. Consider compounding when estimating a rate of return. D. Determine the actual real rate of return. E. Project future rates of return.

E. Project future rates of return.

Steve is fairly cautious when analyzing a new project and thus he projects the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected. Which type of analysis is Steve using? A. Simulation testing. B. Sensitivity analysis. C. Break-even analysis. D. Rationing analysis. E. Scenario analysis.

E. Scenario analysis.

Which one of the following types of analysis is the most complex to conduct? A. Scenario B. Break-even C. Sensitivity D. Degree of operating leverage E. Simulation

E. Simulation

Which one of the following categories of securities had the most volatile annual returns over the period 1926-2013? A. Long-term corporate bonds B. Large-company stocks C. Intermediate-term government bonds D. U.S. Treasury bills E. Small-company stocks

E. Small-company stocks

Brubaker & Goss has received requests for capital investment funds for next year from each of its five divisions. All requests represent positive net present value projects. All projects are independent. Senior management has decided to allocate the available funds based on the profitability index of each project since the company has insufficient funds to fulfill all of the requests. Management is following a practice known as: A. Scenario analysis. B. Sensitivity analysis. C. Leveraging. D. Hard rationing. E. Soft rationing.

E. Soft rationing.

The principle of diversification tells us that: A. Concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk. B. Concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. C. Spreading an investment across five diverse companies will not lower the total risk. D. Spreading an investment across many diverse assets will eliminate all of the systematic risk. E. Spreading an investment across many diverse assets will eliminate some of the total risk.

E. Spreading an investment across many diverse assets will eliminate some of the total risk.

G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost? A. Opportunity B. Fixed C. Incremental D. Erosion E. Sunk

E. Sunk

The bid price is: A. An aftertax price. B. The aftertax contribution margin. C. The highest price you should charge if you want to win the bid. D. The only price you can bid if the project is to be profitable. E. The minimum price that will provide your target rate of return.

E. The minimum price that will provide your target rate of return.

Assume you graph a project's net present value given various sales quantities. Which one of the following is correct regarding the resulting function? A. The steepness of the function relates to the project's degree of operating leverage. B. The steeper the function, the less sensitive the project is to changes in the sales quantity. C. The resulting function will be a hyperbole. D. The resulting function will include only positive values. E. The slope of the function measures the sensitivity of the net present value to a change in sales quantity.

E. The slope of the function measures the sensitivity of the net present value to a change in sales quantity.

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2013? A. Long-term government bonds B. Small company stocks C. Large company stocks D. Long-term corporate bonds E. U.S. Treasury bills

E. U.S. Treasury bills

Which one of the following statements correctly applies to the period 1926-2013? A. Large-company stocks earned a higher average risk premium than did small-company stocks. B. The average inflation rate exceeded the average return on U.S. Treasury bills. C. Large-company stocks had an average annual return of 14.7 percent. D. Inflation averaged 2.6 percent for the period. E. U.S. Treasury bills had a positive average real rate of return.

E. U.S. Treasury bills had a positive average real rate of return.

Which one of the following statements related to unexpected returns is correct? A. All announcements by a firm affect that firm's unexpected returns. B. Unexpected returns over time have a negative effect on the total return of a firm. C. Unexpected returns are relatively predictable in the short-term. D. Unexpected returns generally cause the actual return to vary significantly from the expected return over the long-term. E. Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.

E. Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.