Finance Final

Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?

accounts payable

Inflation, recession, and high interest rates are economic events that are best characterized as being

among the factors that are responsible for market risk

Systematic risk is measured by

beta

Which of the following correctly describes the dividend yield?

next years annual dividend divided by today's stock price

A risk averse investor is considering adding one additional stock to an already well-diversified portfolio. All the potential new stocks have the same expected returns of 16%. Which stock should this investor add to his or her portfolio (assuming that expected return is sufficient to compensate for risk)?

one with the smallest beta

Which of the following is an example of a capital market instrument?

preferred stock

The fisher effect is defined as the relationship between which of the following variables?

real rates, inflation rates, and nominal rates

You recently bought 200 shares of apple stock, and the transfer was made through a broker. This is an example of a:

secondary market transaction

If in the opinion of a given investor a stock's expected return exceeds its required return, this suggests that the investor thinks

the stock is a good buy

Which of the following statements is CORRECT? A. Capital market instruments include both long-term debt and common stock B. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade electronically C. An example of primary market transaction would be your parents transferring 100 shares of Amazon stock to you as a birthday gift D. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction E. While frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors

A

Which of the following statements is CORRECT? A. To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital B. To implement the corporate valuation model, we discount net operating profit after taxes (NOPAT) at the weighted average cost of capital C. To implement the corporate valuation model, we discount projected net income at the weighted average cost of capital D. To implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital

A

Stock A's beta is 1.5 and Stock B's beta is 0.8. Which of the following statements must be true, assuming the CAPM is correct A. In equilibrium, the expected return on stock B will be greater than the expected return on stock A B. In equilibrium, the expected return on stock A will be greater than the expected return on Stock B C. Stock A would be a more desirable addition to a portfolio than Stock B D. Stock B would be a more desirable addition to a portfolio than Stok A E. When held in isolation, Stock A has more risk than stock B

B

Which of the following statements is CORRECT? A. When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation B. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation C. If a company's beta decreases, this will decrease the cost of equity used to calculate the WACC, but only if the company does not have enough retained earnings to take care of its equity financing and hence must issue new stock D. Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WACC E. Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock as measured by the CAPM

B

For a company whose target capital structure calls for 45% debt and 55% common equity, which of the following statements is correct?

The cost of equity is always equal to or greater than the cost of debt

If overall interest rates in the economy decrease, a corporate bond with a fixed interest rate will generally

increase in value

Your grandmother has promised to give you $10,000 when you graduate from college. She is expecting you to graduate 2 years from now. What happens to the present value of this gift if you advance your graduation by one year and graduate one year from now?

increases

Which of the following events would make it likely that a company would sell its outstanding callable bonds?

market interest rates decline sharply