Finance Final

Which one of the following is an example of a sunk cost?

$2,000 paid last year to rent equipment

Cerda Diagnostics spent $5,000 last week repairing equipment. This week the company is trying to decide whether the equipment could be better utilized by assigning it to a proposed project. When analyzing the proposed project, the $5,000 should be treated as which type of cost?

Sunk

________ risk is measured using the standard deviation.

Total

A ________ is the market's measure of systematic risk.

beta of 1

Which one of these will increase a company's after-tax cost of debt?

A decrease in the company's tax rate

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $2.40 per share and has a beta of 1.42, all else constant, which of the following actions will decrease the firm's cost of equity?

A decrease in the firm's beta

Which one of the following statements is correct concerning unsystematic risk

Unsystematic risk can be eliminated though diversification by individual investor.

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $3.36 per share and has a beta of 1.38, all else constant, which of the following actions will increase the firm's cost of equity?

A decrease in the risk-free rate

Which one of the following statements is correct concerning a portfolio beta?

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

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?

Capital asset pricing model (CAPM)

Which one of the following is a project cash inflow? Ignore any tax effects.

Decrease in inventory

Which of the following statements are accurate? I. Nondiversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for nondiversifiable risk. IV. Diversifiable risks are market risks you cannot avoid.

I and III only

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.

I. Non-diversifiable risk is measured by beta. III. Systematic risk is another name for non-diversifiable risk.

Which of the following statements regarding a firm's pretax cost of debt is accurate?

It is based on the current yield to maturity of the company's outstanding bonds.

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?

Net income + Depreciation

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?

Selling fewer hot dogs because hamburgers were added to the menu

Based on the capital asset pricing model (CAPM), which of the following should earn the highest risk premium?

Stock with a beta of 1.24

Which one of the following best describes the concept of erosion?

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

The capital structure weights used in computing a company's weighted average cost of capital:

are based on the market values of the outstanding securities.

When calculating a firm's weighted average cost of capital, the capital structure weights:

are based on the market values of the outstanding securities.

The systematic risk of the market is measured by a:

beta of 1.

Unsystematic risk (also called idiosyncratic risk):

can be effectively eliminated by portfolio diversification.

Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest rate is called the:

cost of debt.

Okonjo Economics has a debt-equity ratio of .38. All of the firm's outstanding shares were purchased by a small number of investors. The return these investors require is called the:

cost of equity.

A firm's aftertax cost of debt will increase if there is a(n):

decrease in the company's tax rate.

When evaluating any capital project proposal, the cost of capital:

depends upon how the funds raised for that project are going to be spent.

Pro forma statements for a proposed project should generally do all of the following except:

include interest expense.

Pro forma statements for a proposed project should generally do all of the following, except:

include interest expense.

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's:

incremental cash flows.

The aftertax cost of debt:

is highly dependent upon a company's tax rate.

If a security is fairly priced, its ________ divided by its beta will equal the slope of the security market line.

risk premium

Pro forma financial statements can best be described as financial statements:

showing projected values for future time periods.

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

Incremental

All of the following cash flows are related to a proposed project. Which one of these should be included in the cash flow at Time 0?

Initial investment in inventory to support the project

The operating cash flow for a project should NOT be affected by which one of the following?

Interest expense

Which of the following statements regarding unsystematic risk is accurate?

It can be effectively eliminated by portfolio diversification.

Which one of the following best illustrates erosion as it relates to a snack stand located on the beach?

Selling fewer cookies because ice cream was added to the menu

GL Plastics 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?

Sunk

Standard deviation measures which type of risk?

Total

According to the capital asset pricing model (CAPM), the amount of reward an investor receives for bearing the risk of an individual security depends upon the:

market risk premium and the amount of systematic risk inherent in the security.

A project's cash flow is equal to the project's operating cash flow:

minus both the project's change in net working capital and capital spending.

The cost of preferred stock is equivalent to the:

rate of return on a perpetuity.

Total risk is measured by ________ and systematic risk is measured by ________.

standard deviation; beta