finance final review

The higher the standard deviation of a security, the _____ the expected rate of return and the _____ the risk.

higher; higher

A portfolio that is adequately diversified should produce a return which

lies at a point on the security market line given the portfolio's beta.

If the financial markets are strong form efficient, then:

no one person has an advantage in the marketplace.

In an efficient market, a security with a beta of .98 will have a rate of return which lies:

on the SML just to the left of the market return.

Which one of the following supports the argument that financial markets are semistrong form efficient?

only company insiders have a marketplace advantage

he Stone Ware Company pays a constant dividend. Last year, the dividend yield was 2.4 percent when the stock was selling for $20 a share. What must the stock price be if the market currently requires a 3.2 percent dividend yield on this stock?

$15.00

A project requires $120,000 of equipment which is classified as 7-year property. What is the depreciation expense in year 3 given the following MACRS depreciation allowance percentages?

$20,988

Lakeside Grapes is considering expanding its wine-making operations. They would need new equipment that costs $350,000 that would be depreciated on a straight-line basis to a zero balance over the 5-year life of the project. The estimated salvage value is $62,000. The project requires $35,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $187,500 a year. What is the net present value of this project if the relevant discount rate is 15 percent and the tax rate is 35 percent?

$280,966.49

One year ago, you purchased 100 shares of stock for $38 a share. The stock pays dividends of $.20 per share per quarter. Today, you sold your shares for $40.50 a share. What is your total dollar return on this investment?

$330

A firm has net income of $42,000, depreciation of $3,000, interest expense of $1,200, and taxes of $1,100. What is the firm's operating cash flow?

$46,200

You are analyzing a project and have developed the following estimates. The depreciation is $2,500 a year and the tax rate is 35 percent. What is the base case operating cash flow?

$6,855

The risk-free rate is based on the rate applicable to:

. U.S. Treasury bills.

The cost of capital for a project should:

. be adjusted based on the risk of the project.

Based on the capital asset pricing model, a security that:

. is over-priced will plot as a point below the security market line.

A firm's overall cost of capital:

. is the required return on the total assets of a firm.

The slope of the security market line is equal to:

. the market risk premium.

Over the past five years, a stock provided annual returns of 12.6 percent, 5.8 percent, 7.9 percent, -11.2 percent and -2.4 percent. What is the variance of these returns?

.0088

The beta of a risk-free security is _____ and the beta of the overall market is:

0; 1.

One year ago, Isabelle purchased 3,500 shares of RTF stock for $133,000. Today, she sold these shares for $41.10 a share. What is Isabelle's total return on this investment if the dividend yield is 4.9 percent?

13.06 percent

A bond has an average return of 6.8 percent and a standard deviation of 4.6 percent. What range of returns would you expect to see 68 percent of the time?

2.2 percent to 11.4 percent

Last year, Kurt invested $1,000 in ABC stock, $1,000 in long-term government bonds, and $1,000 in U.S. Treasury bills. Over the course of the year, he earned returns of 10.3 percent, 8.8 percent, and 4.3 percent, respectively. What is the risk premium that Kurt received on his ABC stock investment?

6.00 percent

The mean plus or minus twice the standard deviation for a normal distribution provides a probability range of _____ percent.

95

Operating cash flow is equal to:

EBIT minus taxes plus depreciation.

Which of the following are examples of managerial options?

I, II, III, and IV

Which one of the following is a correct statement regarding a firm's weighted average cost of capital (WACC)?

The WACC can be used as the required return for all new projects with similar risk to that of the existing firm.

Which one of the following is the best example of an event related to an expected return?

an announcement that a firm will meet its sales projections

Which one of the following will increase the slope of the security market line (SML)?

an increase in the market risk premium

When a financial market reflects all the available information in the prices of the securities the market is referred to as a(n):

efficient capital market.

If the securities markets are only weak form efficient, then the price of a stock will:

be based solely on historical information

The hypothesis that supports the argument that any pricing inefficiencies are rare and relatively small is known as the _____ hypothesis.

efficient market

Risk premium is defined as the

excess return required on a risky investment over that of a risk-free investment.

Investing in a number of differing assets to eliminate some of the risk is referred to as the principle of:

diversification.

1. A pro forma financial statement is a financial statement which:

projects future years' operations.

The net working capital invested in a project is generally:

recouped at the end of the project.

The analysis of the effects that what-if questions have on a project is referred to as _____ analysis.

scenario

the analysis of the effect that a single variable has on the net present value of a project is called _____ analysis.

sensitivity

Which one of the following should you expect to have the highest risk premium in the future?

small-company stocks

Over the period of 1926 through 2004:

small-company stocks outperformed large-company stocks.

The risk associated with the overall market is referred to as _____ risk.

systematic

The risk premium for a security is based on the _____ associated with the security.

systematic risk

Unsystematic risk is defined as the risk:

that affects a small number of securities.

Which one of the following represents the best estimate for a firm's pre-tax cost of debt?

the current yield-to-maturity on the firm's existing debt