Homework #4 Concepts for Final Exam

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project?

The cash flow in Year 2 is valued just as highly as the cash flow in Year 1.

According to M&M Proposition II, without taxes, which of the following statements is accurate?

The required return on assets is equal to the weighted average cost of capital.

A firm should select the capital structure that:

maximizes the value of the firm.

If a project has a net present value equal to zero, then:

the project earns a return exactly equal to the discount rate.

When determining a firm's cost of capital, the most important determinant is the:

use of the funds raised.

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

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

________ risk is the type of equity risk that is most related to the daily operations of a firm.

Business

Ingraham Stoneworks has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires. Which one of the following changes to the project would be most expected to increase the project's internal rate of return?

Condensing the firm's cash inflows into fewer years without lowering the total dollar amount of those inflows

The average compound return earned per year over a multiyear period is called the _____ average return.

geometric

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

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

Evidence seems to support the view that studying public information to identify mispriced stocks is:

ineffective.

The bond market requires a return of 6.2 percent on the 15-year bonds issued by Mingwei Manufacturing. The 6.2 percent is referred to as the:

yield to maturity.

Standard deviation is a measure of which one of the following?

Volatility

You purchased a 10-year bond at par value when it was originally issued. It has an annual coupon of 5 percent and matures five years from now. Coupons are paid semiannually. Which one of the following statements applies to this bond if the relevant market interest rate is now 4.7 percent?

You will realize a capital gain on the bond if you sell it today.

M&M Proposition II, without taxes, is the proposition that:

a company's cost of equity is a linear function with a slope equal to (RA − RD).

What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?

Constant growth model

Which one of the following applies to a premium bond?

Coupon rate > Current yield > Yield to maturity

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?

Efficient capital market

Which of the following items are included when calculating the expected return on a portfolio? 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

I, II, III, and IV

Of the options listed below, which is the best example of systematic risk?

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

Which one of the following statements is accurate?

The optimal capital structure maximizes shareholder value.

A project's average net income divided by its average book value is referred to as the project's average:

accounting return.

Read Corporation currently pays an annual dividend of $1.46 per share and plans on increasing that amount by 2.75 percent annually. Cho, Incorporated, currently pays an annual dividend of $1.42 per share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Cho has a higher ________ than the stock of Read.

capital gains yield

The value of a firm is maximized when the:

weighted average cost of capital is minimized.

Which of the following statements regarding unsystematic risk is accurate?

It can be effectively eliminated by portfolio diversification.

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 statements is correct?

Stocks can have negative growth rates.

Reyes has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true?

The stock has a negative capital gains yield.

A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today?

The yield to maturity is less than the coupon rate.

Sung Office Products just announced it is decreasing its annual dividend from $2.20 per share to $1.85 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price:

decreased proportionately with the dividend decrease.

Financial risk is:

dependent upon a company's capital structure.

A bond's principal is repaid on the ________ date.

maturity

To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return.

risk-free rate