BA360 FINAL - OSUSPRING2017

Independent Projects

A project that can be accepted whether or not others are already accepted

Discounted Payback Decision Rule

Choose the project with the shorter payback period that has a higher npv. Use discounted because it accounts for the time value of money.

Which one of the following statements concerning risk are correct? (can be more than one) 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 and III

Mutually Exclusive Projects

Two or more projects that cannot be invested in at the same time

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

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 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 methods determines the amount of the change a proposed project will have on the value of a firm? a) Net Present Value b) Discounted Payback c) Internal Rate of Return d) Profitability Index e) Payback

a) Net Present Value

Define Unsystematic Risk

a.k.a. Diversifiable Risk. It is the risk that comes with investing in a certain industry or company that can be mitigated through portfolio diversification.

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

If a project has a net present value equal to zero, then: a) The total of the cash inflows must equal the initial cost of the project b) The project earns a return exactly equal to the discount rate c) A decrease in the project's initial cost will cause the project to have a negative NPV d) Any delay in receiving the projected cash inflows will cause the project to have a positive NPV e)The project's PI must also be equal to zero

b) The project earns a return exactly equal to the discount rate

A project has a discounted payback period that is equal to the required payback period. Given this, which of the following statements must be true? a) The project will not be acceptable under the payback rule b) The project must have a profitability index that is equal to or greater than 1.0 c) The project must have a zero net present value d) The project's internal rate of return must equal the required return e) The project will still be acceptable if the discount rate is increased

b) The project must have a profitability index that is equal to or greater than 1.0

Which one of the following 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

Which one of the following is computed by dividing next year's annual dividend by the current stock price? a) Yield to Maturity b) Total Yield c) Dividend Yield d) Capital Gains Yield e) Growth Rate

c) Dividend Yield

A bond's coupon rate is equal to the annual interest divided by which one of the following? a) Call Price b) Current Price c) Face Value d) Clean Price e) Dirty Price

c) Face Value

Which one of the following relationships is stated correctly? a) The coupon rate exceeds the current yield when a bond sells at a discount b) The call price must equal the par value c) An increase in market rates increases the market price of a bond d) Decreasing the time to maturity increases the price of a discount bond, all else equal e) Increasing the coupon rate decreases the current yield, all else equal

d) Decreasing the time to maturity increases the price of a discount bond, all else equal

A decrease in which of the following will increase the current value of a stock according to the dividend growth model? a) Dividend Amount b) Number of future dividends provided the number is less than infinite c) Dividend Growth Rate d) Discount Rate e) Both the discount rate and the dividend growth rate

d) Discount Rate

Which of the following will decrease the net resent value of a project? a) Increasing the value of each of the project's discounted cash inflows b) Moving each of the cash inflows forward to a sooner time period c) Decreasing the required discount rate d) Increasing the project's initial cost at time zero e) Increasing the amount of the final cash inflow

d) Increasing the project's initial cost at time zero

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the... a) Coupon rate will also increase b) Current yield will decrease c) Yield to maturity will be less than the coupon rate d) Market price of the bond will decrease e) Coupon payment will increase

d) Market price of the bond will decrease

The profitability index is most closely related to which one of the following? a) Payback b) Discounted Payback c) Average Accounting Return d) Net Present Value e) Modified Internal Rate of Return

d) Net Present Value

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

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback period of this project? a) The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted b) The cash flow in year three is ignored c) The project's cash flow in year three is discounted by a factor of (1+R)^3 d) The cash flow in year two is valued just as highly as the cash flow in year one e) The project is acceptable whenever the payback period exceeds three years

d) The cash flow in year two is valued just as highly as the cash flow in year one

Which one o 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

Interest rates that include an inflation premium are referred to as: a) Annual Percentage Rates b) Stripped rates c) Effective Annual Rates d) Real Rates e) Nominal Rates

e) Nominal Rates

Which one of these statements related to discounted payback is correct? a) Payback is a better method of analysis than discounted payback b) Discounted payback is used more frequently in business than payback c) Discounted payback does not require a cutoff point d) Discounted payback is biased towards long-term projects e) The discounted payback period decreases as the discount rate increases

e) The discounted payback period decrease as the discount rate increases

A bond has a market price that exceeds its face value. Which one of these features currently applies to this bond? a) Discount Bond b) Yield to Maturity Equal to the Current Yield c) Currently Selling at Par d) Current Yield Greater than Coupon Rate e) Yield to Maturity Less than the Coupon Rate

e) Yield to Maturity Less than the Coupon Rate