Exam 3

the geometric average return answers the question,

"What was your average compound return per year over a particular period?"

for the dividend growth model, the equation can be written as follows: P0=D1/(Re-g) how can this equation be rearranged?

R=D1/P0+g

a firm's target capital structure represents:

a fixed debt-equity ratio that the company attempts to maintain

a portfolio is:

a group of assets held by an investor

an efficient capital market is best defined as a market in which security prices reflect which one of the following?

all available information

systematic risk is defined as:

any risk that affects a large number of assets.

the capital asset pricing model:

considers the relationship between the fluctuations in a security's returns versus the market's returns.

an increase in a levered firm's tax rate will:

decrease the firm's cost of capital.

which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk

diversification

when attempting to forecast for extremely long intervals, such as 50 years, it is best to use:

expected return averages

the percent of investment that the project costs can be referred to as all of the following, except:

free cash flow

a firm that uses its weighted average cost of capital as the required return for all of its investments will:

increase the risk level of the firm over time

the lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk

lower, lower

unsystematic risk can be defined by all of the following except:

market risk

short-run projected wealth levels calculated using geometric averages are probably

pessimistic

Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent?

portfolio weight

Farmer's Supply, Inc. is considering opening a clothing store, which would be a new line of business for the firm. Management has decided to use the cost of capital of a similar clothing store as the discount rate that should be used to evaluate this proposed expansion. Which one of the following terms is used to describe the approach Farmer's Supply is taking to establish an appropriate discount rate for the project?

pure play approach

Diversifying a portfolio across various sectors and industries might do more than one of the following. However, this diversification must do which one of the following?

reduce the portfolio's unique risks

assume a firm has a beta of 1.2. all else held constant, the cost of equity for this firm will increase if the:

risk free rate decreases

on a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. what is this excess return called?

risk premium

expected return is the return on a ____ asset expected in the future

risky

if the financial markets are efficient then:

stock prices should respond only to unexpected news and events

one year ago, you purchased 600 shares of a stock. This morning you sold those shares and realized a total return of 3.1 percent. Given this information, you know for sure the:

sum of the dividend yield and the capital yield is 3.1 percent

For a risky security to have a positive expected return but less risk than the overall market, the security must have a beta:

that is >0 but <1

Assume the securities markets are strong form efficient. Given this assumption, you should expect which one of the following to occur?

the price of each security in that market will frequently fluctuate

the cost capital depends primarily on

the use of the funds

what is the subjective approach

using a WACC that involves making subjective adjustments based upon the project

what is the pure play apporach

using a WACC that is based on companies in similar lines of business

the standard deviation measures the _____ of a security's returns over time

volatility

portfolio beta is the ____ average of the betas of the investments included in the portfolio

weighted

which one of the following represents the minimum rate of return a firm must earn on its assets if it is to maintain the current value of its securities

weighted average cost of capital