Exam 3 Vocab

Which one of the following statements is correct?

A project can create a positive operating cash flow without affecting sales.

which one of the following will increase a bid price?

An increase in the required rate of return

which one of the following is defined by its mean and its standard deviation?

Normal distribution

Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project?

Sensitivity

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

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2019?

U.S. Treasury bills

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

Volatility

the equivalent annual cost method is useful in determining:

Which one of two machines should be purchased when the machines are mutually exclusive, have differing lives, and will be replaced at the end of their lives

which one of the following statements is correct concerning bid prices?

a firm can submit a bid that is higher than the computed bid price and still break even

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

a firm's sales decrease

of the options listed below, which is the best example of a diversifiable risk?

a firm's sales decrease

the depreciation tax shield is best defined as the:

amount of tax that is saved because of the depreciation expense

Changes in the net working capital requirements:

can affect the cash flows of a project every year of the project's life.

the operating cash flow of a cost-cutting project:

can be positive even though there are no sales

Which one of these is most associated with an IRR of negative 100 percent?

cash break-even point

the equivalent annual cost considers all of the following except the

costs of research conducted to identify equpment choices

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

include interest expense.

To convince investors to accept greater volatility, you must:

increase the risk premium

which on of the these combinations must increase the contribution margin?

increasing the sales price and decreasing the variable cost per unit

which of the following statements is true of a portfolio's standard deviation

it can be less than the standard deviation of the least risky security in the portfolio

you are evaluating a project and are concerned abut the reliability of the cash flow forecasts. To reduce any potentially harmful results from accepting this project, you should consider:

lowing the degree of operating leverage

The market risk premium equals the:

market rate of return minus the risk-free rate of return

When calculating the expected rate of return on a stock portfolio using a weighted average, the weights are based on the:

market value of the investment in each stock

Buchi owns several financial instruments: stocks issued by seven different companies, plus bonds issued by four different companies. Her investments are best described as a(n):

portfolio

The contribution margin per unit is equal to the:

sales price per unit minus the variable cost per unit

The historical record for the period 1926-2019 supports which one of the following statements?

small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year

Which of the following statements best describes the principle of diversification?

spreading an investment across many diverse assets will eliminate some of the total risk.

Most financial securities have some level of ________ risk

systematic

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

that state projected values for future time periods

a project that has a payback period exactly equal to the project's life is operating at:

the accounting break-even point

Efficient financial markers fluctuate continuously because:

the markets are continually reacting to new informaiton

If the risk-free rate is 2.2 percent, the inflation rate is 1.9 percent, and the market rate of return is 6.8 percent, what is the amount of the risk premium on a U.S. Treasury bill?

there is no excess return, or risk premium, for a risk-free security such as the T-bill

risk is measured using the standard deviation

total

With respect to unexpected returns, which one of the following statements is accurate?

unexpected returns can be either positive or negative in the short term but tend to be zero over the long term

An unexpected post on social media caused the prices of 22 different companies' stocks to immediately increase by 10 to 15 percent. This occurrence is best described as an example of ________ ris

unsystematic

An investor who owns a well-diversified portfolio would consider ________ to be irrelevant

unsystematic risk

Which one of the following is most indicative of a totally efficient stock market?

zero net present values for all stock investments

which one of the following time periods is associated with low rates of inflation?

2014-2015

Assuming a project has a discounted payback that equals the project's life. The project's sales quantity must be at which one of these break-even points?

Financial

A stock had annual returns of 5.3 percent, −2.7 percent, 16.2 percent, and 13.6 percent over the past four years. Which one of the following best describes the probability that this stock will produce a return of 20 percent or more in a single year?

Less than 16 percent but more than 2.5 percent

Which one of the following statements related to market efficiency tends to be supported by current evidence?

Markets tend to respond quickly to new information

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

Stand-alone principle

Net working capital:

can create either an initial cash inflow or outflow

FisherCo is intending to invest in a new project. The ________ is the minimum rate of return the firm will accept on this project.

cost of capital

1. Over the past five years, a stock produced returns of 11 percent, 14 percent, 4 percent, −9 percent, and 5 percent. What is the probability that an investor in this stock will not lose more than 10 percent in any one given year?

greater than 84 percent but less than 97.5 percent

Which one of the following characteristics best describes a project that has a low degree of operating leverage

high variable costs relative to the fixed costs

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

Estimates of the rate of return on a security based on the historical arithmetic average will probably tend to _____ the expected return for the long-term and estimates using the historical geometric average will probably tend to _____ the expected return for the short-term.

overestimate; underestimate

If the market is efficient and securities are priced fairly, all securities will have the same

reward-to-risk ratio

Small-company stocks, as the term is used in the textbook, are best defined as the:

smallest 20 percent of the companies listed on the NYSE

Generally speaking, which of the following best correspond to a wide frequency distribution?

High Standard deviation, large risk premium

Which of the following are assumptions of the capital asset pricing model (CAPM)? · I. A risk-free asset has no systematic risk. · II. Beta is a reliable estimate of total risk. · III. The reward-to-risk ratio is constant. · IV. The market rate of return can be approximated

I, III, and IV only

If the variability of the returns on large-company stocks were to decrease over the long-term, you would expect which one of the following as related to large-company stocks to occur as a result?

Decrease in the 68 percent probability range of returns

Decreasing which one of the following will increase the acceptability of a project?

Equivalent annual cost

which of the following are inversely related to variable costs per unit?

Operating cash flow per unit and contribution margin per unit

For the period 1926-2019, U.S. Treasury bills always:

Provided a positive annual rate of return

Which one of the following earned the highest risk premium over the period 1926-2019?

Small-company stocks

Monroe partners has received requests for capital investment funds for next year form each of its five divisions. All requests represent positive net present value projects. All projects are independent. Senior management has decided to allocate the available funds based on the profitability index of each project since the company has insufficient funds to fulfill all of the requests. Management is following a practice known as:

Soft rationing

when using economic probabilities to compute the expected return on a stock, the result is:

a mathematical expectation based on a weighted average and not a guaranteed outcome

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 base-case values used in scenario analysis are the values considered to be the most:

likely to occur

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

Based on the period 1926-2019, the actual real return on large-company stocks has been around:

9 percent

A stock had returns of 3 percent, 12 percent, 26 percent, −14 percent, and −1 percent for the past five years. Based on these returns, what is the approximate probability that this stock will return at least 20 percent in any one given year?

Approximately 16 percent

Over the past five years, a stock produced returns of 11 percent, 14 percent, 4 percent, −9 percent, and 5 percent. What is the probability that an investor in this stock will not lose more than 10 percent in any one given year?

Greater than 84 percent but less than 97.5 percent

By definition, which one of the following must equal zero at the accounting break-even point?

Net Income

The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than _____ form efficient

STONG

When analyzing the best-case scenario, which of the following variables will be forecast at their highest expected level?

Salvage value and units sold

Sensitivity analysis determines the:

degree to which the net present value reacts to changes in a single variable.

Operating leverage is the degree of dependence a firm places on its:

fixed costs

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

geometric

Webster Iron Works started a new project last year. As it turns out, the project has been operating at its accounting break-even level of output and is now expected to continue at that level over its lifetime. Given this, you know that the project:

is operating at a higher level than if it were operating at its cash break-even level.

Assume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2 percent. Lexant stock has 2 percent less systematic risk than the market and has an actual return of 10.2 percent. This stock

is underpriced

the base-case values used in scenario analysis are the values considered to be the most

likely to occur

Which one of the following statements correctly applies to the period 1926-2019?

long-term corporate bonds outperformed long-term government bonds

individual investors who continually monitor the financial markets seeking mispriced securities:

make the markets increasingly more efficient

Esther, the sales manager for Reynoso Products, wants to sponsor a one-week "Customer Appreciation Sale" during which the firm will sell additional units of a product at the lowest price possible without negatively affecting the firm's profits. Which one of the following represents the price that should be charged for the additional units during this sale?

marginal cost

. Of the options listed below, which are examples of diversifiable risk? 1. I. Wildfires damage an entire town 2. II. The federal government imposes a $1,000 fee on all business entities 3. III. Payroll taxes are increased nationally 4. IV. All software providers are required to improve their privacy standards

I and IV only

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

Which one of the following statements is correct based on the historical record for the period 1926-2019?

Long-term government bonds had a lower return but a higher standard deviation, on average, than did long-term corporate bonds