FIN 300 Final

All else being equal, which of the following factors will increase WACC (select all that apply)? (Ch. 12 Pt. 1 ICE) a. An increase in risk-free rate. b. An increase in market risk premium. c. An increase in tax rate. d. An increase in flotation cost. e. An increase in equity beta.

a. An increase in risk-free rate. b. An increase in market risk premium. d. An increase in flotation cost. e. An increase in equity beta.

Which of the following statements is CORRECT? (Ch. 7 PA #8) a. The constant growth model takes into consideration the capital gains earned on a stock. b. It is impossible to use the constant growth model to estimate stock value if the growth rate is negative. c. Two firms with the same expected dividend and growth rate must also have the same stock price. d. Stockholders have the highest priority claim in a bankruptcy proceeding. e. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

a. The constant growth model takes into consideration the capital gains earned on a stock.

Which of the following statements is/are CORRECT? (Ch. 11 PA #6) a. The stock with a beta value of 1 has the market rate of return. b. Betas measure a stock's diversifiable risk. c. Adding more stocks will reduce the portfolio's systematic risk. d. Both a and c are correct.

a. The stock with a beta value of 1 has the market rate of return.

Inflation, recession, and high interest rates are economic events that are best characterized as being which of the following: (Ch. 11 PA) a. factors associated with market risk. b. unsystematic risk that can be diversified away. c. risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers. d. irrelevant except to governmental authorities like the Federal Reserve. e. company-specific risks that can be diversified away.

a. factors associated with market risk.

The SML relates required returns to firms' systematic (or market) risk. The slope and intercept of this line can be influenced by managerial actions. (Ch. 11 PA) a. True b. False

b. False

The present value of a future sum decreases as either the discount rate or the number of periods per year decreases. (Ch. 4 PA #1) a. True b. False

b. False

The proportion of the payment of a fully amortized loan that goes toward interest increases over time. (Ch. 5 PA #9) a. True b. False

b. False

The slope of the SML is determined by the value of beta (Ch. 11 PA) a. True b. False

b. False

Which of the following statements is/are INCORRECT? (Ch. 11 PA) a. Beta cannot be negative. (Beta can be positive or negative) b. Beta value is the slope of SML. (Beta is the horizontal axis of SML) c. Market risk premium is the slope of SML. d. GDP and inflation rate can be considered market risks. e. Both a and b are incorrect.

e. Both a and b are incorrect.

When evaluating a new project, firms should include in the projected cash flows all of the following factors EXCEPT: (Ch. 9 Pt. 3 ICE) a. Changes in net operating working capital attributable to the project. b. Previous expenditures associated with a market test to determine the feasibility of the project that have been expensed for tax purposes. (Sunk cost) c. The value of a building owned by the firm that will be used for this project. d. A decline in the sales of an existing product that is directly attributable to this project. e. Salvage value of assets used for the project at the end of the project's life.

b. Previous expenditures associated with a market test to determine the feasibility of the project that have been expensed for tax purposes. (Sunk cost)

1. Which of the following statements is CORRECT? (Ch. 9 PT. 1 ICE) a. A sunk cost is any cost that must be expended in order to complete a project and bring it into operation. b. A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project. c. A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project. d. Sunk costs were formerly hard to deal with, but once the NPV method came into wide use, it became possible to simply include sunk costs in the cash flows and then calculate the PV. e. A good example of a sunk cost is a situation where a retailer opens a new store, and that leads to a decline in sales of some of the firm's existing stores.

c. A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.

Based on CAPM, investors are compensated based on which of the following: (Ch.11 PA #3) I. Market risk premium II. Portfolio standard deviation III. Portfolio beta IV. Risk-free rate a. I and III only b. II and IV only c. I, III and IV only d. I, II, III and IV

c. I, III and IV only

Stock X and Stock Y sell at the same price. Stock X has a required return of 12%. Stock Y has a required return of 10%. Stock X's dividend is expected to grow at a constant rate of 6% a year, while Stock Y's dividend is expected to grow at a constant rate of 4%. Assume that the market is in equilibrium and expected returns equal required returns. Which of the following statements is CORRECT? (Ch. 7 PT. 2 ICE) a. Stock X has a higher dividend yield than Stock Y. b. Stock Y has a higher dividend yield than Stock X. c. One year from now, Stock X's price is expected to be higher than Stock Y's price. d. Stock Y has a higher capital gains yield. e. Stock X has the higher expected year-end dividend.

c. One year from now, Stock X's price is expected to be higher than Stock Y's price.

Which of the following has the highest interest rate risk? (Ch.6-9 PA #13) a. 10-year Corporate bond with rating of AAA b. 10-year Treasury bond c. 10-year convertible bond d. 10-year zero coupon bond

d. 10-year zero coupon bond

Which of the following statements is CORRECT? (Ch. 11 PA) a. Portfolio diversification reduces the variability of returns (as measured by its standard deviation) of each individual stock held in the portfolio. b. If an investor buys enough stocks, he or she can, through diversification, eliminate all of the diversifiable risk inherent in owning stocks. Therefore, if a portfolio contained all publicly traded stocks it would be essentially riskless. c. The required return on a firm's common stock is, in theory, determined solely by its market risk. If the market risk is known, and if that risk is expected to remain constant, then no other information is required to specify the firm's required return. d. A security's beta measures its non-diversifiable, or market, risk relative to that of an average stock. e. A stock's beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only that one stock.

d. A security's beta measures its non-diversifiable, or market, risk relative to that of an average stock.

Which one of the following statements is CORRECT? (Ch. 11 PA) a. The risk premium on a risk-free security is generally considered to be 1%. b. The expected rate of return on any security, given multiple states of the economy, must be positive. c. There is an inverse relationship between the level of risk and the risk premium given a risky security. d. If a risky security is correctly priced, its expected risk premium will be positive. e. If a risky security is priced correctly, it will have an expected return equal to the risk-free rate.

d. If a risky security is correctly priced, its expected risk premium will be positive.

Which of the following statements is CORRECT? (Ch. 9 Pt. 3 ICE) a. Since depreciation is not a cash expense, it plays no role in capital budgeting. b. Under MACRS depreciation, firms write off assets slower than they would under straight line depreciation, and as a result projects' forecasted NPVs are normally lower than they would be if straight line depreciation were permitted for tax purposes. c. Under MACRS depreciation, firms can write off assets faster than they could under straight line depreciation, and as a result projects' forecasted NPVs are normally lower than they would be if straight line depreciation were permitted for tax purposes. d. Under MACRS depreciation, firms can write off assets faster than they could under straight line depreciation, and as a result projects' forecasted NPVs are normally higher than they would be if straight line depreciation had to be used for tax purposes.

d. Under MACRS depreciation, firms can write off assets faster than they could under straight line depreciation, and as a result projects' forecasted NPVs are normally higher than they would be if straight line depreciation had to be used for tax purposes.

Assume that the risk-free rate is 5%. Which of the following statements is CORRECT? (Ch. 11 PA) a. If a stock's beta doubled, its required return would also double. b. If a stock's beta doubled, its required return would more than double. c. If a stock's beta were 1.0, its required return would be 5%. d. If a stock's beta were less than 1.0, its required return would be less than 5%. e. If a stock has a negative beta, its required return would be less than 5%.

e. If a stock has a negative beta, its required return would be less than 5%.