FIN 351 FINAL - Concept Questions

A project has an initial cost of $52,700 and a market value of $61,800. What is the difference between these two values called?

A. Net present value

An investor wants to reduce the unsystematic risk in her portfolio. Which of the following actions is least likely to do so?

A. Reducing the number of stocks held in her stock portfolio

Applying the discounted payback decision rule to all projects may cause:

A. Some positive net present value projects to be rejected

A firms after tax cost of debt will increase if there is a(n):

B. Decrease in the company's tax rate

Which of the following methods of project analysis is defined as computing the value of a project based on the present value of the projects anticipated cash flows?

B. Discounted cash flow valuation

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

B. Make the markets increasingly more efficient

Raffia owns stocks of 15 different companies. Together, the stocks have a value of $78,640. Twelve percent of that total value is from one company, Gambrel & Valdez. The twelve percent is called a(n):

B. Portfolio weight

Assume a manager determines the cost of capital for a specific project based on the cost of capital at another firm with a line of business that is similar to the project. Accordingly, the manager is using the ______ approach.

B. Pure play

The excess return is computed as the:

B. Return on a risky security minus the risk free rate

To calculate the expected risk premium on a stock, one must subtract the _______ from the stocks expected return.

B. Risk free rate

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

B. Unsystematic risk

A projects average net income divided by its average book value is referred to as the projects average:

C. Accounting return

Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest is called the:

C. Cost of debt

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

C. Market value of the investment in each stock

When computing the adjusted cash flow from assets, the tax is calculated as:

D. EBIT (Tc)

A strength of the average account return (ARR) method of project analysis is the fact that ARR:

D. It is easy to calculate

______ Measures total risk, and ______ measures systematic risk.

D. Standard deviation; beta

Flotation costs for a levered firm should be:

D. Weighed and included in the initial cash flow

When utilizing the capital asset pricing model approach to value equity, the outcome:

E. Assumes the reward to risk ratio is constant

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:

E. Discounted payback period

Assume all stock prices fairly reflect all of the available information on those stocks. Which of the following terms best defines the stock market under these conditions?

E. Efficient capital market

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

E. It can be less than the weighted average of the standard deviations of the individual securities held in that portfolio

The slope of the security market line is the:

E. Market risk premium

Thornton Homes has multiple divisions which operate as separate lines of business and face risks unique to those lines. The firm uses its overall WACC as the discount rate to evaluate all proposed projects. Accordingly, each division within the firm will tend to:

E. Prefer higher risk projects over lower risk projects

A project has a net present value of zero. Given this information:

E. The projects cash inflows equal it's cash outflows in current dollar terms

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

E. US Treasury Bills

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

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