FIN 351 Final Exam

What is the amount of the risk premium on a U.S. Treasury bill if the risk-free rate is 2.8 percent and the market rate of return is 8.35 percent?

0

Which one of the following statements best defines the efficient market hypothesis?

All securities in an efficient market are zero net present value investments

Which one of the following statements related to capital gains is correct?

An increase in an unrealized capital gain will increase the capital gains yield.

Which of the following yields on a stock can be negative?

Capital gains yield and total return

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?

Cash inflow in the final year of the

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

High standard deviation, large risk premium

Which one of the following is an example of systematic risk?

Investors panic causing security prices around the globe to fall precipitously

You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?

NPV profile

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?

Net present value

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted?

Net present value

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

Normal distribution

Which one of the following statements related to payback and discounted payback is correct?

Payback is used more frequently even though discounted payback is a better method

Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following?

Portfolio weight

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule?

Project A only

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on the payback decision rule?

Project A only

Two mutually exclusive projects have an initial cost of $47,500 each. Project A produces cash inflows of $25,300, $37,100, and $22,000 for Years 1 through 3, respectively. Project B produces cash inflows of $43,600, $19,800 and $10,400 for Years 1 through 3, respectively. The required rate of return is 14.7 percent for Project A and 14.9 percent for Project B. Which project(s) should be accepted and why?

Project A, because it has the larger NPV.

Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?

Security market line

Which one of the following statements related to the internal rate of return (IRR) is correct?

The IRR is equal to the required return when the net present value is equal to zero.

Stacy purchased a stock last year and sold it today for $3 a share more than her purchase price. She received a total of $0.75 in dividends. Which one of the following statements is correct in relation to this investment?

The capital gains yield is positive.

Stacy purchased a stock last year and sold it today for $4 a share more than her purchase price. She received a total of $1.15 per share in dividends. Which one of the following statements is correct in relation to this investment?

The capital gains yield is positive.

Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient.

The information was expected

The rate of return on which type of security is normally used as the risk-free rate of return?

Treasury bills

Which one of the following risks is irrelevant to a well-diversified investor?

Unsystematic risk

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

Volatility

A project's average net income divided by its average book value is referred to as the project's average:

accounting return

You are comparing two mutually exclusive projects. The crossover point is 12.3 percent. You have determined that you should accept project A if the required return is 13.1 percent. This implies you should:

always accept Project A if the required return exceeds the crossover rate

The capital structure weights used in computing the weighted average cost of capital:

are based on the market value of the firm's debt and equity securities

The return earned in an average year over a multi-year period is called the _____ average return

arithmetic

The capital asset pricing model approach to equity valuation:

assumes the reward-to-risk ratio is constant

Systematic risk is measured by:

beta

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?

beta

Mutually exclusive projects are best defined as competing projects that:

both require the total use of the same limited resource

A company's current cost of capital is based on:

both the returns currently required by its debtholders and stockholders

Unsystematic risk:

can be effectively eliminated by portfolio diversification

The standard deviation of a portfolio:

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

The standard deviation of a portfolio

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

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?

capital asset pricing model

The cost of capital for a new project:

depends upon how the funds raised for that project are going to be spent

The internal rate of return is defined as the:

discount rate which causes the net present value of a project to equal zero.

A project has a net present value of zero. Which one of the following best describes this project?

e. The project's cash inflows equal its cash outflows in current dollar terms.

Assume that the market prices of the securities that trade in a particular market fairly reflect the available information related to those securities. Which one of the following terms best defines that market?

efficient capital market

The primary purpose of portfolio diversification is to:

eliminate asset-specific risk

You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent?

expected return

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

geometric

Graphing the crossover point helps explain

how decisions concerning mutually exclusive projects are derived.

To convince investors to accept greater volatility, you must:

increase the risk premium

Which one of the following will decrease the net present value of a project?

increasing the project's initial cost at time zero

A company's weighted average cost of capital:

is the return investors require on the total assets of the firm

As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return.

less than

Which of the following are advantages of the payback method of project analysis?

liquidity bias and ease of use

If a stock portfolio is well diversified, then the portfolio variance:

may be less than the variance of the least risky stock in the portfolio

The real rate of return on a stock is approximately equal to the nominal rate of return:

minus the inflation rate

A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called?

net present value

Which one of the following correctly describes the dividend yield?

next year's annual dividend divided by today's stock price

The length of time a firm must wait to recoup the money it has invested in a project is called the

payback period

The length of time a firm must wait to recoup the money it has invested in a project is called the:

payback period

Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total. Which one of the following terms most applies to Suzie's investments?

portfolio

The primary purpose of Blume's formula is to:

project future rates of return

The cost of preferred stock is computed the same as the:

rate of return on a perpetuity

The excess return is computed as the

return on a risky security minus the risk-free rate

The excess return is computed as the:

return on a risky security minus the risk-free rate

Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly?

reward-to-risk ratio

Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return?

risk premium

The expected risk premium on a stock is equal to the expected return on the stock minus the:

risk-free rate

You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor continually brags to you about the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best _____ form efficient.

semistrong

The principle of diversification tells us that:

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

Total risk is measured by _____ and systematic risk is measured by _____.

standard deviation; beta

Inside information has the least value when financial markets are:

strong form efficient

The market risk premium is computed by:

subtracting the risk-free rate of return from the market rate of return

Which one of the following is a risk that applies to most securities?

systematic

The internal rate of return is:

tedious to compute without the use of either a financial calculator or a computer

The net present value of a project will increase if:

the aftertax salvage value of the fixed assets increases

Efficient financial markets fluctuate continuously because:

the markets are continually reacting to new information

The intercept point of the security market line is the rate of return which corresponds to:

the risk-free rate.

The primary advantage of using the dividend growth model to estimate a company's cost of equity is:

the simplicity of the model

The flotation cost for a company is computed as:

the weighted average of the flotation costs associated with each form of financing

The expected return on a stock given various states of the economy is equal to the:

weighted average of the returns for each economic state