Finance Conceptual Questions

A company's overall cost of equity is:

directly related to the risk level of the firm

A company's overall cost of equity is:

directly related to the risk level of the firm.

Forecasting risk is defined as the possibility that:

incorrect decisions will be made due to erroneous cash flow projections

All of the following 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 capital asset pricing model (CAPM) assumes which of the following? 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, IV

Assume both the discount and tax rates are positive values. At the financial break-even point, the:

IRR equals the required return

Which one of the following is represented by the slope of the security market line?

Market risk premium

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

Net Income

Which one of the following statements is correct?

Over time, the average unexpected return will be zero.

A company's pretax cost of debt

is based on the current yield to maturity of the company's outstanding bonds

A company's weighted average cost of capital:

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

Which one of the following is represented by the slope of the security market line?

market risk premium

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

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

risk-free rate

Three years ago, Knox Glass purchased a machine for a three-year project. The machine is being depreciated straight-line to zero over a five-year period. Assume the firm decided to forego any bonus depreciation. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (TC represents the relevant tax rate)

sale price + (book value - sale price)(Tc)

The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following?

tax due on the current salvage value of that asset

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

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

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

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

Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold?

Degree of operating leverage

The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following?

Equivalent annual cost

The expected return on a portfolio considers which of the following factors? 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, IV

Which of the following statements concerning risk are correct? I. Non-diversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for non-diversifiable risk. IV. Diversifiable risks are market risks you cannot avoid.

I, III

The capital asset pricing model (CAPM) assumes which of the following? 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

Which of the following values will be equal to zero when a firm is operating at the accounting break-even level of output?

IRR and Net Income

Assume both the discount and tax rates are positive values. At the financial break-even point, the:

IRR equals required return

A decrease in which one of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used and ignore taxes

Sales price per unit

A decrease in which one of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used and ignore taxes.

Sales price per unit

Which one of these will increase a company's aftertax cost of debt?

a decrease in the company's tax rate

The capital structure weights used in computing a company's weighted average cost of capital:

are based on the market values of the outstanding securities

The subjective approach to project analysis

assigns discount rates to projects based on the discretion of the senior managers of a firm

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

both the returns currently required by its debt holders and stockholders

The operating cash flow of a cost-cutting project:

can be positive even though there are no sales

Bell Weather Goods has several proposed independent projects that have positive NPVs. However, the firm cannot initiate any of the projects due to a lack of financing. This situation is referred to as:

capital rationing

When the operating cash flow of a project is equal to zero, the project is operating at the:

cash break-even point

The cost of capital for a new project:

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

The cost of capital for a new project:

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

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine that has the:

lowest equivalent annual cost.

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