Finance Final

One year ago, you purchased 600 shares of stock for $14 a share. The stock pays $.41 a share in dividends each year. Today, you sold your shares for $15.30 a share. What is your total dollar return on this investment?

$1026

Your local athletic center is planning a $1.08 million expansion to its current facility. This cost will be depreciated on a straight-line basis over a 20-year period. The expanded area is expected to generate $489,000 in additional annual sales. Variable costs are 46 percent of sales, the annual fixed costs are $129,400, and the tax rate is 34 percent. What is the operating cash flow for the first year of this project?

$107,235.60

One year ago, you bought a stock for $29.15 a share. You received a dividend of $1.04 per share last month and sold the stock today for $28.80 a share. What is the capital gains yield on this investment?

-1.20

Assume that large-company stocks had an average return of 12.1 percent and a standard deviation of 19.6 percent for a 40-year period. What range of returns would you expect to see on these stocks 95 percent of the time?

-27.1 TO 51.3

Bruno's stock should return 14 percent in a boom, 11 percent in a normal economy, and 4 percent in a recession. The probabilities of a boom, normal economy, and recession are 8 percent, 90 percent, and 2 percent, respectively. What is the variance of the returns on this stock?

.000169

Most stocks have betas in this range

.5 to 1.5

A stock has an expected return of 14.3 percent, the risk-free rate is 3.9 percent, and the market risk premium is 7.8 percent. What must the beta of this stock be?

1.33

Currently, the risk-free rate is 3.2 percent. Stock A has an expected return of 11.4 percent and a beta of 1.11. Stock B has an expected return of 13.7 percent. The stocks have equal reward-to-risk ratios. What is the beta of Stock B?

1.42

BJB stock has an expected return of 17.82 percent. The risk-free rate is 4.6 percent and the market risk premium is 8.2 percent. What is the stock's beta?

1.61 E(R) = .1782 =.46+ (.082)

You own a portfolio of two stocks, A and B. Stock A is valued at $84,650 and has an expected return of 10.6 percent. Stock B has an expected return of 6.4 percent. What is the expected return on the portfolio if the portfolio value is $97,500

10.05

You have compiled the following information on your investments. What rate of return should you expect to earn on this portfolio? Stock Number of Shares Price per share Expected Return A 400 $24 13.6% B 300 $13 14.8% C 100 $33 7.4% D 100 $54 2.1%

10.09

The stock of Wiley United has a beta of .98. The market risk premium is 7.6 percent and the risk-free rate is 3.9 percent. What is the expected return on this stock?

11.35

Alpha Industries stock had returns of 17 percent, -11 percent, 9 percent, and 2 percent. What is the standard deviation of the stock's returns

11.87%

Fiddler's Music Stores' stock has a risk premium of 8.3 percent while the inflation rate is 3.1 percent and the risk-free rate is 3.8 percent. What is the expected return on this stock?

12.1

A debt-free firm has net income of $107,400, taxes of $38,700, and depreciation of $19,300. What is the operating cash flow?

126,700

Bama Entertainment has common stock with a beta of 1.22. The market risk premium is 8.1 percent and the risk-free rate is 3.9 percent. What is the expected return on this stock?

13.78

Assume the economy has a 12 percent chance of booming, a 4 percent chance of being recessionary, and being normal the remainder of the time. A stock is expected to return 18.7 percent in a boom, 14.4 percent in a normal economy, and lose 12 percent in a recession. What is the expected rate of return on this stock?

13.86

A stock has a beta of 1.32, the expected return on the market is 12.72, and the risk-free rate is 4.05. What must the expected return on this stock be?

15.49

You bought a share of 7.5 percent preferred stock for $91.60 last year. The market price for your stock is now $89.10. What is your total return to date on this investment?

5.46% Total return = ($89.10 -91.60 + 7.50)/$91.60 = .0546, or 5.46 percent

A stock has returns for five years of 14 percent, -16 percent, 12 percent, 23 percent, and 4 percent, respectively. The stock has an average return of ______ percent and a standard deviation of _____ percent

7.4 ; 14.72 Average return = (.14 -.16 + .12 + .23 + .04)/5 = .074, or 7.40 percent You can do this easily on your calculator, but here's the math: = [(.14-.074)2 + (-.16-.074)2 + (.12-.074)2 + (.23-.074)2 + (.04-.074)2]/(5 - 1) = .021680 = .021680.5 = .1472, or 14.72 percent

A stock has had returns of 14 percent, -18 percent, 2 percent, 33 percent, 27 percent, and 6 percent over the last six years, respectively. What is the geometric return for this stock?

9.32%

Six years ago, China Exporters paid cash for a new packaging machine that cost $347,000. Three years ago, the firm spent $14,300 on repairs and modifications to the machine. The machine is now fully depreciated and has just sat idly in a back corner of the shop for the past seven months. The estimated value of the machine today is $157,500. The firm is considering using this machine in a new project. If it does so, what value should be assigned to this machine and included in the initial costs of the new project? A) 157,500 B) 0 C) 361,300 D) 128,900

A) 157,500

The amount of systematic risk present in a particular risky asset, relative to the systematic risk present in an average risky asset, is called the particular asset's: A) Beta coefficient. B) Reward to risk ratio. C) Law of One Price. D) Diversifiable risk. E) Treynor index.

A) Beta coefficient

The opportunity cost associated with the firm's capital investment in a project is called its: A) Cost of capital. B) Beta coefficient. C) Capital gains yield. D) Sunk cost. E) Internal rate of return.

A) Cost of Capital

Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive? A)Cost of capital B)Market risk premium C)Expected return minus the risk-free rate D)Risk-free rate

A) Cost of capital

A pro forma financial statement is a financial statement that: A) Projects future years' operating results B) Compares the performance of a firm to its industry C) Expresses all values as a percentage of either total assets or total sales D) Compares actual results to the budgeted amounts

A) Projects future years' operating results

The excess return required on a risky asset over that earned on a risk-free asset is called (a): A) Risk premium. B) Return premium. C) Excess return. D) Average return. E) Variance.

A) Risk Premium

A security has an unexpected negative news announcement specific to that security. Most likely, the ______________________________. A) security's required return on investment will increase. B) security's required return on investment will remain unchanged. C) security's required return on investment will decrease. D) market risk premium will increase. E) security's market price will remain unchanged.

A) Security's required return on investment will increase

Over the past 76 years, which of the following investments has provided the largest average return? A) Small company stocks B) Common stocks C) Treasury bills D) Treasury bonds E) Corporate bonds

A) Small Company stocks

New information regarding a security, when received by the market, leads to a(n): A) Unexpected return. B) Expected return. C) Actual return. D) Systematic return. E) Non-diversifiable return.

A) Unexpected return

Diversification works because: A) Unsystematic risk exists. B) Forming stocks into portfolios reduces the standard deviation of returns for each stock. C) Firm-specific risk can be never be reduced. D) Stocks earn higher returns than bonds. E) Portfolios have higher returns than individual assets.

A) Unsystematic Risk exists

A portfolio is ___________________________. A) a group of assets, such as stocks and bonds, held as a collective unit by an investor B) the expected return on a risky asset C) the expected return on a collection of risky assets D) the variance of returns for a risky asset E) the standard deviation of returns for a collection of risky assets

A) a group of assets, such as stocks and bonds, held as a collective unit by an investor

Over the period of 1926-2014: A)the risk premium on stocks exceeded the risk premium on bonds. B)the risk premium on long-term government bonds was zero percent. C)U.S. Treasury bills had a risk premium that was just slightly over 2 percent. D)the risk premium on large-company stocks was greater than the risk premium on small- company stocks.

A) the risk premium on stocks exceeded the risk premium on bonds

All else the same, a higher corporate tax rate _____________________. A) will decrease the WACC of a firm with some debt in its capital structure B) will increase the WACC of a firm with some debt in its capital structure C) will not affect the WACC of a firm with some debt in its capital structure D) will decrease the WACC of a firm with no debt in its capital structure E) will change the WACC of a firm with some debt in its capital structure, but the direction is unclear.

A) will decrease the WACC of a firm with some debt in its capital structure

Green Woods sells specialty equipment for mountain climbers. Its sales for last year included $387,000 of tents and $718,000 of climbing gear. For next year, management has decided to sell specialty sleeping bags also. As a result of this change, sales projections for next year are $411,000 of tents, $806,000 of climbing gear, and $128,000 of sleeping bags. How much of next year's sales are derived from the side effects of adding the new product to its sales offerings? A) 112,000 B) 251,000 C) 128,000 D) 0

B) 251,000

The return that shareholders require on their investment in the firm is called the: A) Dividend yield. B) Cost of equity. C) Capital gains yield. D) Cost of capital. E) Income return.

B) Cost of equity

Which one of the following will affect the capital structure weights used to compute a firm's weighted average cost of capital? A)Decrease in the book value of a firm's equity B)Increase in the market value of the firm's common stock C)Increase in the market risk premium D)Decrease in a firm's tax rate

B) Increase in the market value if the firm's common stock

Unsystematic risk can be defined by all of the following except: A) Diversidiable risk B) Market risk C) Unique risk D) unrewarded risk

B) Market risk

Ed owns a store that caters primarily to men. Each of the answer options represents an item related to a planned store expansion. Each of these items should be included in the expansion analysis with the exception of the cost: A) of the additional sales person that will be required B)of the blueprints that have been drawn of the expansion area C)of the inventory required to fill the additional retail space D)of the property insurance premium increase

B) Of the blueprints that have been drawn of the expansion area

The percentage of a portfolio's total value invested in a particular asset is called that asset's: A) Portfolio return. B) Portfolio weight. C) Portfolio risk. D) Rate of return. E) Investment value.

B) Portfolio Weight

If the financial markets are efficient then: A)stock prices should increase or decrease slowly as new events are analyzed and the information is absorbed by the markets. B)stock prices should respond only to unexpected news and events. C) stock prices should remain constant. D) an increase in the value of one security should be offset by a decrease in the value of another security.

B) Stock prices should respond only to unexpected news and events

The ___________________ tells us that the expected return on a risky asset depends only on that asset's systematic risk. A) Efficient Markets Hypothesis (EMH) B) systematic risk principle C) Open Markets Theorem D) Law of One Price E) principle of diversification

B) Systematic Risk Principle

Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $708,000 that would be depreciated on a straight-line basis to a zero balance over the four-year life of the project. The equipment can be sold for $220,000 after the four years. The project requires $46,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $211,500 a year. What is the net present value of this project if the relevant discount rate is 13 percent and the tax rate is 34 percent? A) $7,008.14 B) -$8,309.18 C) -$7,632.77 D) -$10,747.11

C) -7,632.77

The Golf Range is considering adding an additional driving range to its facility. The range would cost $229,000, would be depreciated on a straight-line basis over its seven-year life, and would have a zero salvage value. The anticipated revenue from the project is $62,500 a year with $18,400 of that amount being variable cost. The fixed cost would be $15,700. The firm believes that it will earn an additional $22,500 a year from its current operations should the driving range be added. The project will require $3,000 of net working capital, which is recoverable at the end of the project. What is the internal rate of return on this project at a tax rate of 34 percent? A) 9.68% B) 7.32% C) 8.32% D) 10.11%

C) 8.32%

The return that lenders require on their loaned funds to the firm is called the: A) Coupon rate. B) Current yield. C) Cost of debt. D) Capital gains yield. E) Cost of capital.

C) Cost of debt

Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as: A) Eroded cash flows B) Deviated projections C) Incremental cash flows D) Directly impacted flows

C) Incremental cash flows

Risk that affects a large number of assets, each to a greater or lesser degree, is called: A) Idiosyncratic risk. B) Diversifiable risk. C) Systematic risk. D) Asset-specific risk. E) Total risk.

C) Systematic Risk

To estimate the cost of equity for a firm, which of the following variables would NOT be needed? A) The current dividend payment. B) The risk-free interest rate. C) The debt/equity ratio. D) The beta coefficient. E) The market price of the stock.

C) The debt/equity ratio

You track the liquidity of companies and find that you can consistently earn unusually high returns by purchasing the shares of firms whose stock price falls below the cash value per share as indicated on the balance sheet. Which of the following describes this strategy? A) This would not be a violation of market efficiency. B) This would be a violation of weak form efficiency. C) This would be a violation of semi-strong form efficiency. D) This would be a violation of strong form efficiency. E) This would be a violation of all forms of market efficiency.

C) This would be a violation of semi-strong form of efficiency

Over the past 76 years, which of the following investments has been the least risky? A) Small company stocks B) Common stocks C) Treasury bills D) Treasury bonds E) Corporate bonds

C) Treasury Bills

Katie owns 100 shares of ABC stock. Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC?

Cost of equity

The return required by equity investors given the risk of the cash flows from the firm

Cost of equity

The weighted average cost of capital is defined as the weighted average of a firm's:

Cost of equity, cost of preferred, and its aftertax cost of debt

Last year you purchased 1,000 shares of Sun Microsystems stock for $15 per share. According to today's quote in The Wall Street Journal, the stock is currently selling for $3 per share. The stock pays no dividends. Your return on this investment is comprised of _____________. A) retained earnings and dividend yields B) an income return and a capital gains return C) a real return only D) a capital gains return only E) there is no return, since you lost money on this investment

D) A capital gains return only

Which one of the following will increase the cost of equity, all else held constant? A)Decrease in beta B)Increase in stock price C)Decrease in future dividends D)Increase in the dividend growth rate

D) Increase in the dividend growth rate

The linear relation between an asset's expected return and its beta coefficient is the: A) Reward to risk ratio. B) Portfolio weight. C) Portfolio risk. D) Security market line. E) Market risk premium.

D) Security market line

A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a(n): A) Fixed Cost B) Forgotten cost C) Variable cost D) Sunk cost

D) Sunk cost

Which of the following, among other things, is needed to calculate the weighted average cost of capital for a non-profit corporation? A) The par value of bonds outstanding. B) The bond rating of the firm's outstanding debt issues. C) The corporate tax rate. D) The number of preferred shares outstanding. E) The operating cash flow for the most recent reporting period.

D) The number of proffered shares outstanding

Risk that affects at most a small number of assets is called: A) Portfolio risk. B) Undiversifiable risk. C) Market risk. D) Unsystematic risk. E) Total risk.

D) Unsystematic Risk

Which one of the following statements is accurate for a levered firm? A)A firm's WACC will decrease whenever the firm's tax rate decreases B)An increase in the market risk premium will decrease a firm's WACC. C)WACC should be used as the required return for all proposed investments D)A reduction in the risk level of a firm will tend to decrease the firm's WACC.

D) a reduction in the risk level of a firm will tend to decrease the firm's WACC

If the financial markets are semistrong form efficient, then: A)technical analysis provides the best tool to use to gain a marketplace advantage. B)only the most talented analysts can determine the true value of a security C) no one individual has an advantage in the marketplace D) only individuals with private information have a marketplace advantage

D) only individuals with private information have a marketplace advantage

Which one of the following combinations will always result in an increased dividend yield?

Decrease in the stock price combined with a higher dividend amount

Dividend / invested stock price

Dividend yield

. An efficient capital market is one in which: A) Brokerage commissions are zero. B) Taxes are irrelevant. C) Securities always offer a positive rate of return to investors. D) Security prices are guaranteed (by the Securities and Exchange Commission) to be fair. E) Security prices reflect available information.

E) Security Prices reflect available information

Which of the following is generally considered to represent the risk-free return? A) Common stocks B) Small stocks C) Long-term government bonds D) Long-term corporate bonds E) Treasury bills

E) Treasury Bills

All of the following could be considered advantages in assessing the cost of preferred stock compared to the cost of common stock EXCEPT: A) Preferred stock generally carries with it a fixed dividend payment. B) Preferred stock is often rated for default risk. C) The cost of preferred stock is simply equal to its dividend yield. D) The cost of preferred stock can be calculated as a perpetuity based on the fixed dividend payment and the present stock price. E) Unlike common stock, preferred stock requires no assumptions be made about future cash flows.

E) Unlike common stock, preferred stock requires no assumptions be made about future cash flows.

The principle of diversification tells us that: A) Concentrating an investment in two or three large stocks will eliminate all of your risk. B) Concentrating an investment in two or three large stocks will reduce your overall risk. C) Spreading an investment across many diverse assets cannot (in an efficient market) eliminate any risk. D) Spreading an investment across many diverse assets will eliminate all of the risk. E) Spreading an investment across many diverse assets will eliminate some of the risk.

E)Spreading an investment across many diverse assets will eliminate some of the risk.

Stock prices are in equilibrium and "fairly priced"

Efficient market hypothesis

Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project?

Erosion

Forecasting risk is best best defined as:

Estimation risk

This return is based on the profitability of possible outcomes

Expected return

68%

First standard deviation

Average compound return per period over multiple periods

Geometric Return

Which one of the following is defined as the average compound return earned per year over a multiyear period?

Geometric average return

Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as

Incremental cash flow

The risk-free rate is 3.7 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.1 and an expected return of 13.1 percent. Stock B has a beta of .86 and an expected return of 11.4 percent. Are these stocks correctly priced? Why or why not?

No, Stock A is overpriced and Stock B is underpriced E(RA) = .037 + 1.1(.123 -.037) = .1316, or 13.16 percent E(RB) = .037 + .86(.123 -.037) = .1110, or 11.10 percent Stock A is overpriced because its expected return lies below the security market line. Stock B is underpriced because its expected return lies above the security market line

$ Return / $ invested

Percent return

Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent?

Portfolio weight

Another name for a projected income statement

Pro Forma income statement

A pro forma financial statement is a financial statement that:

Projects future years' operating results

Cash flows that will only occur if the project is accepted

Relevant cash flow

Another name for discount rate

Required return

Return earned on assets depends on the _______ if those assets

Risk

The dispersion, spread, or volatility of returns

Risk

The higher the beta, greater the _____________ ___________ should be

Risk Premium

On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called?

Risk premium

The value of a capital assets at the end of the projection period

Salvage

Kate is analyzing a proposed project to determine how changes in the sales quantity would affect the project's net present value. What type of analysis is being conducted?

Sensitivity analysis

Over the period of 1926-2014, which one of the following investment classes had the highest volatility of returns?

Small company stocks

Allows analysis of each project in isolation from the firm simply by focusing on incremental cash flows

Stand - alone principles

Square root of variation

Standard Deviation

This measures total risk

Standard deviation

Which one of the following is the positive square root of the variance?

Standard deviation

Which one of the following refers to the option to expand into related businesses in the future?

Strategic option

A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a(n)

Sunk cost

Non-diversified / Market risk affects a large number of assets

Systematic risk

The expected return depends only on the assets

Systematic risk

For the period 1926-2014, which one of the following had the smallest risk premium?

T- Bills

The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:

Tax Shield

A firm has a return on equity of 12.4 percent according to the dividend growth model and a return of 18.7 percent according to the capital asset pricing model. The market rate of return is 13.5 percent. What rate should the firm use as the cost of equity when computing the firm's weighted average cost of capital (WACC)?

The arithmetic average of 12.4% and 18.7%

Expected return + unexpected return

Total expected return

This can be eliminated by combining assets into a portfolio

Unsystematic risk

Weighted average of squared deviations

Variance

SML and dividend discount model

Ways to find the required rate of return

Proportion of the market value of equity and the market value of debt

Weighted average cost of capital

The weighted average of the firm's costs of equity, preferred stock, and aftertax debt is the: A) Reward to risk ratio for the firm. B) Expected capital gains yield for the stock. C) Expected capital gains yield for the firm. D) Portfolio beta for the firm. E) Weighted average cost of capital (WACC).

Weighted average cost of capital (WACC)

Expected return of a portfolio is the weighted average of the

Weighted average of the expected returns fir each asset in the portfolio

All else constant, an increase in a firm's cost of debt

Will result in an increase in the firm's cost of capital

This is recovered in final year if a projected cash flow statement

Working capital

a portfolio is

a group of assets held by an investor

Semistrong form market efficiency states that the value of a security is based on

all public and private information

Systematic risk is defined as

any risk that affects a large number of assets.

A collection of assets

portfolio

Theoretically, the greater the risk, the greater the ___________

return

Kate is the CFO of a major firm and has the job of assigning discount rates to each project under consideration. Kate's method of doing this is to assign an incrementally higher rate as the risk level of the project increases and a lower rate as the risk level declines. Kate is applying the ___ approach.

subjective

Beta measures this type of risk

systematic risk

The standard deviation measures the ____ of a security's returns over time

volatility