'' MGF Final

B. Changes in the sign of the Cash Flows

A project can have as many different Internal Rates of Return (IRR) as it has: a. Periods of Cash Flow b. Changes in the sign of the cash flows c. Cash Inflows d. Cash Outflows

D. 2.74 years Payback Period = "Zig Zag Rule" = _____ + _____ / ______

A project has the following cash flows. What is the Payback Period? a. 3.33 years b. 2.38 years c. 3.01 years d. 2.74 years

A. Negative NPV

A project requires an initial outlay of $10 million. If the cost of capital exceeds the project IRR, then the project has a(n): a. Negative NPV b. Acceptable payback period c. positive NPV d. Positive Profitability Index

D. Be unchanged

A project's Payback Period is determined to be 4 years. If it is later discovered that additional Cash Flows will be generated in years 5 and 6, then the project's Payback Period will: a. Be reduced b. Be increased c. Change but the discount rate must be known to determine the nature of the change d. Be unchanged

C. $53.33 Rate of Return = (End - Beg.) + Div / Beg.

A share of stock currently sells for $60, pays an annual dividend of $4.00, and earned a rate of return of 20% over the past year. What did this stock sell for one year ago? a. $46.15 b. $48.46 c. $53.33 d. $42.00

C. 11.10% Expected Return on Stock = Return * Probability, then Sum of all totals

A stock is expected to return 11% in a normal economy, 19% if the economy booms, and lose 8% if the economy moves into a recessionary period. Economists predict a 65% chance of a normal economy, a 25% chance of a boom, and a 10% chance of a recession. What is the expected return on the stock? a. 11.98% b. 11.23 c. 11.10% d. 12.06%

TRUE

Average returns on high-risk assets are higher than those on low-risk assets True or False?

TRUE

Beta Measures a stock's sensitivity to market risks True or False?

D. 16.67% Variance of Returns = (D -D1)^2/N

Calculate the Variance of returns for Alphabet stock with the following historical rates of return: a. 100.00 b. 33.33 c. 50.00 d. 16.67

FALSE: You first and foremost look at the NPV to determine which project to choose

For mutually exclusive projects, the project with the highre IRR is the correct selection True or False?

UNKNOWN

Given the following information, what is the expected return on a portfolio that is invested 35% in Stock A, 45% in Stock B, and the balance in Stock C? a. 12.91% b. 13.46% c. 12.04% d. 11.87% e. 12.16%

A. Capital Rationing. Since the company has a limited amount of money, they would not be able to afford the project with the highest NPV. Instead, they must look at which project with give them the highest Profitability Index.

Given the various investment options listed, what investment criteria concept might make an investor select Project B over other projects? a. Capital Rationing b. Mutually Exclusive Projects c. The Gold Standard d. The Internal Rate of Return Rule

C. Three

How many IRR's are possible for the following set of cash flows? CF0 = -$1,0000, C1 = $500, C2 = -$300, C3 = $1,000 C4 = $200 a. One b. Two c. Three d. Four

A. It has a positive NPV

If a project has a cost of $50,000 and a Profitability Index of 0.45, then: a. It has a positive NPV b. Its Cash Flow is $100,00 c. Its NPV could be positive or negative depending on cost of capital d. It has a negative NPV

C. Exceed 5 Years

If a project has a payback period of 5 years and a cost of capital of 10%, then the Discounted Payback Period will: a. Be less than 5 years b. Decrease if the payback period increases due to revised cash flows c. Exceed 5 years d. Decrease if the cost of capital increases

FALSE: If a project has multiple IRRs, none are necessarily "incorrect", it just tells you the overall cash flows throughout a project.

If a project has multiple IRRs, the lowest one is incorrect. True or False?

C. The project should be rejected

If a project's NPV is calculated to be negative what should a project manager do? a. The present value of the project cost should be determined b. The profitability index should be calculated c. The project should be rejected d. The discount rate should be decreased

D. Add the same amount of value to the firm

If two projects offer the same positive NPV, then they: a. Are mutually exclusive projects b. Must have the same IRR c. Must have the same Payback Period d. Add the same amount of value to the firm

C. 9% Risk Premium = Rate of Return - Treasury Bill

In a year in which common stocks offered an average return of 12% and Treasury bills offered 3%. The risk premium for common stocks was: a. 12% b. 3% c. 9% d. 1%

C. Stocks with returns that are not correlated

In general, which stocks should be combined into a portfolio if the goal is the greatest reduction possible in overall portfolio risk? a. Stocks with returns that have the highest specific risk b. Stock returns that are positively correlated c. Stocks with returns that are not correlated d. Stocks that have the highest expected returns

A. Systematic Risk

Investors require a risk premium as compensation for bearing: a. Systematic Risk b. Alpha Risk c. Residual Risk d. Unsystematic Risk

FALSE: Common stocks are riskier than bonds in general, and Treasury bills are less risky than Long-term bonds

Long-term bonds are the only portfolio of securities found to be riskier than common stocks True or False?

TRUE

Market Risk Premium is defined as the difference between the market rate of return and the risk-free interest rate True or False?

FALSE: Market Risk can never be completely eliminated

Market risk can be eliminated in a stock portfolio through diversification True or False?

D. NPV

Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation? a. Payback Period b. Internal Rate of Return c. Profitability Index d. NPV e. Discounted Payback Period

A. Expected Rate of Return

Mary owns a risky stock and anticipates to earn 16.5% on her investment in that stock. Which one of the following best describes the 16.5% rate of return? a. Expected Rate of Return b. Risk Premium c. Systematic Risk d. Market Return

A. Are called Specific Risks

Risks that are peculiar to a single firm: a. Are called Specific Risks b. Are called Market Risks c. Cannot be diversified d. Tend to cause stocks to move together

B. There is Capital Rationing

Selecting the project(s) with the highest NPV(s) is not the correct decision rule when: a. There are mutually exclusive projects b. There is capital rationing c. Projects are long lived d. Projects are independent

A. 2.87 years Payback Period = "Zig Zag Rule" = ____ + ____ / _____

Services United is considering a new project that requires an initial cash investment of $26,000. The project will generate cash inflows of $2,500, $11,700, $13,500, and $10,000 over each of the next four years, respectively. How long will it take to recover the initial investment? a. 2.87 years b. 3.27 years c. 3.68 years d. 2.99 years e. 2.74 years

C. 11.16% Total Return= (End - Beg.) + Div / Beg.

Sue purchased a stock for $25 a share, held it for one year, received a $1.34 dividend, and sold the stock for $26.45. What total return did she earn? a. 14.23% b. 10.55% c. 11.16% d. 12.09%

D. Any risk that affects a large number of assets

Systematic Risk is defined as: a. Diversifiable risk b. Asset-specific risk c. The risk unique to a firm's management d. Any risk that affects a large number of assets e. The total risk of an individual security

TRUE

The CAPM states that the expected risk premium on any security equals its beta times the market risk premium True or False?

A. An index of 30 major blue-chip stocks

The Dow Jones Industrial Average is: a. An index of 30 major blue-chip stocks b. An index of 500 largest corporate stocks in America c. An equally weighted index of all stocks traded on the New York Stock Exchange d. The most representative of the stock market indexes

FALSE: The IRR is the discount rate, and you need to know the opportunity cost of capital to find this.

The IRR is the rate of return on the cash flows of the investment, also known as the opportunity cost of capital True or False?

D. Multiple Internal Rates of Return

The Modified Internal Rate of Return (MIRR) can be used to correct for: a. Borrowing Projects b. Negative NPV Calculations c. Undefined Payback Periods d. Multiple Internal Rates of Return

TRUE

The capital asset pricing model (CAPM) assumes that the stock market is dominated by well-diversified investors who are concerned only with Market Risk True of False?

C. Wider dispersion of those returns over time

The higher the standard deviation of a stock's returns, the: a. Lower the expected rate of return b. Higher the accuracy of predictions of the stock's return for any given year c. Wider dispersion of those returns over time d. Lower the level of specific risk

B. Discount rate that result in a zero net present value for the project

The internal rate of return is the: a. Project's current market rate of return b. Discount rate that results in a zero net present value for the project c. Rate of return required by the project's investors d. Discount rate that causes a project's after tax income to equal zero

A. Reduction in the portfolio's total risk

The major benefit of diversification is the: a. Reduction in the portfolio's total risk b. Increased Expected Return c. Removal of all negative risk assets from the portfolio d. Reduction in the portfolio's market risk

FALSE: The payback rule has nothing to do with the well-being of the shareholders. It only tells the company when they should expect to break even

The payback rule always makes shareholders better off. True or False?

FALSE: Specified Risk has to do with...

The risk that remains in well-diversified stock portfolio is known as specific risk. True or False?

TRUE

The security market line displays the relationship between expected return and beta True of False?

B. Volatility of the Rates of Return

The variance of an investment's returns is a measure of the: a. Average value of the investment b. Volatility of the Rates of Return c. Historic return over long time periods d. Probability of a negative return

C. Project C Profitability Index = NPV / Investment

Using the Profitability Index, which of the four projects is the best investment? a. Project A b. Project B c. Project C d. Project D

B. Common Stocks

Volatility is likely to be highest in which of the following investments? a. Corporate Bonds b. Common Stocks c. Treasury Bills d. Treasury Bonds

C. 10% Because...

What is the IRR of a project with the following cash flows: C0 = -$200, C1 = $110, C2 = $121? A. 5% B. Zero C. 10%

B. $16,081.60 NPV = CF/(1+r)^t , then Sum of all PV(CF) REMEMBER: 1. CF/(1+r)^1 2. CF/(1+r)^2 3. CF/(1+r)^3

What is the NPV of a project that costs $100,000 and generates cash flows $50,000 annually for 3 years if the cost of capital is 14%? a. $33,748.58 b. $16,081.60 c. $14,473.44 d. $13,397.57

D. -$2,687.98 NPV = CF/(1-r)^t, then Sum of All PV(CF)

What is the Net Present Value of a project with the following cash flows if the discount rate is 15%? a. $1,044.16 b. $1,035.24 c. -$1,618.48 d. -$2,687.98 e. $9,593.19

A. 100%

What is the standard deviation of returns for an investment that is equally likely to return 100% as it is to provide a 100% loss? a. 100% b. 0% c. 50%

D. -2.50% Total Return = (End - Beg.) / Beg.

What was the percentage return on a non-dividend-paying stock that was purchased for $40.00 and then sold after one year for $39.00? a. -2.56% b. -0.04% c. -0.39% d. -2.50%

C. NPV will be 0

When a project's Internal Rate of Return equals its opportunity cost of capital, then the: a. Project has no cash inflows b. NPV will be positive c. NPV will be 0 d. Project should be rejected

B. Highest NPV

When projects are mutually exclusive, you should choose the project with the: a. Highest IRR b. Highest NPV c. Longer Life d. Shorter Payback Period

A. Also to be high

When the annual rate of return on U.S. Treasury bills is historically high, investors expect the return on the stock market: a. Also to be high b. Independent of T-Bill Rate c. Considerably lower than normal d. About Average

TRUE: The higher the profitability index, the more you are likely to make good profit off of a project. Vice versa with a negative profitability Index.

When using a profitability index to select projects, a high value is preferred over a low value. True or False?

D. Tyson, Sony, Apple, Delta

Which combination of U.S. companies is likely to provide the best diversification benefit? a. Facebook, Twitter, Google, Snap Inc. b. Walmart, Target, Home Depot, Lowes c. Ford, Toyota, Nissan, GM d. Tyson, Sony, Apple, Delta

A. Project A Because you begin making cash flows sooner

Which mutually exclusive project would you select, if both require initial investment of $1,000 and your required rate of return is 15%: Project A with three annual cash flows of $1,000, starting from next year (t=1); or Project B, with 3 years of zero cash flow followed by 3 years of $1,000 annually? a. Project A b. Project B c. Neither project should be selected d. You are indifferent since NPV's are equal

A. Profitability Index

Which of the following can be defined as a benefit-cost ratio? a. Profitability Index b. Internal Rate of Return c. NPV d. Modified Internal Rate of Return

D. Profitability Index, IRR, and NPV

Which of the following investment criteria takes the time value of money into consideration? a. NPV and Payback Period Only b. Internal Rate of Return and NPV only c. Profitability Index and NPV only d. Profitability Index, Internal Rate of Return and NPV

A. Payback Period

Which of the following investment decision rules tends to improperly reject long-lived projects? a. Payback Period b. NPV c. IRR d. Profitability Index

D. Net Present Value

Which of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities? a. Payback b. Internal Rate of Return c. Profitability Index d. Net Present Value

B. The IRR must be greater than 0

Which of the following statements is correct for a project with a positive NPV? a. The profitability index equals 1 b. The IRR must be greater than 0 c. The discount rate exceeds the cost of capital d. Accepting the project has an indeterminate effect on shareholders' wealth

D. A warehouse fire

Which one of the following is the best example of unsystematic risk? a. Decrease in corporate tax rates b. Decrease in the value of the dollar c. Increase in consumer spending d. A warehouse fire e. Inflation exceeding market expectations

E. Decrease in gross domestic product

Which one of these is the best example of systematic risk? a. Decrease in management bonuses for banking executives b. Increase in agricultural exports c. Discovery of a major gas field d. Decrease in textile imports e. Decrease in gross domestic product

D. U.S. Treasury Bills

Which one of these is the safest investment? a. Corporate Bonds b. Common Stock c. U.S. Treasury Bonds d. U.S. Treasury Bills

E. Project A, because it has a higher NPV

You are considering the following two mutually exclusive projects. The required return on each project is 12 percent. Which project should you accept and what is the best reason for that decision? a. Project A, because it pays back faster b. Project A, because it has a higher IRR c. Project B, because it has a higher IRR d. Project B, because it has a higher NPV e. Project A, because it has a higher NPV

C. 11.26% Expected Return on Portfolio = Investment * Expected Return then, Sum of all totals

You own a portfolio that is invested 43 percent in Stock A, 16 percent in Stock B, and the remainder in Stock C. The expected returns on stocks A, B, and C are 9.1%, 16.7%, and 11.4%, respectively. What is the expected return on the portfolio? a. 11.67% b. 11.02% c. 11.26% d. 10.55%