FIN 351 Final Ch12-14

cost of capital

FisherCo is intending to invest in a new project. The ________ is the minimum rate of return the firm will accept on this project. average arithmetic return expected return market rate of return internal rate of return cost of capital

risks associated with the use of the funds required by the project.

For any given capital project proposal, the discount rate should be based on the: company's overall weighted average cost of capital. actual sources of funding used for the project. average of the company's overall cost of capital for the past five years. current risk level of the overall firm. risks associated with the use of the funds required by the project.

reward-to-risk ratio.

If the market is efficient and securities are priced fairly, all securities will have the same: variance. standard deviation. reward-to-risk ratio. beta value. market risk premium.

cost of equity.

Okonjo Economics has a debt-equity ratio of .38. All of the firm's outstanding shares were purchased by a small number of investors. The return these investors require is called the: dividend yield. cost of equity. capital gains yield. cost of capital. income return.

portfolio weight.

Rafia 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, Gambrell & Valdez. The twelve percent figure is called a(n): portfolio return. portfolio weight. degree of risk. price-earnings ratio. index value.

the returns currently required by both debtholders and stockholders.

To determine a firm's cost of capital, one must include: only the return required by the firm's current shareholders. only the current market rate of return on equity shares. the weighted costs of all future funding sources. the returns currently required by both debtholders and stockholders. the company's original debt-equity ratio.

Standard deviation; beta

________ measures total risk, and ________ measures systematic risk. Beta; alpha Beta; standard deviation Alpha; beta Standard deviation; beta Standard deviation; variance

is dependent upon a reliable estimate of the market risk premium.

Assume Barnes' Boots has a debt-equity ratio of .52. The firm uses the capital asset pricing model to determine its cost of equity. Accordingly, the firm's estimated cost of equity: is affected by the firm's rate of growth projections. implies that the firm pays out all of its earnings to its shareholders. is dependent upon a reliable estimate of the market risk premium. would be unaffected if the dividend discount model were applied instead. will be unaffected by changes in overall market risks.

is affected by both a change in the firm's beta and the firm's projected rate of growth.

Assume a firm has a debt-equity ratio of .36. The firm's cost of equity: tends to remain static even as the company's level of risk increases. increases as the unsystematic risk of the company's stock increases. is affected by both a change in the firm's beta and the firm's projected rate of growth. equals the risk-free rate plus the market risk premium. equals the company's pretax weighted average cost of capital.

Efficient capital market

Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions? Riskless market Evenly distributed market Zero volatility market Blume's market Efficient capital market

Investors panic causing security prices around the globe to fall precipitously.

Of the options listed below, which is the best example of systematic risk? Investors panic causing security prices around the globe to fall precipitously. A flood washes away a firm's warehouse. A city imposes an additional one percent sales tax on all products. A toymaker has to recall its top-selling toy. Corn prices increase due to increased demand for alternative fuels.

smallest 20 percent of the companies listed on the NYSE.

Small-company stocks, as the term is used in the textbook, are best defined as the: 500 newest corporations in the U.S. companies whose stock trades OTC. smallest 20 percent of the companies listed on the NYSE. smallest 25 percent of the companies listed on Nasdaq. companies whose stock is listed on Nasdaq.

capital asset pricing model

The ________ explains the relationship between the expected return on a security and the level of that security's systematic risk. capital asset pricing model time value of money equation unsystematic risk equation market performance equation expected risk formula

geometric

The average compound return earned per year over a multiyear period is called the _____ average return. arithmetic standard variant geometric real

return on a risky security minus the risk-free rate.

The excess return is computed as the: return on a security minus the inflation rate. return on a risky security minus the risk-free rate. risk premium on a risky security minus the risk-free rate. risk-free rate plus the inflation rate. risk-free rate minus the inflation rate.

increase the risk premium.

To convince investors to accept greater volatility, you must: decrease the risk premium. increase the risk premium. decrease the real return. decrease the risk-free rate. increase the risk-free rate.

are based on the market values of the outstanding securities.

When calculating a firm's weighted average cost of capital, the capital structure weights: are based on the book values of debt and equity. are based on the market values of the outstanding securities. depend upon the financing obtained to fund each specific project. remain constant over time unless new securities are issued or outstanding securities are redeemed. are restricted to debt and common stock.

Weak

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst? Weak Semiweak Semistrong Strong Perfect

The simplicity of the model.

Which of the following is the main advantage of using the dividend growth model to estimate a firm's cost of equity? The ability to apply either current or future tax rates. The model's applicability to all corporations. The model's consideration of risk. The stability of the computed cost of equity over time. The simplicity of the model.

I and III only

Which of the following statements are accurate? I. Nondiversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for nondiversifiable risk. IV. Diversifiable risks are market risks you cannot avoid. I and III only II and IV only I and II only III and IV only I, II, and III only

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

Which of the following statements best describes the principle of diversification? Concentrating an investment in two or three stocks will eliminate all of the unsystematic risk. Concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. Spreading an investment across multiple diverse companies will not lower the total risk. Spreading an investment across many diverse assets will eliminate all of the systematic risk. Spreading an investment across many diverse assets will eliminate some of the total risk.

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

Which of the following statements regarding a firm's pretax cost of debt is accurate? It is based on the current yield to maturity of the company's outstanding bonds. It is equal to the coupon rate on the latest bonds issued by the company. It is equivalent to the average current yield on all of a company's outstanding bonds. It is based on the original yield to maturity on the latest bonds issued by a company. It must be estimated as it cannot be directly observed in the market.

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

Which of the following statements regarding the weighted average cost of capital is accurate? It equals the aftertax cost of the outstanding liabilities. It should be used as the required return when analyzing any new project. It is the return investors require on the total assets of the firm. It remains constant when the debt-equity ratio changes. It is unaffected by changes in corporate tax rates.

It can be effectively eliminated by portfolio diversification.

Which of the following statements regarding unsystematic risk is accurate? It can be effectively eliminated by portfolio diversification. It is compensated for by the risk premium. It is measured by beta. It is measured by standard deviation. It is related to the overall economy.

Capital gains yield and total return

Which of the following yields on a stock can be negative? Dividend yield Capital gains yield Capital gains yield and total return Dividend yield, capital gains yield, and total return Dividend yield and total return

U.S. Treasury bills

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2019? Long-term government bonds Small-company stocks Large-company stocks Long-term corporate bonds U.S. Treasury bills

U.S. Treasury bills

Which one of the following had the least volatile annual returns over the period of 1926-2019? Large-company stocks Inflation Long-term corporate bonds U.S. Treasury bills Intermediate-term government bonds

Normal distribution

Which one of the following is defined by its mean and its standard deviation? Arithmetic nominal return Geometric real return Normal distribution Variance Risk premium

A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio.

Which one of the following statements is accurate? Portfolio betas range between −1.0 and +1.0. A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio. A portfolio beta cannot be computed from the betas of the individual securities comprising the portfolio because some risk is eliminated via diversification. A portfolio of U.S. Treasury bills will have a beta of +1.0. The beta of a market portfolio is equal to zero.

cost of debt.

Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest rate is called the: compound rate. current yield. cost of debt. capital gains yield. cost of capital.