FIN Final Exam
According to Jeremy Siegel, the real return on stocks over the long-term has averaged about: A. 6.7 percent B. 8.7 percent C. 10.4 percent D. 12.3 percent E. 14.8 percent
A
If you excel in analyzing the future outlook of firms, you would prefer the financial markets be ____ form efficient so that you can have an advantage in the marketplace. A. weak B. semiweak C. semistrong D. strong E. perfect
A
The systematic risk of the market is measured by: A. a beta of 1.0. B. a beta of 0.0. C. a standard deviation of 1.0. D. a standard deviation of 0.0. E. a variance of 1.0.
A
How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio? A. 5 B. 10 C. 25 D. 50 E. 75
B
You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value. To determine that sales level you should compute the: A. contribution margin per unit and set that margin equal to the fixed costs per unit. B. contribution margin per unit. C. accounting break-even point. D. cash break-even point. E. financial break-even point.
E
The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's: A. incremental cash flows. B. internal cash flows. C. external cash flows. D. erosion effects. E. financing cash flows.
A
Changes in the net working capital requirements: A. can affect the cash flows of a project every year of the project's life. B. only affect the initial cash flows of a project. C. only affect the cash flow at time zero and the final year of a project. D. are generally excluded from project analysis due to their irrelevance to the total project. E. reflect only the changes in the current asset accounts.
A
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? A. risk premium B. geometric return C. arithmetic D. standard deviation E. variance
A
Sensitivity analysis is based on: A. varying a single variable and measuring the resulting change in the NPV of a project. B. applying differing discount rates to a project's cash flows and measuring the effect on the NPV. C. expanding and contracting the number of years for a project to determine the optimal project length. D. the best, worst, and most expected situations. E. various states of the economy and the probability of each state occurring.
A
Standard deviation measures which type of risk? A. total B. nondiversifiable C. unsystematic D. systematic E. economic
A
The change in revenue that occurs when one more unit of output is sold is referred to as: A. marginal revenue. B. average revenue. C. total revenue. D. erosion. E. scenario revenue.
A
The change in variable costs that occurs when production is increased by one unit is referred to as the: A. marginal cost. B. average cost. C. total cost. D. scenario cost. E. net cost.
A
The intercept point of the security market line is the rate of return which corresponds to: A. the risk-free rate. B. the market rate. C. a return of zero. D. a return of 1.0 percent. E. the market risk premium.
A
The market rate of return is 11 percent and the risk-free rate of return is 3 percent. Lexant stock has 3 percent less systematic risk than the market and has an actual return of 12 percent. This stock: A. is underpriced. B. is correctly priced. C. will plot below the security market line. D. will plot on the security market line. E. will plot to the right of the overall market on a security market line graph.
A
The return earned in an average year over a multi-year period is called the _____ average return. A. arithmetic B. standard C. variant D. geometric E. real
A
The top-down approach to computing the operating cash flow: A. ignores noncash expenses. B. applies only if a project increases sales. C. applies only to cost cutting projects. D. is equal to sales - costs - taxes + depreciation. E. is used solely to compute a bid price.
A
Unsystematic risk: A. can be effectively eliminated by portfolio diversification. B. is compensated for by the risk premium. C. is measured by beta. D. is measured by standard deviation. E. is related to the overall economy.
A
Which of the following characteristics relate to the cash break-even point for a given project? I. The project never pays back. II. The IRR equals the required rate of return. III. The NPV is negative and equal to the initial cash outlay. IV. The operating cash flow is equal to the depreciation expense. A. I and III only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV
A
Which of the following statements concerning risk are correct? 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. A. I and III only B. II and IV only C. I and II only D. III and IV only E. I, II, and III only
A
Which one of the following characteristics best describes a project that has a low degree of operating leverage? A. high variable costs relative to the fixed costs B. relatively high initial cash outlay C. an OCF that is highly sensitive to the sales quantity D. high level of forecasting risk E. a high depreciation expense
A
Which one of the following correctly describes the dividend yield? A. next year's annual dividend divided by today's stock price B. this year's annual dividend divided by today's stock price C. this year's annual dividend divided by next year's expected stock price D. next year's annual dividend divided by this year's annual dividend E. the increase in next year's dividend over this year's dividend divided by this year's dividend
A
Which one of the following is an example of systematic risk? A. investors panic causing security prices around the globe to fall precipitously B. a flood washes away a firm's warehouse C. a city imposes an additional one percent sales tax on all products D. a toymaker has to recall its top-selling toy E. corn prices increase due to increased demand for alternative fuels
A
Which one of the following is least apt to reduce the unsystematic risk of a portfolio? A. reducing the number of stocks held in the portfolio B. adding bonds to a stock portfolio C. adding international securities into a portfolio of U.S. stocks D. adding U.S. Treasury bills to a risky portfolio E. adding technology stocks to a portfolio of industrial stocks
A
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? A. capital asset pricing model B. time value of money equation C. unsystematic risk equation D. market performance equation E. expected risk formula
A
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? A. beta B. reward-to-risk ratio C. risk ratio D. standard deviation E. price-earnings ratio
A
Which one of the following statements is correct? A. The greater the volatility of returns, the greater the risk premium. B. The lower the volatility of returns, the greater the risk premium. C. The lower the average return, the greater the risk premium. D. The risk premium is unrelated to the average rate of return. E. The risk premium is not affected by the volatility of returns.
A
You are considering a project that you believe is quite risky. To reduce any potentially harmful results from accepting this project, you could: A. lower the degree of operating leverage. B. lower the contribution margin per unit. C. increase the initial cash outlay. D. increase the fixed costs per unit while lowering the contribution margin per unit. E. lower the operating cash flow of the project.
A
3. 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? A. portfolio return B. portfolio weight C. degree of risk D. price-earnings ratio E. index value
B
A company that utilizes the MACRS system of depreciation: A. will have equal depreciation costs each year of an asset's life. B. will have a greater tax shield in year two of a project than it would have if the firm had opted for straight-line depreciation, given the same depreciation life. C. can depreciate the cost of land, if it so desires. D. will expense less than the entire cost of an asset. E. cannot expense any of the cost of a new asset during the first year of the asset's life.
B
According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the: A. amount of total risk assumed and the market risk premium. B. market risk premium and the amount of systematic risk inherent in the security. C. risk free rate, the market rate of return, and the standard deviation of the security. D. beta of the security and the market rate of return. E. standard deviation of the security and the risk-free rate of return.
B
All of the following are related to a proposed project. Which of these should be included in the cash flow at time zero? I. purchase of $1,400 of parts inventory needed to support the project II. loan of $125,000 used to finance the project III. depreciation tax shield of $1,100 IV. $6,500 of equipment needed to commence the project A. I and II only B. I and IV only C. II and IV only D. I, II, and IV only E. I, II, III, and IV
B
Assume that you invest in a portfolio of large-company stocks. Further assume that the portfolio will earn a rate of return similar to the average return on large-company stocks for the period 1926-2010. What rate of return should you expect to earn? A. less than 10 percent B. between 10 and 12.5 percent C. between 12.5 and 15 percent D. between 15 and 17.5 percent E. more than 17.5 percent
B
At a minimum, which of the following would you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset? I. asset's standard deviation II. asset's beta III. risk-free rate of return IV. market risk premium A. I and III only B. II and IV only C. III and IV only D. I, III, and IV only E. I, II, III, and IV
B
Efficient financial markets fluctuate continuously because: A. the markets are continually reacting to old information as that information is absorbed. B. the markets are continually reacting to new information. C. arbitrage trading is limited. D. current trading systems require human intervention. E. investments produce varying levels of net present values.
B
Estimates of the rate of return on a security based on a historical arithmetic average will probably tend to _____ the expected return for the long-term and estimates using the historical geometric average will probably tend to _____ the expected return for the short-term. A. overestimate; overestimate B. overestimate; underestimate C. underestimate; overestimate D. underestimate; underestimate E. accurately; accurately
B
Fixed costs: A. change as a small quantity of output produced changes. B. are constant over the short-run regardless of the quantity of output produced. C. are defined as the change in total costs when one more unit of output is produced. D. are subtracted from sales to compute the contribution margin. E. can be ignored in scenario analysis since they are constant over the life of a project.
B
The primary purpose of portfolio diversification is to: A. increase returns and risks. B. eliminate all risks. C. eliminate asset-specific risk. D. eliminate systematic risk. E. lower both returns and risks.
C
If a stock portfolio is well diversified, then the portfolio variance: A. will equal the variance of the most volatile stock in the portfolio. B. may be less than the variance of the least risky stock in the portfolio. C. must be equal to or greater than the variance of the least risky stock in the portfolio. D. will be a weighted average of the variances of the individual securities in the portfolio. E. will be an arithmetic average of the variances of the individual securities in the portfolio.
B
Individuals who continually monitor the financial markets seeking mispriced securities: A. earn excess profits over the long-term. B. make the markets increasingly more efficient. C. are never able to find a security that is temporarily mispriced. D. are overwhelmingly successful in earning abnormal profits. E. are always quite successful using only historical price information as their basis of evaluation.
B
Operating leverage is the degree of dependence a firm places on its: A. variable costs. B. fixed costs. C. sales. D. operating cash flows. E. net working capital.
B
Scenario analysis is defined as the: A. determination of the initial cash outlay required to implement a project. B. determination of changes in NPV estimates when what-if questions are posed. C. isolation of the effect that a single variable has on the NPV of a project. D. separation of a project's sunk costs from its opportunity costs. E. analysis of the effects that a project's terminal cash flows has on the project's NPV.
B
Sensitivity analysis determines the: A. range of possible outcomes given that most variables are reliable only within a stated range. B. degree to which the net present value reacts to changes in a single variable. C. net present value range that can be realized from a proposed project. D. degree to which a project relies on its fixed costs. E. ideal ratio of variable costs to fixed costs for profit maximization.
B
Standard deviation is a measure of which one of the following? A. average rate of return B. volatility C. probability D. risk premium E. real returns
B
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? A. index B. portfolio C. collection D. grouping E. risk-free
B
Systematic risk is measured by: A. the mean. B. beta. C. the geometric average. D. the standard deviation. E. the arithmetic average.
B
Ted is analyzing a project using simulation. His focus is limited to the short-term. To ease the simulation process, he is combining expenses into various categories. Which one of the following should he include in the fixed cost category? A. production department payroll taxes B. equipment insurance C. sales tax D. raw materials E. product shipping costs
B
The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk. A. efficient markets hypothesis B. systematic risk principle C. open markets theorem D. law of one price E. principle of diversification
B
The average annual return on small-company stocks was about _____ percent greater than the average annual return on large-company stocks over the period 1926-2010. A. 3 B. 5 C. 7 D. 9 E. 11
B
The bottom-up approach to computing the operating cash flow applies only when: A. both the depreciation expense and the interest expense are equal to zero. B. the interest expense is equal to zero. C. the project is a cost-cutting project. D. no fixed assets are required for a project. E. both taxes and the interest expense are equal to zero.
B
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? A. depreciation tax shield B. tax due on the salvage value of that asset C. current year's operating cash flow D. change in net working capital E. MACRS depreciation for the current year
B
The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the: A. market risk premium. B. risk premium. C. systematic return. D. total return. E. real rate of return.
B
The excess return is computed as the: A. return on a security minus the inflation rate. B. return on a risky security minus the risk-free rate. C. risk premium on a risky security minus the risk-free rate. D. the risk-free rate plus the inflation rate. E. risk-free rate minus the inflation rate.
B
The expected risk premium on a stock is equal to the expected return on the stock minus the: A. expected market rate of return. B. risk-free rate. C. inflation rate. D. standard deviation. E. variance.
B
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? A. underlying value principle B. stand-alone principle C. equivalent cost principle D. salvage principle E. fundamental principle
B
To convince investors to accept greater volatility, you must: A. decrease the risk premium. B. increase the risk premium. C. decrease the real return. D. decrease the risk-free rate. E. increase the risk-free rate.
B
When using the equivalent annual cost as a basis for deciding which equipment should be purchased, the equipment under consideration must fit which two of the following criteria? I. differing productive lives II. differing manufacturers III. required replacement at end of economic life IV. differing initial cost A. I and II B. I and III C. I and IV D. II and IIII E. II and IV
B
Which of the following statements are true based on the historical record for 1926-2010? I. Risk and potential reward are inversely related. II. Risk-free securities produce a positive real rate of return each year. III. Returns are more predictable over the short-term than they are over the long-term. IV. Bonds are generally a safer investment than are stocks. A. I only B. IV only C. II and III only D. II and IV only E. II, III, and IV only
B
Which one of the following is an example of a sunk cost? A. $1,500 of lost sales because an item was out of stock B. $1,200 paid to repair a machine last year C. $20,000 project that must be forfeited if another project is accepted D. $4,500 reduction in current shoe sales if a store commences selling sandals E. $1,800 increase in comic book sales if a store commences selling puzzles
B
Which one of the following is the depreciation method which allows accelerated write-offs of property under various lifetime classifications? A. IRR B. ACRS C. AAR D. straight-line to zero E. straight-line with salvage
B
Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold? A. degree of sensitivity B. degree of operating leverage C. accounting break-even D. cash break-even E. contribution margin
B
Which one of the following risks is irrelevant to a well-diversified investor? A. systematic risk B. unsystematic risk C. market risk D. nondiversifiable risk E. systematic portion of a surprise
B
Which one of the following should earn the most risk premium based on CAPM? A. diversified portfolio with returns similar to the overall market B. stock with a beta of 1.38 C. stock with a beta of 0.74 D. U.S. Treasury bill E. portfolio with a beta of 1.01
B
Which one of the following statements is a correct reflection of the U.S. markets for the period 1926-2010? A. U.S. Treasury bill returns never exceeded a 9 percent return in any one year during the period. B. U.S. Treasury bills provided a positive rate of return each and every year during the period. C. Inflation equaled or exceeded the return on U.S. Treasury bills every year during the period. D. Long-term government bonds outperformed U.S. Treasury bills every year during the period. E. National deflation occurred at least once every decade during the period.
B
Which one of the following statements is correct concerning a portfolio beta? A. Portfolio betas range between -1.0 and +1.0. B. A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio. C. A portfolio beta cannot be computed from the betas of the individual securities comprising the portfolio because some risk is eliminated via diversification. D. A portfolio of U.S. Treasury bills will have a beta of +1.0. E. The beta of a market portfolio is equal to zero.
B
Which one of the following statements is correct concerning bid prices? A. The bid price is the maximum price that a firm should bid. B. A firm can submit a bid that is higher than the computed bid price and still break even. C. A bid price ignores taxes. D. A bid price should be computed based solely on the operating cash flows of the project. E. A bid price should be computed based on a zero percent required rate of return.
B
Which one of the following statements is correct concerning unsystematic risk? A. An investor is rewarded for assuming unsystematic risk. B. Eliminating unsystematic risk is the responsibility of the individual investor. C. Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk. D. Beta measures the level of unsystematic risk inherent in an individual security. E. Standard deviation is a measure of unsystematic risk.
B
Which one of the following statements is correct? A. Project analysis should only include the cash flows that affect the income statement. B. A project can create a positive operating cash flow without affecting sales. C. The depreciation tax shield creates a cash outflow for a project. D. Interest expense should always be included as a cash outflow when analyzing a project. E. The opportunity cost of a company-owned building that is going to be used in a new project should be included as a cash inflow to the project.
B
Which one of the following statements related to capital gains is correct? A. The capital gains yield includes only realized capital gains. B. An increase in an unrealized capital gain will increase the capital gains yield. C. The capital gains yield must be either positive or equal to zero. D. The capital gains yield is expressed as a percentage of the sales price. E. The capital gains yield represents the total return earned by an investor.
B
Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage? A. hiring temporary workers from an employment agency rather than hiring part-time production employees B. subcontracting portions of the project rather than purchasing new equipment to do all the work in-house C. leasing equipment on a long-term basis rather than buying equipment D. lowering the projected selling price per unit E. changing the proposed labor-intensive production method to a more capital intensive method
B
The procedure of allocating a fixed amount of funds for capital spending to each business unit is called: A. marginal spending. B. capital preservation. C. soft rationing. D. hard rationing. E. marginal rationing.
C
The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly. A. real return B. actual return C. nominal return D. risk premium E. expected return
D
The real rate of return on a stock is approximately equal to the nominal rate of return: A. multiplied by (1 + inflation rate). B. plus the inflation rate. C. minus the inflation rate. D. divided by (1 + inflation rate). E. divided by (1 - inflation rate).
C
A project has a projected IRR of negative 100 percent. Which one of the following statements must also be true concerning this project? A. The discounted payback period equals the life of the project. B. The operating cash flow is positive and equal to the depreciation. C. The net present value of the project is negative and equal to the initial investment. D. The payback period is exactly equal to the life of the project. E. The net present value of the project is equal to zero.
C
A stock with an actual return that lies above the security market line has: A. more systematic risk than the overall market. B. more risk than that warranted by CAPM. C. a higher return than expected for the level of risk assumed. D. less systematic risk than the overall market. E. a return equivalent to the level of risk assumed.
C
According to theory, studying historical stock price movements to identify mispriced stocks: A. is effective as long as the market is only semistrong form efficient. B. is effective provided the market is only weak form efficient. C. is ineffective even when the market is only weak form efficient. D. becomes ineffective as soon as the market gains semistrong form efficiency. E. is ineffective only in strong form efficient markets.
C
An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis. A. forecasting B. scenario C. sensitivity D. simulation E. break-even
C
As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return. A. greater than B. equal to C. less than D. greater than or equal to E. unrelated to
C
As the degree of sensitivity of a project to a single variable rises, the: A. less important the variable to the final outcome of the project. B. less volatile the project's net present value to that variable. C. greater the importance of accurately predicting the value of that variable. D. greater the sensitivity of the project to the other variable inputs. E. less volatile the project's outcome.
C
At the accounting break-even point, the: A. payback period must equal the required payback period. B. NPV is zero. C. IRR is zero. D. contribution margin per unit equals the fixed costs per unit. E. contribution margin per unit is zero.
C
Bayside Marina just announced it is decreasing its annual dividend from $1.64 per share to $1.50 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price: A. was unaffected by the announcement. B. increased proportionately with the dividend decrease. C. decreased proportionately with the dividend decrease. D. decreased by $0.14 per share. E. increased by $0.14 per share.
C
Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs, differing machine lives, and will be replaced when worn out. Which one of the following computational methods should Dan use as the basis for his decision? A. internal rate of return B. operating cash flow C. equivalent annual cost D. depreciation tax shield E. bottom-up operating cash flow
C
Danielle's is a furniture store that is considering adding appliances to its offerings. Which of the following should be considered incremental cash flows of this project? I. utilizing the credit offered by a supplier to purchase the appliance inventory II. benefiting from increased furniture sales to appliance customers III. borrowing money from a bank to fund the appliance project IV. purchasing parts for inventory to handle any appliance repairs that might be necessary A. I and II only B. III and IV only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV
C
Dexter Smith & Co. is replacing a machine simply because it has worn out. The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its 5-year life. The firm has a 34 percent tax rate, uses straight-line depreciation over an asset's life, and has a positive net income. Given this, which one of the following statements is correct? A. As a project, the new machine has a net present value equal to minus one times the machine's purchase price. B. The new machine will have a zero rate of return. C. The new machine will generate positive operating cash flows, at least in the first few years of its life. D. The new machine will create a cash outflow when the firm disposes of it at the end of its life. E. The new machine creates erosion effects.
C
Forecasting risk is defined as the possibility that: A. some proposed projects will be rejected. B. some proposed projects will be temporarily delayed. C. incorrect decisions will be made due to erroneous cash flow projections. D. some projects will be mutually exclusive. E. tax rates could change over the life of a project.
C
Given the following, which feature identifies the most desirable level of output for a project? A. operating cash flow equal to the depreciation expense B. payback period equal to the project's life C. discounted payback period equal to the project's life D. zero IRR E. zero operating cash flow
C
If the variability of the returns on large-company stocks were to increase over the long-term, you would expect which of the following to occur as a result? I. decrease in the average rate of return II. increase in the risk premium III. increase in the 68 percent probability range of the frequency distribution of returns IV. decrease in the standard deviation A. I only B. IV only C. II and III only D. I and III only E. II and IV only
C
Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The firm is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project? A. storing supplies in the same space currently used for materials storage B. utilizing the basket manager to oversee wreath production C. hiring additional employees to handle the increased workload should the firm accept the wreath project D. researching the market to determine if wreath sales might be profitable before deciding to proceed E. planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt
C
Scenario analysis is best suited to accomplishing which one of the following when analyzing a project? A. determining how fixed costs affect NPV B. estimating the residual value of fixed assets C. identifying the potential range of reasonable outcomes D. determining the minimal level of sales required to break-even on an accounting basis E. determining the minimal level of sales required to break-even on a financial basis
C
Small-company stocks, as the term is used in the textbook, are best defined as the: A. 500 newest corporations in the U.S. B. firms whose stock trades OTC. C. smallest twenty percent of the firms listed on the NYSE. D. smallest twenty-five percent of the firms listed on NASDAQ. E. firms whose stock is listed on NASDAQ.
C
The CFO of Edward's Food Distributors is continually receiving capital funding requests from its division managers. These requests are seeking funding for positive net present value projects. The CFO continues to deny all funding requests due to the financial situation of the company. Apparently, the company is: A. operating at the accounting break-even point. B. operating at the financial break-even point. C. facing hard rationing. D. operating with zero leverage. E. operating at maximum capacity.
C
The bid price always assumes which one of the following? A. A project has a one-year life. B. The aftertax net income of the project is zero. C. The net present value of the project is zero. D. Any assets purchased will have a positive salvage value at the end of the project. E. Assets will be depreciated based on MACRS.
C
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. A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV
C
The contribution margin per unit is equal to the: A. sales price per unit minus the total costs per unit. B. variable cost per unit minus the fixed cost per unit. C. sales price per unit minus the variable cost per unit. D. pre-tax profit per unit. E. aftertax profit per unit.
C
The degree of operating leverage is equal to: A. the percentage change in quantity divided by the percentage change in OCF. B. the percentage change in sales divided by the percentage change in OCF. C. 1 + FC/OCF. D. 1 + VC/OCF. E. 1 - (FC + VC)/OCF.
C
The expected rate of return on a stock portfolio is a weighted average where the weights are based on the: A. number of shares owned of each stock. B. market price per share of each stock. C. market value of the investment in each stock. D. original amount invested in each stock. E. cost per share of each stock held.
C
Three years ago, Knox Glass purchased a machine for a 3-year project. The machine is being depreciated straight-line to zero over a 5-year period. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate) A. Sale price + (Sales price - Book value) × T B. Sale price + (Sales price - Book value) × (1 - T) C. Sale price + (Book value - Sale price) × T D. Sale price + (Book value - Sale price) × (1 - T) E. Sale price × (1 - T)
C
Variable costs can be defined as the costs that: A. remain constant for all time periods. B. remain constant over the short run. C. vary directly with sales. D. are classified as non-cash expenses. E. are inversely related to the number of units sold.
C
Webster Iron Works started a new project last year. As it turns out, the project has been operating at its accounting break-even level of output and is now expected to continue at that level over its lifetime. Given this, you know that the project: A. will never pay back. B. has a zero net present value. C. is operating at a higher level than if it were operating at its cash break-even level. D. is operating at a higher level than if it were operating at its financial break-even level. E. is lowering the total net income of the firm.
C
Which of the following statements is correct in relation to a stock investment? I. The capital gains yield can be positive, negative, or zero. II. The dividend yield can be positive, negative, or zero. III. The total return can be positive, negative, or zero. IV. Neither the dividend yield nor the total return can be negative. A. I only B. I and II only C. I and III only D. I and IV only E. IV only
C
Which of the following values will be equal to zero when a firm is producing the accounting break-even level of output? I. operating cash flow II. internal rate of return III. net income IV. payback period A. I only B. III only C. II and III only D. I and IV only E. I, II, and III only
C
Which one of the following best describes pro forma financial statements? A. financial statements expressed in a foreign currency B. financial statements where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales C. financial statements showing projected values for future time periods D. financial statements expressed in real dollars, given a stated base year E. financial statements where all accounts are expressed as a percentage of last year's values
C
Which one of the following best describes the concept of erosion? A. expenses that have already been incurred and cannot be recovered B. change in net working capital related to implementing a new project C. the cash flows of a new project that come at the expense of a firm's existing cash flows D. the alternative that is forfeited when a fixed asset is utilized by a project E. the differences in a firm's cash flows with and without a particular project
C
Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? A. providing both ketchup and mustard for its customer's use B. repairing the roof of the hot dog stand because of water damage C. selling fewer hot dogs because hamburgers were added to the menu D. offering French fries but not onion rings E. losing sales due to bad weather
C
Which one of the following categories of securities had the highest average return for the period 1926-2010? A. U.S. Treasury bills B. large company stocks C. small company stocks D. long-term corporate bonds E. long-term government bonds
C
Which one of the following costs was incurred in the past and cannot be recouped? A. incremental B. side C. sunk D. opportunity E. erosion
C
Which one of the following earned the highest risk premium over the period 1926-2010? A. long-term corporate bonds B. U.S. Treasury bills C. small-company stocks D. large-company stocks E. long-term government bonds
C
Which one of the following events would be included in the expected return on Sussex stock? A. The chief financial officer of Sussex unexpectedly resigned. B. The labor union representing Sussex' employees unexpectedly called a strike. C. This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated. D. The price of Sussex stock suddenly declined in value because researchers accidentally discovered that one of the firm's products can be toxic to household pets. E. The board of directors made an unprecedented decision to give sizeable bonuses to the firm's internal auditors for their efforts in uncovering wasteful spending.
C
Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero? A. EBIT + D B. EBIT - T C. NI + D D. (Sales - Costs) × (1 - D) × (1- T) E. (Sales - Costs) × (1 - T)
C
Which one of the following is a correct ranking of securities based on their volatility over the period of 1926-2010? Rank from highest to lowest. A. large company stocks, U.S. Treasury bills, long-term government bonds B. small company stocks, long-term corporate bonds, large company stocks C. small company stocks, long-term corporate bonds, intermediate-term government bonds D. large company stocks, small company stocks, long-term government bonds E. intermediate-term government bonds, long-term corporate bonds, U.S. Treasury bills
C
Which one of the following is a project cash inflow? Ignore any tax effects. A. decrease in accounts payable B. increase in inventory C. decrease in accounts receivable D. depreciation expense based on MACRS E. equipment acquisition
C
Which one of the following is a risk that applies to most securities? A. unsystematic B. diversifiable C. systematic D. asset-specific E. total
C
Which one of the following is defined by its mean and its standard deviation? A. arithmetic nominal return B. geometric real return C. normal distribution D. variance E. risk premium
C
Which one of the following is most directly affected by the level of systematic risk in a security? A. variance of the returns B. standard deviation of the returns C. expected rate of return D. risk-free rate E. market risk premium
C
Which one of the following is most indicative of a totally efficient stock market? A. extraordinary returns earned on a routine basis B. positive net present values on stock investments over the long-term C. zero net present values for all stock investments D. arbitrage opportunities which develop on a routine basis E. realizing negative returns on a routine basis
C
Which one of the following statements concerning U.S. Treasury bills is correct for the period 1926- 2010? A. The annual rate of return always exceeded the annual inflation rate. B. The average risk premium was 0.7 percent. C. The annual rate of return was always positive. D. The average excess return was 1.1 percent. E. The average real rate of return was zero.
C
Which one of the following statements is correct based on the historical record for the period 1926-2010? A. The standard deviation of returns for small-company stocks was double that of large-company stocks. B. U.S. Treasury bills had a zero standard deviation of returns because they are considered to be risk-free. C. Long-term government bonds had a lower return but a higher standard deviation on average than did long-term corporate bonds. D. Inflation was less volatile than the returns on U.S. Treasury bills. E. Long-term government bonds underperformed intermediate-term government bonds.
C
Which one of the following statements related to risk is correct? A. The beta of a portfolio must increase when a stock with a high standard deviation is added to the portfolio. B. Every portfolio that contains 25 or more securities is free of unsystematic risk. C. The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio. D. Adding five additional stocks to a diversified portfolio will lower the portfolio's beta. E. Stocks that move in tandem with the overall market have zero betas.
C
Which one of the following time periods is associated with high rates of inflation? A. 1929-1933 B. 1957-1961 C. 1978-1981 D. 1992-1996 E. 2001-2005
C
Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly? A. variance B. standard deviation C. reward-to-risk ratio D. beta E. risk premium
C
Which one of the following would make a project unacceptable? A. cash inflow for net working capital at time zero B. requiring fixed assets that would have no salvage value C. an equivalent annual cost that exceeds that of an alternative project D. lack of revenue generation E. a depreciation tax shield that exceeds the value of the interest expense
C
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. A. weak B. semiweak C. semistrong D. strong E. perfect
C
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? A. arithmetic return B. historical return C. expected return D. geometric return E. required return
C
A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20 percent. What type of risk does this news flash represent? A. portfolio B. nondiversifiable C. market D. unsystematic E. total
D
A project has a payback period that exactly equals the project's life. The project is operating at: A. its maximum capacity. B. the financial break-even point. C. the cash break-even point. D. the accounting break-even point. E. a zero level of output.
D
An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis. A. forecasting B. combined C. complex D. simulation E. break-even
D
An increase in which of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used. I. annual salary for the firm's president II. contribution margin per unit III. cost of equipment required by a project IV. variable cost per unit A. I and III only B. I and IV only C. II and III only D. I, III, and IV only E. I, II, and IV only
D
By definition, which one of the following must equal zero at the accounting break-even point? A. net present value B. internal rate of return C. contribution margin D. net income E. operating cash flow
D
Decreasing which one of the following will increase the acceptability of a project? A. sunk costs B. salvage value C. depreciation tax shield D. equivalent annual cost E. accounts payable requirement
D
Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the: A. method of analysis used to make the decision. B. initial cash outflow. C. ability to recoup any investment in net working capital. D. accuracy of the projected cash flows. E. length of the project.
D
Inside information has the least value when financial markets are: A. weak form efficient. B. semiweak form efficient. C. semistrong form efficient. D. strong form efficient. E. inefficient.
D
Net working capital: A. can be ignored in project analysis because any expenditure is normally recouped at the end of the project. B. requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project. C. is rarely affected when a new product is introduced. D. can create either a cash inflow or a cash outflow at time zero of a project. E. is the only expenditure where at least a partial recovery can be made at the end of a project.
D
Simulation analysis is based on assigning a _____ and analyzing the results. A. narrow range of values to a single variable B. narrow range of values to multiple variables simultaneously C. wide range of values to a single variable D. wide range of values to multiple variables simultaneously E. single value to each of the variables
D
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? A. The dividend yield is expressed as a percentage of the selling price. B. The capital gain would have been less had Stacy not received the dividends. C. The total dollar return per share is $3. D. The capital gains yield is positive. E. The dividend yield is greater than the capital gains yield.
D
The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than _____ form efficient. A. weak B. semiweak C. semistrong D. strong E. perfect
D
The average compound return earned per year over a multi-year period is called the _____ average return. A. arithmetic B. standard C. variant D. geometric E. real
D
The depreciation tax shield is best defined as the: A. amount of tax that is saved when an asset is purchased. B. tax that is avoided when an asset is sold as salvage. C. amount of tax that is due when an asset is sold. D. amount of tax that is saved because of the depreciation expense. E. amount by which the aftertax depreciation expense lowers net income.
D
The expected return on a portfolio: I. can never exceed the expected return of the best performing security in the portfolio. II. must be equal to or greater than the expected return of the worst performing security in the portfolio. III. is independent of the unsystematic risks of the individual securities held in the portfolio. IV. is independent of the allocation of the portfolio amongst individual securities. A. I and III only B. II and IV only C. I and II only D. I, II, and III only E. I, II, III, and IV
D
The expected return on a stock computed using economic probabilities is: A. guaranteed to equal the actual average return on the stock for the next five years. B. guaranteed to be the minimal rate of return on the stock over the next two years. C. guaranteed to equal the actual return for the immediate twelve month period. D. a mathematical expectation based on a weighted average and not an actual anticipated outcome. E. the actual return you should anticipate as long as the economic forecast remains constant.
D
The expected return on a stock given various states of the economy is equal to the: A. highest expected return given any economic state. B. arithmetic average of the returns for each economic state. C. summation of the individual expected rates of return. D. weighted average of the returns for each economic state. E. return for the economic state with the highest probability of occurrence.
D
The historical record for the period 1926-2010 supports which one of the following statements? A. A higher-risk security will provide a higher rate of return next year than will a lower-risk security. B. If you need a stated amount of money next year, your best investment option today for those funds would be long-term government bonds. C. Increased long-run potential returns are obtained by lowering risks. D. It is possible for small-company stocks to more than double in value in any one given year. E. Inflation was positive each year throughout the period of 1926-2010.
D
The market risk premium is computed by: A. adding the risk-free rate of return to the inflation rate. B. adding the risk-free rate of return to the market rate of return. C. subtracting the risk-free rate of return from the inflation rate. D. subtracting the risk-free rate of return from the market rate of return. E. multiplying the risk-free rate of return by a beta of 1.0.
D
The operating cash flow for a project should exclude which one of the following? A. taxes B. variable costs C. fixed costs D. interest expense E. depreciation tax shield
D
The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following? A. salvage value B. wasted value C. sunk cost D. opportunity cost E. erosion
D
The reward-to-risk ratio for stock A is less than the reward-to-risk ratio of stock B. Stock A has a beta of 0.82 and stock B has a beta of 1.29. This information implies that: A. stock A is riskier than stock B and both stocks are fairly priced. B. stock A is less risky than stock B and both stocks are fairly priced. C. either stock A is underpriced or stock B is overpriced or both. D. either stock A is overpriced or stock B is underpriced or both. E. both stock A and stock B are correctly priced since stock A is riskier than stock B.
D
The stand-alone principle advocates that project analysis should be based solely on which one of the following costs? A. sunk B. total C. variable D. incremental E. fixed
D
Total risk is measured by _____ and systematic risk is measured by _____. A. beta; alpha B. beta; standard deviation C. alpha; beta D. standard deviation; beta E. standard deviation; variance
D
Uptown Promotions has three divisions. As part of the planning process, the CFO requested that each division submit its capital budgeting proposals for next year. These proposals represent positive net present value projects that fall within the long-range plans of the firm. The requests from the divisions are $4.2 million, $3.1 million, and $6.8 million, respectively. For the firm as a whole, the management of Uptown Promotions has limited spending to $10 million for new projects next year. This is an example of: A. scenario analysis. B. sensitivity analysis. C. determining operating leverage. D. soft rationing. E. hard rationing.
D
What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average? A. 1.0 percent B. 2.5 percent C. 5.0 percent D. 16 percent E. 32 percent
D
What was the average rate of inflation over the period of 1926-2010? A. less than 2.0 percent B. between 2.0 and 2.5 percent C. between 2.5 and 3.0 percent D. between 3.0 and 3.5 percent E. greater than 3.5 percent
D
What was the highest annual rate of inflation during the period 1926-2010? A. between 0 and 3 percent B. between 3 and 5 percent C. between 5 and 10 percent D. between 10 and 15 percent E. between 15 and 20 percent
D
When you assign the lowest anticipated sales price and the highest anticipated costs to a project, you are analyzing the project under the condition known as: A. best case sensitivity analysis. B. worst case sensitivity analysis. C. best case scenario analysis. D. worst case scenario analysis. E. base case scenario analysis.
D
Which of the following are examples of diversifiable risk? I. earthquake damages an entire town II. federal government imposes a $100 fee on all business entities III. employment taxes increase nationally IV. toymakers are required to improve their safety standards A. I and III only B. II and IV only C. II and III only D. I and IV only E. I, III, and IV only
D
Which of the following are inversely related to variable costs per unit? I. contribution margin per unit II. number of units sold III. operating cash flow per unit IV. net profit per unit A. I and II only B. III and IV only C. II, III, and IV only D. I, III, and IV only E. I, II, III, and IV
D
Which of the following should be included in the analysis of a new product? I. money already spent for research and development of the new product II. reduction in sales for a current product once the new product is introduced III. increase in accounts receivable needed to finance sales of the new product IV. market value of a machine owned by the firm which will be used to produce the new product A. I and III only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV
D
Which of the following statements are correct concerning diversifiable risks? I. Diversifiable risks can be essentially eliminated by investing in thirty unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk. A. I and III only B. II and IV only C. I and IV only D. I, II and III only E. I, II, III, and IV
D
Which of the following variables will be at their highest expected level under a worst case scenario? I. fixed cost II. sales price III. variable cost IV. sales quantity A. I only B. III only C. II and III only D. I and III only E. I, III, and IV only
D
Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas? A. reward-to-risk matrix B. portfolio weight graph C. normal distribution D. security market line E. market real returns
D
Which one of the following is the best example of a diversifiable risk? A. interest rates increase B. energy costs increase C. core inflation increases D. a firm's sales decrease E. taxes decrease
D
Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement? A. capital break-even B. cash break-even C. accounting break-even D. financial break-even E. internal break-even
D
Which one of the following statements best defines the efficient market hypothesis? A. Efficient markets limit competition. B. Security prices in efficient markets remain steady as new information becomes available. C. Mispriced securities are common in efficient markets. D. All securities in an efficient market are zero net present value investments. E. Profits are removed as a market incentive when markets become efficient.
D
Which one of the following statements concerning scenario analysis is correct? A. The pessimistic case scenario determines the maximum loss, in current dollars, that a firm could possibly incur from a given project. B. Scenario analysis defines the entire range of results that could be realized from a proposed investment project. C. Scenario analysis determines which variable has the greatest impact on a project's final outcome. D. Scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions. E. Management is guaranteed a positive outcome for a project when the worst case scenario produces a positive NPV.
D
Which one of the following statements is correct concerning market efficiency? A. Real asset markets are more efficient than financial markets. B. If a market is efficient, arbitrage opportunities should be common. C. In an efficient market, some market participants will have an advantage over others. D. A firm will generally receive a fair price when it issues new shares of stock. E. New information will gradually be reflected in a stock's price to avoid any sudden change in the price of the stock.
D
Which one of the following was the least volatile over the period of 1926-2010? A. large-company stocks B. inflation C. long-term corporate bonds D. U.S. Treasury bills E. intermediate-term government bonds
D
Which one of the following will be used in the computation of the best-case analysis of a proposed project? A. minimal number of units that are expected to be produced and sold B. the lowest expected salvage value that can be obtained for a project's fixed assets C. the most anticipated sales price per unit D. the lowest variable cost per unit that can reasonably be expected E. the highest level of fixed costs that is actually anticipated
D
Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project? A. leverage B. risk C. break-even D. sensitivity E. cash flow
D
18. Steve is fairly cautious when analyzing a new project and thus he projects the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected. Which type of analysis is Steve using? A. simulation testing B. sensitivity analysis C. break-even analysis D. rationing analysis E. scenario analysis
E
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? A. riskless market B. evenly distributed market C. zero volatility market D. Blume's market E. efficient capital market
E
Which one of the following is defined as the sales level that corresponds to a zero NPV? A. accounting break-even B. leveraged break-even C. marginal break-even D. cash break-even E. financial break-even
E
Assume you graph a project's net present value given various sales quantities. Which one of the following is correct regarding the resulting function? A. The steepness of the function relates to the project's degree of operating leverage. B. The steeper the function, the less sensitive the project is to changes in the sales quantity. C. The resulting function will be a hyperbole. D. The resulting function will include only positive values. E. The slope of the function measures the sensitivity of the net present value to a change in sales quantity.
E
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: A. financial rejection. B. project rejection. C. soft rationing. D. marginal rationing. E. capital rationing.
E
Brubaker & Goss has received requests for capital investment funds for next year from each of its five divisions. All requests represent positive net present value projects. All projects are independent. Senior management has decided to allocate the available funds based on the profitability index of each project since the company has insufficient funds to fulfill all of the requests. Management is following a practice known as: A. scenario analysis. B. sensitivity analysis. C. leveraging. D. hard rationing. E. soft rationing.
E
By definition, which one of the following must equal zero at the cash break-even point? A. net present value B. internal rate of return C. contribution margin D. net income E. operating cash flow
E
G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost? A. opportunity B. fixed C. incremental D. erosion E. sunk
E
Increasing which one of the following will increase the operating cash flow assuming that the bottom-up approach is used to compute the operating cash flow? A. erosion effects B. taxes C. fixed expenses D. salaries E. depreciation expense
E
PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing: A. financial deferral. B. financial allocation. C. capital allocation. D. marginal rationing. E. hard rationing.
E
Pro forma statements for a proposed project should: I. be compiled on a stand-alone basis. II. include all the incremental cash flows related to the project. III. generally exclude interest expense. IV. include all project-related fixed asset acquisitions and disposals. A. I and II only B. II and III only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV
E
Steve, the sales manager for TL Products, wants to sponsor a one-week "Customer Appreciation Sale" where the firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits. Which one of the following represents the price that should be charged for the additional units during this sale? A. average variable cost B. average total cost C. average total revenue D. marginal revenue E. marginal cost
E
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? A. yearly incremental costs B. sunk costs C. opportunity costs D. erosion cost E. equivalent annual cost
E
The base case values used in scenario analysis are the ones considered the most: A. optimistic. B. desired by management. C. pessimistic. D. conducive to creating a positive net present value. E. likely to occur.
E
The bid price is: A. an aftertax price. B. the aftertax contribution margin. C. the highest price you should charge if you want the project. D. the only price you can bid if the project is to be profitable. E. the minimum price you should charge if you want to earn a target return on investment.
E
The equivalent annual cost considers which of the following? I. required rate of return II. operating costs III. need for replacement IV. economic life A. I and II only B. II and IV only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV
E
The equivalent annual cost method is useful in determining: A. which one of two machines to purchase if the machines are mutually exclusive, have differing lives, and are a one-time purchase. B. the tax shield benefits of depreciation given the purchase of new assets for a project. C. the operating cash flows of a cost-cutting project. D. which one of two investments to accept when the investments have different required rates of return. E. which one of two machines should be purchased when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.
E
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 A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV
E
The net book value of equipment will: A. remain constant over the life of the equipment. B. vary in response to changes in the market value. C. decrease at a constant rate when MACRS depreciation is used. D. increase over the taxable life of an asset. E. decrease slower under straight-line depreciation than under MACRS.
E
The operating cash flow of a cost cutting project: A. is equal to the depreciation tax shield. B. is equal to zero because there is no incremental sales. C. can only be analyzed by projecting the sales and costs for a firm's entire operations. D. includes any changes that occur in the current accounts. E. can be positive even though there are no sales.
E
Valerie just completed analyzing a project. Her analysis indicates that the project will have a 6-year life and require an initial cash outlay of $320,000. Annual sales are estimated at $589,000 and the tax rate is 34 percent. The net present value is a negative $320,000. Based on this analysis, the project is expected to operate at the: A. maximum possible level of production. B. minimum possible level of production. C. financial break-even point. D. accounting break-even point. E. cash break-even point.
E
The president of Global Wholesalers would like to offer special sale prices to the firm's best customers under the following terms: 1. The prices will apply only to units purchased in excess of the quantity normally purchased by a customer. 2. The units purchased must be paid for in cash at the time of sale. 3. The total quantity sold under these terms cannot exceed the excess capacity of the firm. 4. The net profit of the firm should not be affected. 5. The prices will be in effect for one week only. Given these conditions, the special sale price should be set equal to the: A. average variable cost of materials only. B. average cost of all variable inputs. C. sensitivity value of the variable costs. D. marginal cost of materials only. E. marginal cost of all variable inputs.
E
The primary purpose of Blume's formula is to: A. compute an accurate historical rate of return. B. determine a stock's true current value. C. consider compounding when estimating a rate of return. D. determine the actual real rate of return. E. project future rates of return.
E
The principle of diversification tells us that: A. concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk. B. concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. C. spreading an investment across five diverse companies will not lower the total risk. D. spreading an investment across many diverse assets will eliminate all of the systematic risk. E. spreading an investment across many diverse assets will eliminate some of the total risk.
E
The standard deviation of a portfolio: A. is a measure of that portfolio's systematic risk. B. is a weighed average of the standard deviations of the individual securities held in that portfolio. C. measures the amount of diversifiable risk inherent in the portfolio. D. serves as the basis for computing the appropriate risk premium for that portfolio. E. can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.
E
The standard deviation of a portfolio: A. is a weighted average of the standard deviations of the individual securities held in the portfolio. B. can never be less than the standard deviation of the most risky security in the portfolio. C. must be equal to or greater than the lowest standard deviation of any single security held in the portfolio. D. is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio. E. can be less than the standard deviation of the least risky security in the portfolio.
E
Theresa is analyzing a project that currently has a projected NPV of zero. Which of the following changes that she is considering will help that project produce a positive NPV instead? Consider each change independently. I. increase the quantity sold II. decrease the fixed leasing cost for equipment III. decrease the labor hours needed to produce one unit IV. increase the sales price A. I and II only B. I and IV only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV
E
Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the: A. average arithmetic return. B. expected return. C. market rate of return. D. internal rate of return. E. cost of capital.
E
When the operating cash flow of a project is equal to zero, the project is operating at the: A. maximum possible level of production. B. minimum possible level of production. C. financial break-even point. D. accounting break-even point. E. cash break-even point.
E
Which of the following correspond to a wide frequency distribution? I. relatively low risk II. relatively low rate of return III. relatively high standard deviation IV. relatively large risk premium A. II only B. III only C. I and II only D. II and III only E. III and IV only
E
Which of the following statements are identified with financial break-even point? I. The present value of the cash inflows exactly offsets the initial cash outflow. II. The payback period is equal to the life of the project. III. The NPV is zero. IV. The discounted payback period equals the life of the project. A. I and II only B. I and III only C. II and IV only D. I, II, and III only E. I, III, and IV only
E
Which of the following statements related to market efficiency tend to be supported by current evidence? I. Markets tend to respond quickly to new information. II. It is difficult for investors to earn abnormal returns. III. Short-run prices are difficult to predict accurately based on public information. IV. Markets are most likely weak form efficient. A. I and III only B. II and IV only C. I and IV only D. I, III, and IV only E. I, II, and III only
E
Which one of the following best defines the variance of an investment's annual returns over a number of years? A. The average squared difference between the arithmetic and the geometric average annual returns. B. The squared summation of the differences between the actual returns and the average geometric return. C. The average difference between the annual returns and the average return for the period. D. The difference between the arithmetic average and the geometric average return for the period. E. The average squared difference between the actual returns and the arithmetic average return.
E
Which one of the following categories of securities had the lowest average risk premium for the period 1926-2010? A. long-term government bonds B. small company stocks C. large company stocks D. long-term corporate bonds E. U.S. Treasury bills
E
Which one of the following categories of securities has had the most volatile returns over the period 1926-2010? A. long-term corporate bonds B. large-company stocks C. intermediate-term government bonds D. U.S. Treasury bills E. small-company stocks
E
Which one of the following indicates a portfolio is being effectively diversified? A. an increase in the portfolio beta B. a decrease in the portfolio beta C. an increase in the portfolio rate of return D. an increase in the portfolio standard deviation E. a decrease in the portfolio standard deviation
E
Which one of the following is an example of unsystematic risk? A. income taxes are increased across the board B. a national sales tax is adopted C. inflation decreases at the national level D. an increased feeling of prosperity is felt around the globe E. consumer spending on entertainment decreased nationally
E
Which one of the following is represented by the slope of the security market line? A. reward-to-risk ratio B. market standard deviation C. beta coefficient D. risk-free interest rate E. market risk premium
E
Which one of the following statements concerning variable costs is correct? A. Variable costs minus fixed costs equal marginal costs. B. Variable costs are equal to fixed costs when production is equal to zero. C. An increase in variable costs increases the operating cash flow. D. Variable costs are inversely related to fixed costs. E. Variable costs per unit are inversely related to the contribution margin per unit.
E
Which one of the following statements correctly applies to the period 1926-2010? A. Large-company stocks earned a higher average risk premium than did small-company stocks. B. Intermediate-term government bonds had a higher average return than long-term corporate bonds. C. Large-company stocks had an average annual return of 14.7 percent. D. Inflation averaged 2.6 percent for the period. E. U.S. Treasury bills had a positive average real rate of return.
E
Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights? A. Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market. B. The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved. C. Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio. D. The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified. E. Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.
E
Which one of the following statements is correct? A. The unexpected return is always negative. B. The expected return minus the unexpected return is equal to the total return. C. Over time, the average return is equal to the unexpected return. D. The expected return includes the surprise portion of news announcements. E. Over time, the average unexpected return will be zero.
E
Which one of the following statements related to unexpected returns is correct? A. All announcements by a firm affect that firm's unexpected returns. B. Unexpected returns over time have a negative effect on the total return of a firm. C. Unexpected returns are relatively predictable in the short-term. D. Unexpected returns generally cause the actual return to vary significantly from the expected return over the long-term. E. Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.
E
Which one of the following types of analysis is the most complex to conduct? A. scenario B. break-even C. sensitivity D. degree of operating leverage E. simulation
E
Which one of the following will increase a bid price? A. a decrease in the fixed costs B. a reduction in the net working capital requirement C. a reduction in the firm's tax rate D. an increase in the salvage value E. an increase in the required rate of return
E
Which two of the following are the most likely reasons why a stock price might not react at all on the day that new information related to the stock issuer is released? I. insiders knew the information prior to the announcement II. investors need time to digest the information prior to reacting III. the information has no bearing on the value of the firm IV. the information was anticipated A. I and II only B. I and III only C. II and III only D. II and IV only E. III and IV only
E
You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines which 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 which has the: A. longest life. B. highest annual operating cost. C. lowest annual operating cost. D. highest equivalent annual cost. E. lowest equivalent annual cost.
E
