final - FIN 5023

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) Volatility

To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return. a) expected market rate of return b) risk-free rate c) inflation rate d) standard deviation e) variance

b) risk-free rate

The bond market requires a return of 6.2 percent on the 15-year bonds issued by Mingwei Manufacturing. The 6.2 percent is referred to as the: a) coupon rate. b) face rate. c) call rate. d) yield to maturity. e) current yield.

d) yield to maturity.

Which one of the following statements is correct? a) Stocks can only be assigned one dividend growth rate. b) Preferred stocks generally have variable growth rates. c) Dividend growth rates must be either zero or positive. d) All stocks can be valued using the dividend discount models. e) Stocks can have negative growth rates.

e) Stocks can have negative growth rates.

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $2.40 per share and has a beta of 1.42, all else constant, which of the following actions will decrease the firm's cost of equity? a) A decrease in the dividend amount b) An increase in the dividend amount c) An increase in the market rate of return d) A decrease in the firm's beta e) A decrease in the risk-free rate

d) A decrease in the firm's beta

________ risk is the type of equity risk that is most related to the daily operations of a firm. a) Extrinsic b) Market c) Systematic d) Business e) Financial

d) Business

Financial risk is: a) the risk inherent in a company's operations. b) a type of unsystematic risk. c) inversely related to the cost of equity. d) dependent upon a company's capital structure. e) irrelevant to the value of a company.

d) dependent upon a company's capital structure.

The value of a firm is maximized when the: a) cost of equity is maximized. b) tax rate equals the cost of capital. c) levered cost of capital is maximized. d) weighted average cost of capital is minimized. e) debt-equity ratio is minimized.

d) weighted average cost of capital is minimized.

When determining a firm's cost of capital, the most important determinant is the: a) debt-equity ratio of any new funds raised. b) marginal tax rate. c) pretax cost of equity. d) aftertax cost of equity. e) use of the funds raised.

e) use of the funds raised.

Of the options listed below, which is the best 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) Investors panic causing security prices around the globe to fall precipitously.

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

a) It can be effectively eliminated by portfolio diversification.

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

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

Which of the following items are included when calculating the expected return on a portfolio? 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

all of them

What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? a) Maximal growth model b) Constant growth model c) Capital pricing model d) Realized earnings model e) Realized growth model

b) Constant growth model

Reyes has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true? a) The dividend must be constant. b) The stock has a negative capital gains yield. c) The capital gains yield must be zero. d) The required rate of return for this stock increased over the year. e) The firm is experiencing supernormal growth.

b) The stock has a negative capital gains yield.

A firm should select the capital structure that: a) produces the highest cost of capital. b) maximizes the value of the firm. c) minimizes taxes. d) is fully unlevered. e) equates the value of debt with the value of equity.

b) maximizes the value of the firm.

Boston Free Press has a dividend policy whereby the firm pays a constant annual dividend of $2.40 per share of common stock. The firm has 1,000 shares of stock outstanding. The company: a) must always show a current liability of $2,400 for dividends payable. b) must still declare each dividend before it becomes an actual company liability. c) is obligated to pay $2.40 per share each year in perpetuity. d) will be declared in default if it does not pay at least $2.40 per share per year on a timely basis. e) incurs a liability that must be paid at a later date should the company miss paying an annual dividend payment.

b) must still declare each dividend before it becomes an actual company liability.

If a project has a net present value equal to zero, then: a) the total of the cash inflows must equal the initial cost of the project. b) the project earns a return exactly equal to the discount rate. c) a decrease in the project's initial cost will cause the project to have a negative NPV. d) any delay in receiving the projected cash inflows will cause the project to have a positive NPV. e) the project's PI must also be equal to zero.

b) the project earns a return exactly equal to the discount rate.

Ingraham Stoneworks has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires. Which one of the following changes to the project would be most expected to increase the project's internal rate of return? a) Decreasing the required discount rate b) Increasing the initial investment in fixed assets c) Condensing the firm's cash inflows into fewer years without lowering the total dollar amount of those inflows d) Eliminating the salvage value e) Decreasing the amount of the final cash inflow

c) Condensing the firm's cash inflows into fewer years without lowering the total dollar amount of those inflows

Which one of the following statements is accurate? a) Capital structure has no effect on shareholder value b) The optimal capital structure occurs when the cost of equity is minimized. c) The optimal capital structure maximizes shareholder value. d) Shareholder value is maximized when WACC is also maximized. e) Unlevered firms have more value than levered firms when firms are profitable.

c) The optimal capital structure maximizes shareholder value.

According to M&M Proposition II, without taxes, which of the following statements is accurate? a) The cost of equity remains constant as the debt-equity ratio increases. b) The cost of equity is inversely related to the debt-equity ratio. c)The required return on assets is equal to the weighted average cost of capital. d)Financial risk determines the return on assets. e)Financial risk is unaffected by the debt-equity ratio.

c) The required return on assets is equal to the weighted average cost of capital.

A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today? a) The face value of the bond today is greater than it was when the bond was issued. b) The bond is worth less today than when it was issued. c) The yield to maturity is less than the coupon rate. d) The coupon rate is less than the current yield. e) The yield to maturity equals the current yield.

c) The yield to maturity is less than the coupon rate.

M&M Proposition II, without taxes, is the proposition that: a) the capital structure of a company has no effect on that company's value. b) the cost of equity depends on the return on debt, the debt-equity ratio, and the tax rate. c) a company's cost of equity is a linear function with a slope equal to (RA − RD). d) the cost of equity is equivalent to the required rate of return on assets. e) the size of the pie does not depend on how the pie is sliced.

c) a company's cost of equity is a linear function with a slope equal to (RA − RD).

A project's average net income divided by its average book value is referred to as the project's average: a) net present value. b) internal rate of return. c) accounting return. d) profitability index. e) payback period.

c) accounting return.

Read Corporation currently pays an annual dividend of $1.46 per share and plans on increasing that amount by 2.75 percent annually. Cho, Incorporated, currently pays an annual dividend of $1.42 per share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Cho has a higher ________ than the stock of Read. a) market price b) dividend yield c) capital gains yield d) total return e) real return

c) capital gains yield

Sung Office Products just announced it is decreasing its annual dividend from $2.20 per share to $1.85 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 $.35 per share. e) increased by $.35 per share.

c) decreased proportionately with the dividend decrease.

Evidence seems to support the view that studying public information to identify mispriced stocks is: a) effective as long as the market is only semistrong form efficient. b) effective provided the market is only weak form efficient. c) ineffective. d) effective only in strong form efficient markets. e) ineffective only in strong form efficient markets.

c) ineffective.

A bond's principal is repaid on the ________ date. a) coupon b) yield c) maturity d) dirty e) clean

c) maturity

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project? a) The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted. b) The cash flow in Year 3 is ignored. c) The project's cash flow in Year 3 is discounted by a factor of (1 + R)3. d) The cash flow in Year 2 is valued just as highly as the cash flow in Year 1. e) The project is acceptable whenever the payback period exceeds three years.

d) The cash flow in Year 2 is valued just as highly as the cash flow in Year 1.

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

d) geometric

Which one of the following applies to a premium bond? a) Yield to maturity > Current yield > Coupon rate b) Coupon rate = Current yield = Yield to maturity c) Coupon rate > Yield to maturity > Current yield d) Coupon rate < Yield to maturity < Current yield e) Coupon rate > Current yield > Yield to maturity

e) Coupon rate > Current yield > Yield to maturity

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?\ a) Riskless market b) Evenly distributed market c) Zero volatility market d) Blume's market e) Efficient capital market

e) Efficient capital market