finance exam 2

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Equilibrium -

is when enough mispricing occurs for a few investors to profit from research and trading.

Accept if the payback period is -

less than some preset limit.

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?

liquidity

Which of the following are advantages of the payback method of project analysis?

liquidity bias; ease of use

There is a reward for bearing risk, but only over the _______. -

long-run

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that 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 that has the: -

lowest equivalent annual cost *EAC want lower cost

Individual investors who continually monitor the financial markets seeking mispriced securities: -

make the markets increasingly more efficient.

Benefits of Modified IRR: -

single answer and specific rates for borrowing and reinvestment.

Small-company stocks, as the term is used in the textbook, are best defined as the: -

smallest 20 percent of the companies listed on the NYSE.

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:

spread

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the: equilibrium. premium. discount. call price. spread. -

spread

The difference between the price that adealer is willing to pay and the price at which he or she will sell is called the:

spread

The principle of diversification tells us that: -

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

Discounting Cash Flow (DCF) Valuation -

the process of valuing an investment by discounting the future cash flows.

A positive NPV means that -

the project is expected to add value to the firm and will therefore increase the wealth of the owners.

The bond market requires a return of 9.8 percent on the five-year bonds issued by JW Industries. The 9.8 percent is referred to as which one of the following?

yield to maturity

Which one of these equations applies to a bond that currently has a market price that exceeds par value?

yield to maturity<coupon rate

NPV profile -

you are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?

Whenever there is a conflict between NPV and another decision rule, -

you should always use NPV.

Which one of the following increases the net present value of a project?

An increase in the aftertax salvage value of the fixed assets.

A note is generally defined as:

An unsecured bond with an initial maturity of 10 years or less.

Which one of these is most apt to be included in a bond's indenture one year after the bond has been issued? Current yield Written record of all the current bond holders List of collateral used as bond security Current market price Price at which a bondholder can resell a bond to another bondholder -

List of collateral used as bond security

Which one of these is a strength of the average accounting return method of project analysis?

Based on easily obtainable information.

decreased proportionately with the dividend decrease. -

Bayside Marina just announced it is decreasing its annual dividend from $1.48 per share to $1.45 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price: was unaffected by the announcement. increased proportionately with the dividend decrease. decreased proportionately with the dividend decrease. decreased by $.03 per share. increased by $.03 per share.

What was the average rate of inflation over the period of 1926-2016? -

Between 2.8 and 3.2 percent

Assume you invest in a portfolio of long-term corporate bonds. Based on the period 1926-2016, what average annual rate of return should you expect to earn? -

Between 6 and 7 percent

Which of the following statements are true based on the historical record for 1926-2016? -

Bonds are generally a safer, or less risky, investment than are stocks.

Which one of these statements is correct? Most long-term bond issues are referred to as unfunded debt. Bonds often provide tax benefits to issuers. The risk of a company financially failing decreases when the company issues bonds. All bonds are treated equally in a bankruptcy proceeding. A debenture is a senior secured debt. -

Bonds often provide tax benefits to issuers.

Which one of these statements is correct?

Bonds provide tax benefits to issuers.

Mutually exclusive projects are best defined as competing projects that:

Both require the total use of the same limited resource.

There are two distinct rates at which a particular project will have a zero net present value. In this situation, the project is said to: -

Have multiple rates of return

There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:

Have multiple rates of return.

Generally speaking, which of the following best correspond to a wide frequency distribution? -

High standard deviation, large risk premium

Graphing the crossover point helps explain:

How decisions concerning mutually exclusive projects are derived.

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 -

I, II, III, IV

In actual practice, managers most frequently use which two types of investment criteria?

IRR and NPV

Accept the project if the -

IRR is greater than the required return.

mutually exclusive. -

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

the project earns a return exactly equal to the discount rate. -

If a project has a net present value equal to zero, then:

Jen owns 30 shares of stock in Delta Fashions and wants to win a seat on the board of directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect three new directors. Which one of the following statements must be true given this information?

If cumulative voting applies, Jen is assured one seat on the board.

Decrease in the 68 percent probability range of returns -

If the variability of the returns on large-company stocks were to decrease over the long-term, you would expect which one of the following as related to large-company stocks to occur as a result?

decrease slower under straight-line depreciation than under MACRS -

Ignoring bonus depreciation, the net book value of equipment will: remain constant over the life of the equipment. vary in response to changes in the market value of that equipment. decrease at a constant rate when MACRS depreciation is used. increase over the taxable life of an asset. decrease slower under straight-line depreciation than under MACRS.

Internal rate of return and net present value -

In actual practice, managers most frequently use which two types of investment criteria?

The Normal Rule (or empirical rule) -

In statistics, the 68-95-99.7 rule, also known as the empirical rule, is a shorthand used to remember the percentage of values that lie within a band around the mean in a normal distribution with a width of two, four and six standard deviations, respectively; more accurately, 68.27%, 95.45% and 99.73% of the values lie within one, two and three standard deviations of the mean, respectively. IMPORTANT: If you buy stocks of large companies, you should expect to be outside of this range (-7.2%; +33.2%) one year out of every three on average

Advantages of Discounted Payback Period (2) -

Includes time value of money Easy to understand Does not accept negative estimated NPV investments when all future cash flows are positive Biased towards liquidity

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:

Increases at a decreasing rate.

Which one of the following will decrease the net present value of a project?

Increasing the project's initial cost at time zero.

Depreciation expense -

Increasing which one of the following will increase the operating cash flow of a profitable, tax paying company assuming that the bottom-up approach is used to compute the operating cash flow?

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs? -

Incremental

make the markets increasingly more efficient. -

Individual investors who continually monitor the financial markets seeking mispriced securities:

strong form efficient. -

Inside information has the least value when financial markets are:

Cat bonds are primarily designed to help:

Insurance companies fund excessive claims.

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond?

Interest rate risk

In actual practice, managers most frequently use which two types of investment criteria? -

Internal rate of return and net present value

A "fallen angel" is a bond that has moved from:

Investment grade to speculative grade.

Which one of the following is an example of systematic risk? -

Investors panic causing security prices around the globe to fall precipitously

Net present value:

Is the best method of analyzing mutually exclusive projects.

Net present value: -

Is the best method of analyzing mutually exclusive projects.

Supernormal growth is a growth rate that:

Is unsustainable over the long term.

Which one of the following correctly applies to the average accounting rate of return?

It can be compared to the return on assets ratio.

Hot Foods has an investment-grade bond issue outstanding that pays $30 semiannual interest payments. The bonds sell at par and are callable at a price equal to the present value of all future interest and principal payments discounted at a rate equal to the comparable Treasury rate plus .50 percent. Which one of the following correctly describes this bond?

It has a "make whole" call price.

Why is payback often used as the sole method of analyzing a proposed small project?

It is the only method where the benefits of the analysis outweigh the costs of that analysis.

Hiring additional employees to handle the increased workload should the firm accept the wreath project -

Kelley's Baskets makes handmade baskets and 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?

payback -

Kristi wants to start training her most junior assistant, Amy, in the art of project analysis. Amy has just started college and has no experience or background in business finance. To get her started, Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze. Which method is Kristi most apt to ask Amy to use in making her initial decisions?

Which one of these is most apt to be included in a bond's indenture one year after the bond has been issued?

List of collateral used as bond security.

Which one of the following statements is correct based on the historical record for the period 1926-2016? -

Long-term government bonds had a lower return but a higher standard deviation on average than did long-term corporate bonds. AND Long-term corporate bonds outperformed long-term government bonds.

Which one of the following statements is correct based on the period 1926-2016? -

Long-term government bonds had more volatile annual returns than did the long-term corporate bonds.

Which one of the following is a correct ranking of securities based on the volatility of their annual returns over the period of 1926-2016? Rank from highest to lowest. -

Long-term government bonds, long-term corporate bonds, intermediate-term government bonds

Which bond would you generally expect to have the highest yield?

Long-term, taxable junk bond

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? -

Net present value

is the best method of analyzing mutually exclusive projects. -

Net present value:

can create either an initial cash inflow or outflow. -

Net working capital: can be ignored in project analysis because any expenditure is normally recouped at the end of the project. requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project. is rarely affected when a new product is introduced. can create either an initial cash inflow or outflow. is the only expenditure where at least a partial recovery can be made at the end of a project.

Scott is considering a project that will produce cash inflows of $2,900 a year for 3 years. The required rate of return is 15.4% and the initial cost is $6,800. What is the discounted payback period? -

Never PVA = $2,900 {[1 - (1/1.154^3)] /.154} PVA = $6,577.68 This project never pays back on a discounted basis because the PV of the cash inflows is less than the initial cost.

Which one of the following correctly describes the dividend yield? -

Next year's annual dividend divided by today's stock price

IRR is unreliable in the following situations -

Nonconventional cash flows Mutually exclusive projects

Which one of the following is defined by its mean and its standard deviation? -

Normal distribution

OCF -

OCF = (sales-cost)(1-tax) + Dep.(tax)

The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following? -

Opportunity cost

The Fisher effect is defined as the relationship between which of the following variables?

Real rates, inflation rates, and nominal rates

The Fisher effect is defined as the relationship between which of the following variables? Default risk premium, inflation risk premium, and real rates Nominal rates, real rates, and interest rate risk premium Interest rate risk premium, real rates, and default risk premium Real rates, inflation rates, and nominal rates Real rates, interest rate risk premium, and nominal rates -

Real rates, inflation rates, and nominal rates

The Green Fiddle is considering a project with sales of $86,800 a year for the next four years. The profit margin is 6%, the project cost is $97,500, and depreciation is straight-line to a zero book value over the life of the project. The required accounting return is 10.8%. This project should be ______ because the AAR is _______%. -

Rejected ; 10.68 AAR = [0.06 ($86,800)] / [($97,500 + 0) / 2] AAR = 0.1068, or 10.68% The project should be rejected because the AAR is less than the requirement.

The dividend growth model:

Requires the growth rate to be less than the required return.

Hardy Lumber has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most apt to be granted to the preferred shareholders?

Right to share in company profits prior to other shareholders.

Assume that last year T-bills returned 2.8 percent while your investment in large-company stocks earned an average of 7.6 percent. Which one of the following terms refers to the difference between these two rates of return? -

Risk premium

%Why do stock and bond prices fluctuate? -

Risks such as rising interest rates and economic stimulus policies have an effect on both stocks and bonds, but each reacts in an opposite way. When stocks are on the rise, investors generally move out of bonds and flock to the booming stock market. When the stock market corrects, as it inevitably does, or when severe economic problems ensue, investors seek the safety of bonds. As with any free-market economy, bond prices are affected by supply and demand.

Assumes the firm has sufficient funds to undertake both projects -

Roger's Meat Market is considering two independent projects. The profitability index decision rule indicates that both projects should be accepted. This result most likely does which one of the following? Conflicts with the results of the net present value decision rule Assumes the firm has sufficient funds to undertake both projects Agrees with the decision that would also apply if the projects were mutually exclusive Bases the accept/reject decision on the same variables as the average accounting return Fails to provide useful information as the firm must reject at least one of the projects

Cash inflow in the final year of the project -

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity? Default risk Taxability Liquidity Inflation Interest rate risk -

Liquidity

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? -

Selling fewer hot dogs because hamburgers were added to the menu *impacts sales

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

Tedder Mining 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?

The internal rate of return is:

Tedious to compute without the use of either a financial calculator or a computer.

The pure time value of money is known as the:

Term structure of interest rates.

Average accounting return (AAR): -

The AAR is a measure of accounting profit relative to book value. It is not related to the IRR, but it is similar to the accounting return on assets (ROA) measure in Chapter 3. The AAR rule is to take an investment if its AAR exceeds a benchmark AAR. The AAR is seriously flawed for a variety of reasons, and it has little to recommend it.

Which one of the following statements related to the internal rate of return (IRR) is correct?

The IRR is equal to the required return when the net present value is equal to zero.

Internal rate of return (IRR): -

The IRR is the discount rate that makes the estimated NPV of an investment equal to zero; it is sometimes called the discounted cash flow (DCF) return. The IRR rule is to take a project when its IRR exceeds the required return. IRR is closely related to NPV, and it leads to exactly the same decisions as NPV for conventional, independent projects. When project cash flows are not conventional, there may be no IRR or there may be more than one. More seriously, the IRR cannot be used to rank mutually exclusive projects; the project with the highest IRR is not necessarily the preferred investment.

crossover rate. -

The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the:

Modified internal rate of return (MIRR): -

The MIRR is a modification to the IRR. A project's cash flows are modified by (1) discounting the negative cash flows back to the present; (2) compounding cash flows to the end of the project's life; or (3) combining (1) and (2). An IRR is then computed on the modified cash flows. MIRRs are guaranteed to avoid the multiple rate of return problem, but it is unclear how to interpret them; and they are not truly "internal" because they depend on externally supplied discounting or compounding rates.

Net present value (NPV): -

The NPV of an investment is the difference between its market value and its cost. The NPV rule is to take a project if its NPV is positive. NPV is frequently estimated by calculating the present value of the future cash flows (to estimate market value) and then subtracting the cost. NPV has no serious flaws; it is the preferred decision criterion.

Profitability index (PI): -

The PI, also called the benefit-cost ratio, is the ratio of present value to cost. The PI rule is to take an investment if the index exceeds 1. The PI measures the present value of an investment per dollar invested. It is quite similar to NPV; but, like IRR, it cannot be used to rank mutually exclusive projects. However, it is sometimes used to rank projects when a firm has more positive NPV investments than it can currently finance.

Project A should be rejected and Project B should be accepted. -

The Square Box is considering two independent projects with an initial cost of $18,000 each. The cash inflows of Project A are $3,000, $7,000, and $10,000 for Years 1 to 3, respectively. The cash inflows for Project B are $3,000, $7,000, and $15,000 for Years 1 to 3, respectively. The required return is 12 percent and the required discounted payback period is 3 years. Based on discounted payback, which project(s), if either, should be accepted?

strong -

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.

Equivalent annual cost -

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?

is similar to the return on assets ratio. -

The average accounting rate of return (AAR):

geometric -

The average compound return earned per year over a multiyear period is called the _____ average return.

Which one of the following best defines the variance of an investment's annual returns over a number of years? -

The average squared difference between the actual returns and the arithmetic average return

The net present value of the project is zero. -

The bid price always assumes which one of the following? Multiple Choice A project has a one-year life. The aftertax net income of the project is zero. The net present value of the project is zero. Any assets purchased will have a positive salvage value at the end of the project. Assets will be depreciated based on MACRS.

the minimum price that will provide your target rate of return. -

The bid price is the:

Hot Foods has an investment-grade bond issue outstanding that pays $30 semiannual interest payments. The bonds sell at par and are callable at a price equal to the present value of all future interest and principal payments discounted at a rate equal to the comparable Treasury rate plus .50 percent. Which one of the following correctly describes this bond? The bond rating is B. Market value is less than face value. The coupon rate is 3 percent. The bond has a "make whole" call price. The interest payments are variable. -

The bond has a "make whole" call price.

Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct?

The bonds will sell at a premium if the market rate is 5.5 percent.

Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct? The bonds will become discount bonds if the market rate of interest declines. The bonds will pay 10 interest payments of $60 each. The bonds will sell at a premium if the market rate is 5.5 percent. The bonds will initially sell for $1,030 each. The final payment will be in the amount of $1,060. -

The bonds will sell at a premium if the market rate is 5.5 percent.

the interest expense is equal to zero. -

The bottom-up approach to computing the operating cash flow applies only when:

Stacy purchased a stock last year and sold it today for $4 a share more than her purchase price. She received a total of $1.15 per share in dividends. Which one of the following statements is correct in relation to this investment? -

The capital gains yield is positive.

A project has a net present value of zero. Which one of the following best describes this project?

The project's cash inflows equal its cash outflows in current dollar terms.

A project has a net present value of zero. Which one of the following best describes this project? -

The project's cash inflows equal its cash outflows in current dollar terms.

Treasury bills -

The rate of return on which type of security is normally used as the risk-free rate of return?

Which one of the following statements is correct?

The real rate must be less than the nominal rate given a positive rate of inflation.

A bond that is payable to whomever has physical possession of the bond is said to be in: new-issue condition. registered form. bearer form. debenture status. collateral status. -

bearer form

Many of the sample (or historical) return distributions have a distinct _____ shaped curve. -

bell -They are mound-shaped and symmetric -Most observations lay around the sample mean -Fewer observations lay symmetrically on the tails

For the period 2009-2016, U.S. Treasury bills had an annual rate of return that was: -

between 0 and .25 percent.

If you sell a 6 percent bond to a dealer when the market rate is 7 percent, which one of the following prices will you receive?

bid price

If you sell a bond with a coupon of 6 percent to a dealer when the market rate is 7 percent, which one of the following prices will you receive? Call price Par value Bid price Correct Asked price Bid-ask spread -

bid price

Efficient Market Hypothesis (EMH) does NOT mean that, you cannot gain or lose in the stock-market. In fact, it means that typically you would, though, on the average, you would _______. -

break even **EMH does not imply that prices would be steady; rather it suggests that they should fluctuate, as they constantly reflect newly available information.

An agent who arranges a transaction between a buyer and a seller of equity securities is called a:

broker

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the:

call premium

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the: dirty price. redemption value. call premium. original-issue discount. redemption discount. -

call premium

A $1000 face value bond can be redeemed early at the issuers discretion for $1030 plus any accrued interest. The additional $30 is called the:

call premium

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?

callable

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond? Par value Callable Senior Subordinated Unsecured -

callable

Unsystematic risk: -

can be effectively eliminated by portfolio diversification.

Net working capital: -

can create either an initial cash inflow or outflow

net working capital -

can create either an initial cash inflow or outflow.

A call-protected bond is a bond that: is guaranteed to be called. can never be called. is currently being called. is callable at any time. cannot be called at this point in time. -

cannot be called at this point in time.

An example of a negative covenant that might be found in a bond indenture is a statement that the company: shall maintain a current ratio of 1.1 or higher. cannot lease any major assets without bondholder approval. must maintain the loan collateral in good working order. shall provide audited financial statements in a timely manner. shall maintain a cash surplus of $100,000 at all times. -

cannot lease any major assets without bondholder approval.

Dixie South currently pays an annual dividend of $1.46 a share and plans on increasing that amount by 2.75 percent annually. Northern Culture currently pays an annual dividend of $1.42 a share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Northern Culture has a higher ______ than the stock of Dixie South.

capital gains yield

Which one of following is the rate at which a stock's price is expected to appreciate?

capital gains yield

A bond is quoted at a price of $1,011. This price is referred to as the:

clean price

A bond is quoted at a price of $1,011. This price is referred to as the: call price. face value. clean price. dirty price. maturity price. -

clean price

A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n):

commission broker

Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings?

common

You are trying to compare the present values of two separate streams of cash flows that have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows?

comparable real rate

The interest rate risk premium is the: additional compensation paid to investors to offset rising prices. compensation investors demand for accepting interest rate risk. difference between the yield to maturity and the current yield. difference between the market interest rate and the coupon rate. difference between the coupon rate and the current yield. -

compensation investors demand for accepting interest rate risk.

Which one of the following best describes NASDAQ?

computer network of securities dealers

Recently, you discovered a convertible, callable bond with a semiannual coupon of 5 percent. If you purchase this bond you will have the right to: force the issuer to repurchase the bond prior to maturity. convert the bond into equity shares. defer all taxable income until the bond matures. convert the bond into a perpetuity paying 5 percent. have the principal amount adjusted for inflation. -

convert the bond into equity shares.

Allison just received her semiannual payment of $35 on a bond she owns. Which term refers to this payment?

coupon

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment?

coupon

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment? Coupon Face value Discount Call premium Yield -

coupon

The price sensitivity of a bond increases in response to a change in the market rate of interest as the:

coupon rate decreases and the time to maturity increases

The price sensitivity of a bond increases in response to a change in the market rate of interest as the: coupon rate increases. time to maturity decreases. coupon rate decreases and the time to maturity increases. time to maturity and coupon rate both decrease. coupon rate and time to maturity both increase. -

coupon rate decreases and the time to maturity increases.

The collar of a floating-rate bond refers to the minimum and maximum: call periods. maturity dates. market prices. coupon rates. yields to maturity. -

coupon rates

The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the:

crossover rate

A company has four open seats on its board of directors. There are seven candidates vying for these four positions. There will be a single election to determine the winners. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 400 of your votes for a single candidate. What is this type of voting called?

cumulative

An agent who maintains an inventory from which he or she buys and sells securities is called a:

dealer

Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?

debenture

Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms? Note Discounted Zero-coupon Callable Debenture -

debenture

Ignoring bonus depreciation, the net book value of equipment will: -

decrease slower under straight-line depreciation than under MACRS.

Bayside Marina just announced it is decreasing its annual dividend from $1.48 per share to $1.45 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price: -

decreased proportionately with the dividend decrease.

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?

default risk

A discount bond's coupon rate is equal to the annual interest divided by the: call price. current price. face value. clean price. dirty price. -

face value

Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?

face value

An individual on the floor of the NYSE who owns a trading license and buys and sells for his or her personal account is called a:

floor trader

Which one of the following represents the capital gains yield as used in the dividend growth model?

g

Which one of the following statements is correct concerning the two-stage dividend growth model?

g1 can be greater than R.

Evidence seems to support the view that studying public information to identify mispriced stocks is: -

ineffective.

The Normal distribution assumes a/an _________ number of observations -

infinite -Empirical distributions of returns are only based on hundreds, maybe thousands of observations -Therefore, the Normal distribution is simply an approximation, and returns are only roughly Normal ... ****review slide 25

Real rates are defined as nominal rates that have been adjusted for which of the following?

inflation

Real rates are defined as nominal rates that have been adjusted for which of the following? Inflation Default risk Accrued interest Interest rate risk Both inflation and interest rate risk -

inflation

The Fisher effect primarily emphasizes the effects of _____ on an investor's rate of return.

inflation

The Fisher effect primarily emphasizes the effects of _____ on an investor's rate of return. default market movements interest rate changes inflation the time to maturity -

inflation

The operating cash flow for a project should exclude which one of the following? -

interest expense

Which one of the following risks would a floating rate bond tend to have less of as compared to a fixed rate coupon bond?

interest rate risk

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond? Real rate risk Interest rate risk Default risk Liquidity risk Taxability risk -

interest rate risk

A "fallen angel" is a bond that has moved from: being publicly traded to being privately traded. being a long-term obligation to being a short-term obligation. being a premium bond to being a discount bond. senior status to junior status for liquidation purposes. investment grade to speculative grade. -

investment grade to speculative grade.

The internal rate of return:

is easy to understand

Which one of the following is an example of a sunk cost? -

$1,200 paid to repair a machine last year

Dependable Motors just purchased some MACRS five-year property at a cost of $216,000. The MACRS rates are .2, .32, and .192 for Years 1 to 3, respectively. Assume the firm opted to forego any bonus depreciation. Which one of the following will correctly give you the book value of this equipment at the end of Year 2? -

$216,000(1 − .2 − .32)

A new molding machine is expected to produce operating cash flows of $109,000 a year for 4 years. At the beginning of the project, inventory will decrease by $8,700, accounts receivables will increase by $9,500, and accounts payable will decrease by $5,200. All net working capital will be recovered at the end of the project. The initial cost of the molding machine is $319,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $51,600 aftertax cash inflow. What is the net present value of this project given a required return of 14.2 percent? -

$25,162.45 CF0 = -$319,000 + 8,700 - 9,500 - 5,200 CF0 = -$325,000 C04 = $109,000 + 51,600 - 8,700 + 9,500 + 5,200 C04 = $166,600 NPV = -$325,000 + $109,000{[1 - (1/1.142^3)] / .142} + $166,600 / 1.142^4 NPV = $25,162.45

Callable bonds generally:

Have a sinking fund provision.

Winn Corp. currently sells 9,820 motor homes per year at $45,500 each and 3,680 luxury motor coaches per year at $89,700 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 4,00 of these campers per year at $14,750 each. An independent consultant has determined that if Winn introduces the new campers, it should boost the sales of its existing motor homes by 250 units per year and reduce the sales of its motor coaches by 368 units per year. Required: What is the amount to use as the annual sales figure when evaluating the portable camper project? -

$37,365,400 Sales = 4,000($14,750) + 250($45,500) - 368($89,700) Sales = $37,365,400

Atlas Manufacturing purchased a new computer system in 2018 at a cost of $622,400. This system falls in the 5-year MACRS class that has depreciation allowance percentages of 20, 32, 19.2, 11.52, 11.52, and 5.76. What is the maximum amount of depreciation the firm can claim on this system in the first year if it selects the bonus depreciation method? -

$622,400

Average Accounting Return Formula -

(Average NI)/(Average Book Value)

Debate on Efficient Market Hypothesis (EMH): -

-30 years ago EMH was outright dismissed by practitioners and many academics -Today, it is widely accepted, studied at Business Schools, understood by government and policy-makers when dealing with security markets -Empirical evidence indicates that markets are generally weak form efficient -Empirical evidence indicates that markets are NOT strong form efficient and that insiders could earn abnormal returns -Semi-strong efficiency: greatest controversy ... some equilibrium abnormal profit & anomalies

Disadvantages of Payback Period (2) -

-Ignores the time value of money Requires an arbitrary cutoff point Ignores cash flows beyond the cutoff date Biased against longterm projects, such as research and development, and new projects

Advantages of IRR: -

-Knowing a return is intuitively appealing • It is a simple way to communicate the value of a project to someone who doesn't know all the estimation details • If the IRR is high enough, you may not need to estimate a required return, which is often a difficult task

Disadvantages of AAR: -

-Not a true rate of return; time value of money is ignored Uses an arbitrary benchmark cutoff rate Based on accounting net income and book values, not cash flows and market values

Variability of an asset's historical returns: -

-The greater the volatility (of past returns) the greater the uncertainty (of future returns) -The greater the uncertainty (of future returns) the greater the risk premium investors demand

The typical range for the price-sales ratio is ___ but younger, faster-growing firms may have ratios that are much _____.

.8 - 2.0; higher

IRR is the return that makes NPV= -

0.

Which one of the following time periods is associated with low rates of inflation? -

2014-2015

Advantages of IRR -

1. Closely related to NPV often leading to identical decisions. 2. Easy to understand and communicate.

Advantages of the profitability index -

1. Closely related to NPV, generally leading to identical decisions. 2. Easy to understand and communicate. 3. Maybe useful when available investments funds are limited.

Advantages of AAR -

1. Easy to calculate. 2. Needed info will usually be available.

Advantages of Payback Period -

1. Easy to understand. 2. Adjusts for uncertainty of later cash flows. 3. Biased toward liquidity.

Disadvantages of Payback Period -

1. Ignores time value of money. 2. Requires an arbitrary cutoff point. 3. Ignores cash flows beyond cutoff date. 4. Biased against long-term projects, such as R and D and new projects.

Advantages of Discounted Payback Period -

1. Includes time value of money. 2. Easy to understand. 3. Doesn't accept negative estimated NPV invests. 4. Biased toward liquidity.

Competition makes a market efficient: -

1. Investors learn as much as possible about companies 2. They then look for securities whose price is not fair (mispricing) based on their analysis 3. Investors trade on these securities: 4. Trading shrinks expected profits and drives prices toward "fair" values: markets gradually become efficient

Disadvantages of the profitability index -

1. May lead to incorrect decisions in comparisons of mutually exclusive investments.

Disadvantages of Discounted Payback Period -

1. May reject positive NPV invests. 2. Requires an arbitrary cutoff point. 3. Ignores cash flows beyond the cutoff date. 4. Biased against long-term projects, such as R and D and new projects.

Disadvantages of IRR -

1. May result in multiple answers or not deal with nonconventional CF's. 2. May lead to incorrect decisions in comparisons of mutually exclusive investments.

Disadvantages of AAR -

1. Not a true rate of return; time value of money is ignored. 2. Uses an arbitrary benchmark cutoff rate. 3. Based on accounting (book) values, not cash flows and market values.

The enormous amount of data on stocks, bonds, & currencies can help us understand: -

1. The historical returns on various types of investments 2. The historical risks on those investments 3. How human being react to and price risk

Year-to-year dollar return: What could you have earned if you had invested $1 into: -

1. U.S. Treasury bills: a portfolio of T-bills with 3-month maturity = $20 2. Long-term U.S. Treasury bonds: a portfolio of T-bonds with 20-year maturity = $133 3. Long-term corporate bonds: a portfolio of high-quality bonds with 20-year maturity = ? 4. Large company stocks: the S&P 500 Index, a portfolio of 500 largest U.S. companies for market cap = $6,029 5. Small company stocks: portfolio of the smallest 20% of the companies listed on the NYSE = $33,214

TL Lumber is evaluating a project with csh flows of -$12,800, $7,400, $11,600, and -$3,200 for years 0 to 3, respectively. Given an interest rate of 8 percent, what is the MIRR using the discounted approach? -

14.36 percent MIRR = 0 = (-$12,800 - $3,200 / 1.08^3) + $7,400 / (1 + MIRR) + $11,600 / (1 + MIRR)^2 MIRR = .1436 or 14.36

What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average? -

16 percent

You own one share of a cumulative preferred stock that pays quarterly dividends. The firm has recently suffered some financial setbacks and has failed to pay the last two dividends. However, new funding has been arranged and the firm intends to restore all dividends, both common and preferred, this quarter. As a preferred shareholder, you should expect to receive the equivalent of ____ quarter(s) of dividends when the next dividend is paid.

3

Which one of the following bonds is the least sensitive to interest rate risk? 3-year; 4 percent coupon 3-year; 6 percent coupon 5-year; 6 percent coupon 7-year; 6 percent coupon 7-year; 4 percent coupon -

3 year; 6 percent coupon

Which one of the following bonds is the least sensitive to interest rate risk?

3-year; 6 percent coupon.

The average annual return on small-company stocks was about ________ percent greater than the average annual return on large-company stocks over the period 1926-2016. -

5

Al is retired and his sole source of income is his bond portfolio. Although he has sufficient principal to live on, he only wants to spend the interest income and thus is concerned about the purchasing power of that income. Which one of the following bonds should best ease Al's concerns?

5 year TIPS

Al is retired and his sole source of income is his bond portfolio. Although he has sufficient principal to live on, he only wants to spend the interest income and thus is concerned about the purchasing power of that income. Which one of the following bonds should best ease Al's concerns? 6-year coupon bonds 5-year TIPS 20-year coupon bonds 5-year municipal bonds 7-year income bonds -

5-year TIPS

The Blue Marlin is owned by a group of five shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting?

50 percent plus one vote

Nadine is a retired widow who is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own?

7- year income bond.

Nadine is a retired widow who is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own? 6-year, high-coupon, put bond 5-year TIPS 10-year AAA coupon bond 5-year floating rate bond 7-year income bond -

7-year income bond

For the period 1926-2016, the average risk premium on large-company stocks was about: -

8.6 percent.

Based on the period 1926-2016, the actual real return on large-company stocks has been around: -

9 percent

The taxability risk premium compensates bondholders for which one of the following? Yield decreases in response to market changes Lack of coupon payments Possibility of default A bond's unfavorable tax status Decrease in a municipality's credit rating -

A bond's unfavorable tax status

A project with financing type cash flows is typified by a project that has which one of the following characteristics?

A cash inflow at time zero.

use of easily obtained information. -

An advantage of the average accounting return method of analysis is its:

will have a greater depreciation tax shield in Year 2 than in Year 1. -

A company that utilizes the MACRS system of depreciation but does not use bonus depreciation: Multiple Choice will have equal depreciation costs each year of an asset's life. will have a greater depreciation tax shield in Year 2 than in Year 1. can depreciate the cost of land. will expense less than the entire cost of an asset. will fully depreciate a MACRS five-year asset within 5 years.

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect:

A decrease in all stock values.

Which one of the following statements is correct concerning market efficiency? -

A firm will generally receive a fair price when it issues new shares of stock if the market is efficient.

NPV Profile -

A graphical representation of the relationship between an investments' NPV's and various discount rates.

must have a profitability index that is equal to or greater than 1.0. -

A project has a discounted payback period that is equal to the required payback period. Given this, the project:

The project's cash inflows equal its cash outflows in current dollar terms. -

A project has a net present value of zero. Which one of the following best describes this project? The project has a zero percent rate of return. The project requires no initial cash investment. The project has no cash flows. The summation of all of the project's cash flows is zero. The project's cash inflows equal its cash outflows in current dollar terms.

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

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? 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. The cash flow in Year 3 is ignored. The project's cash flow in Year 3 is discounted by a factor of (1 + R)3. The cash flow in Year 2 is valued just as highly as the cash flow in Year 1. The project is acceptable whenever the payback period exceeds three years.

Net present value -

A project has an initial cost of $31,800 and a market value of $29,600. What is the difference between these two values called?

A cash inflow at Time 0 -

A project with financing type cash flows is typified by a project that has which one of the following characteristics?

accounting return. -

A project's average net income divided by its average book value is referred to as the project's average:

minus both the project's change in net working capital and capital spending. -

A project's cash flow is equal to the project's operating cash flow: Multiple Choice plus the project's depreciation expense minus both the project's taxes and capital spending. minus both the project's change in net working capital and capital spending. minus the project's change in net working capital plus all of the depreciation expenses. plus the project's depreciation expenses minus the project's taxes. minus the project's taxes.

Yes; The IRR exceeds the required return. -

A proposed project has an initial cost of $38,000 and cash inflows of $12,300, $24,200, and $16,100 for Years 1 through 3, respectively. The required rate of return is 16.8 percent. Based on IRR, should this project be accepted? Why or why not?

Which one of the following transactions occurs in the primary market?

A purchase of newly issued stock from ATamp;T.

Mutually Exclusive Investment Decisions -

A situation in which taking one investment prevents the taking of another.

is easy to calculate. -

A strength of the average accounting return (AAR) method of project analysis is the fact that AAR:

49) Which one of the following statements related to the NYSE is correct? A) Exchange members must purchase trading licenses. B) NYSE shareholders currently own "seats" on the exchange. C) Designated market makers buy at the asked price. D) The NYSE is privately owned by an investment firm. E) Electronic trading has increased the demand for floor brokers. -

A) Exchange members must purchase trading licenses.

22) Hardy Lumber has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most apt to be granted to the preferred shareholders? A) Right to share in company profits prior to other shareholders B) Right to elect the corporate directors C) Right to vote on proposed mergers D) Right to all residual income after the common dividends have been paid E) Right to a permanent seat on the board of directors -

A) Right to share in company profits prior to other shareholders

37) An agent who arranges a transaction between a buyer and a seller of equity securities is called a: A) broker. B) floor trader. C) capitalist. D) principal. E) dealer. -

A) broker.

42) An individual on the floor of the NYSE who owns a trading license and buys and sells for his or her personal account is called a: A) floor trader. B) exchange customer. C) specialist. D) floor broker. E) market maker. -

A) floor trader.

Accept the project if the -

AAR is greater than a preset rate.

Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31%. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22%. The required return for Project A is 11.5% while it is 12% for Project B. Both projects have a required AAR of 9.25%. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be? -

Accept Project B and reject Project A based on the NPVs

Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be?

Accept Project B and reject Project A based on the NPVs.

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

Accepted because the profitability index is greater than 1.

Initial investment in inventory to support the project -

All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0? Loan obtained to finance the project Initial investment in inventory to support the project Annual depreciation tax shield Aftertax salvage value Net working capital recovery

Which one of the following statements best defines the efficient market hypothesis? -

All securities in an efficient market are zero net present value investments.

You are comparing two mutually exclusive projects. The crossover point is 12.3 percent. You have determined that you should accept project A if the required return is 13.1 percent. This implies you should:

Always accept Project A if the required return exceeds the crossover rate.

Which one of the following statements related to capital gains is correct? -

An increase in an unrealized capital gain will increase the capital gains yield.

some positive net present value projects to be rejected -

Applying the discounted payback decision rule to all projects may cause: some positive net present value projects to be rejected. the most liquid projects to be rejected in favor of the less liquid projects. projects to be incorrectly accepted due to ignoring the time value of money. a firm to become more long-term focused. some projects to be accepted which would otherwise be rejected under the payback rule.

Bonds issued by the U.S. government:

Are considered to be free of default risk.

Protective covenants:

Are primarily designed to protect bondholders.

How are short-run returns measure? -

Arithmetic Mean

How are medium-run returns measure? -

Arithmetic Mean Geometric Mean

Which one of the following is the price at which a dealer will sell a bond? Call price Asked price Bid price Bid-ask spread Par value -

Asked price

The project is acceptable if the required return exceeds the IRR. -

Assume a project is independent with financing cash flows. Which one of these statements is The IRR cannot be used to determine the acceptability of the project. The project is acceptable if the required return exceeds the IRR. The project is acceptable only if the NPV is zero or negative. The project's required rate of return will always be negative. The project is acceptable if the internal rate of return is negative.

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?

Risk premium -

Assume that last year T-bills returned 2.8 percent while your investment in large-company stocks earned an average of 7.6 percent. Which one of the following terms refers to the difference between these two rates of return?

Differing lives and planned replacement at end of life -

Assume you are considering two mutually exclusive machines and need to select one for a cost-cutting project. Which one of these sets of characteristics best indicates the use of the equivalent annual cost method of analysis?

Roger's Meat Market is considering two independent projects. The profitability index decision rule indicates that both projects should be accepted. This result most likely does which one of the following?

Assumes the firm has sufficient funds to undertake both projects.

Summary AAR -

Average Accounting Return Measure of accounting profit relative to book value Similar to return on assets measure Take the investment if the AAR exceeds some specified return level Serious problems and should not be used

Definitions of Average Accounting Return -

Average net income / average book value Note that the average book value depends on how the asset is depreciated.

1) 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

29) A company has four open seats on its board of directors. There are seven candidates vying for these four positions. There will be a single election to determine the winners. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 400 of your votes for a single candidate. What is this type of voting called? A) Democratic B) Cumulative C) Straight D) Deferred E) Proxy -

B) Cumulative

9) Which one of the following applies to the dividend growth model? A) An individual stock has the same value to every investor. B) Even if the dividend amount and growth rate remain constant, the value of a stock can vary. C) Zero-growth stocks have no market value. D) Stocks that pay the same annual dividend will have equal market values. E) The dividend growth rate is inversely related to a stock's market price. -

B) Even if the dividend amount and growth rate remain constant, the value of a stock can vary.

43) Which one of the following is an electronic system used by the NYSE for directly transmitting orders to designated market makers? A) Garage order flow B) Pillar system C) Big Room system D) SLP network E) Order NET -

B) Pillar system

15) Winston Co. 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.

38) The owner of a trading license for the NYSE is called a: A) broker. B) member. C) agent. D) specialist. E) dealer. -

B) member.

23) 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.

32) What are the distributions of either cash or stock to shareholders by a corporation called? A) Coupon payments B) Retained earnings C) Dividends D) Capital payments E) Diluted profits -

C) Dividends

41) A floor broker on the NYSE does which one of the following? A) Supervises the commission brokers of a specific financial firm B) Trades for his or her own personal inventory C) Executes orders on behalf of customers D) Maintains an inventory and assumes the role of a market maker E) Is charged with maintaining a liquid, orderly market -

C) Executes orders on behalf of customers

46) A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market? A) Auction B) Private C) Over-the-counter D) Regional E) Insider -

C) Over-the-counter

30) You want to be on the board of directors of Uptown Communications. Since you are the only shareholder who will vote for you, you will need to own more than half of the outstanding shares of stock if you are to be elected to the board. What is the type of voting called that requires this level of stock ownership to be successfully elected? A) Democratic B) Cumulative C) Straight D) Deferred E) Proxy -

C) Straight

10) Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect: A) an increase in all stock values. B) all stock values to remain constant. C) a decrease in all stock values. D) dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value. E) dividend-paying stocks to increase in price while non-dividend paying stocks remain constant in value. -

C) a decrease in all stock values.

48) NYSE designated market makers: A) execute trades on behalf of their clients. B) are guaranteed a profit on every stock purchased and resold. C) act as dealers. D) provide a one-sided market. E) are also referred to as "$2 brokers." -

C) act as dealers.

7) Dixie South currently pays an annual dividend of $1.46 a share and plans on increasing that amount by 2.75 percent annually. Northern Culture currently pays an annual dividend of $1.42 a share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Northern Culture has a higher ________ than the stock of Dixie South. A) market price B) dividend yield C) capital gains yield D) total return E) real return -

C) capital gains yield

40) A member who acts as a dealer in a limited number of securities on the floor of the NYSE is called a: A) floor trader. B) floor post. C) designated market maker. D) floor broker. E) commission broker. -

C) designated market maker.

2) The annual dividend yield is computed by dividing ________ annual dividend by the current stock price. A) this year's B) last year's C) next year's D) the past 5-year average E) the next 5-year average -

C) next year's

44) The stream of customer orders coming in to the NYSE trading floor is called the: A) paper trail. B) trading volume. C) order flow. D) bid-ask spread. E) commission trail. -

C) order flow.

4) National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is: A) basically worthless as it offers no growth potential. B) equal in value to the present value of $1 paid one year from today. C) priced the same as a $1 perpetuity. D) valued at an assumed growth rate of 1 percent. E) worth $1 a share in the current market. -

C) priced the same as a $1 perpetuity.

47) NASDAQ has: A) an electronic network that transmits orders directly to the trading floor. B) both floor and commission brokers. C) three separate markets. D) a single designated market maker for each listed stock. E) level 3 data available online for easy access by all investors. -

C) three separate markets.

A call-protected bond is a bond that:

Cannot be called at this point in time.

Which of the following yields on a stock can be negative? -

Capital gains yield and total return

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?

Cash inflow in the final year of the project.

can affect the cash flows of a project every year of the project's life. -

Changes in the net working capital requirements: can affect the cash flows of a project every year of the project's life. only affect the initial cash flows of a project. only affect the initial and final cash flows of a project. are generally excluded from project analysis due to their irrelevance to the total project. are excluded from project analysis as long as they are recovered when the project ends.

The interest rate risk premium is the:

Compensation investors demand for accepting interest rate risk.

Tedder Mining 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?

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

Recently, you discovered a convertible, callable bond with a 5 percent semiannual coupon. If you purchase this bond you will have the right to:

Convert the bond into equity shares.

Which one of the following statements related to corporate dividends is correct?

Corporate shareholders may receive a tax break on a portion of their dividend income.

Which one of the following relationships applies to a par value bond? Yield to maturity > Current yield > Coupon rate Coupon rate > Yield to maturity > Current yield Coupon rate = Current yield = Yield to maturity Coupon rate < Yield to maturity < Current yield Coupon rate > Current yield > Yield to maturity -

Coupon rate = Current yield = Yield to maturity

Which one of the following relationships applies to a par value bond?

Coupon rate = current yield = yield-to-maturity.

Which one of the following applies to a premium bond? Yield to maturity > Current yield > Coupon rate Coupon rate = Current yield = Yield to maturity Coupon rate > Yield to maturity > Current yield Coupon rate < Yield to maturity < Current yield Coupon rate > Current yield > Yield to maturity -

Coupon rate > Current yield > Yield to maturity

Which one of the following applies to a premium bond?

Coupon rate > current yield > yield to maturity.

The price sensitivity of a bond increases in response to a change in the market rate of interest as the:

Coupon rate decreases and the time to maturity increases.

The collar of a floating-rate bond refers to the minimum and maximum:

Coupon rates.

Which one of these statements related to preferred stock is correct?

Cumulative preferred shares are more valuable than comparable noncumulative shares.

Summary-Discounted Payback Period -

Discounted payback period Length of time until initial investment is recovered on a discounted basis Take the project if it pays back in some specified period There is an arbitrary cutoff period

26) You own one share of a cumulative preferred stock that pays quarterly dividends. The firm has recently suffered some financial setbacks and has failed to pay the last two dividends. However, new funding has been arranged and the firm intends to restore all dividends, both common and preferred, this quarter. As a preferred shareholder, you should expect to receive the equivalent of ________ quarter(s) of dividends when the next dividend is paid. A) 0 B) 1 C) 2 D) 3 E) either 1, 2, or 3 -

D) 3

20) The Blue Marlin is owned by a group of five shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting? A) 17 percent B) 20 percent plus one vote C) 25 percent plus one vote D) 50 percent plus one vote E) 51 percent -

D) 50 percent plus one vote

50) Which one of the following transactions occurs in the primary market? A) Purchase of 500 shares of GE stock from a current shareholder B) Gift of 100 outstanding shares to a charitable organization C) Gift of 200 shares of stock by a mother to her daughter D) A purchase of newly issued stock from the issuer E) IBM's purchase of GE stock from a dealer -

D) A purchase of newly issued stock from the issuer

3) Which one of following is the rate at which a stock's price is expected to appreciate? A) Current yield B) Total return C) Dividend yield D) Capital gains yield E) Coupon rate -

D) Capital gains yield

52) Which one of the following best describes NASDAQ? A) Largest U.S. stock market in terms of dollar trading volume B) Market where dealers buy at the asked price C) Market where the designated market makers are located at posts D) Computer network of securities dealers E) Market with three physical trading floors -

D) Computer network of securities dealers

18) Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? A) Electing the board of directors B) Receiving a distribution of company profits C) Voting either for or against a proposed merger or acquisition D) Determining the amount of the dividend to be paid per share E) Having first chance to purchase any new equity shares that may be offered -

D) Determining the amount of the dividend to be paid per share

6) A decrease in which of the following will increase the current value of a stock according to the dividend growth model? A) Dividend amount B) Number of future dividends, provided the total number of dividends is less than infinite C) Dividend growth rate D) Discount rate E) Both the discount rate and the dividend growth rate -

D) Discount rate

19) Jen owns 30 shares of stock in Delta Fashions and wants to win a seat on the board of directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect three new directors. Which one of the following statements must be true given this information? A) Regardless of the voting procedure, Jen does not own enough shares to gain a seat on the board. B) If straight voting applies, Jen is assured a seat on the board. C) If straight voting applies, Jen can control all of the open seats. D) If cumulative voting applies, Jen is assured one seat on the board. E) If cumulative voting applies, Jen can control all of the open seats. -

D) If cumulative voting applies, Jen is assured one seat on the board.

53) Who can access Level 3 of NASDAQ's information? A) Anyone with internet access B) Only NASDAQ regulators C) Customers who pay an access fee D) NASDAQ market makers E) There is no Level 3 -

D) NASDAQ market makers

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:

Discounted payback period.

5) A forward PE is based on: A) the last four quarterly dividend payments. B) the last dividend payment multiplied by 2. C) historical earnings. D) estimated future earnings. E) industry averages. -

D) estimated future earnings.

14) Which one of the following represents the capital gains yield as used in the dividend growth model? A) D1 B) D1/P0 C) P0 D) g E) g/P0 -

D) g

11) When using the two-stage dividend growth model: A) g1 cannot be negative. B) Pt = Dt/R. C) g1 must be greater than g2. D) g1 can be greater than R. E) R must be less than g1 but greater than g2. -

D) g1 can be greater than R.

16) The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will: A) pay an increasing dividend for a period of time and then cease paying dividends altogether. B) increase the dividend amount every other year. C) pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year. D) grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely. E) pay increasing dividends for a fixed period of time, cease paying dividends for a period of time, and then commence paying increasing dividends for an indefinite period of time. -

D) grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.

13) Supernormal growth is a growth rate that: A) is both positive and follows a year or more of negative growth. B) exceeds a firm's previous year's rate of growth. C) is generally constant for an infinite period of time. D) is unsustainable over the long term. E) applies to a single, abnormal year. -

D) is unsustainable over the long term.

45) The average time for a trade on the NYSE Arca is best defined as less than: A) five minutes. B) ten minutes. C) one minute. D) one second. E) fifteen minutes. -

D) one second.

35) The secondary market is best defined as the market: A) in which subordinated shares are issued and resold. B) conducted solely by brokers. C) dominated by dealers. D) where outstanding shares of stock are resold. E) where warrants are offered and sold. -

D) where outstanding shares of stock are resold.

Equivalent annual cost -

Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs and 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?

Which one of the following is a project cash inflow? Ignore any tax effects. -

Decrease in inventory

If the variability of the returns on large-company stocks were to decrease over the long-term, you would expect which one of the following as related to large-company stocks to occur as a result? -

Decrease in the 68 percent probability range of returns

Which one of the following relationships is stated correctly?

Decreasing the time to maturity increases the price of a discount bond, all else constant

Which one of the following relationships is stated correctly?

Decreasing the time to maturity increases the price of a discount bond, all else constant.

Which one of the following relationships is stated correctly? The coupon rate exceeds the current yield when a bond sells at a discount. The call price must equal the par value. An increase in market rates increases the market price of a bond. Decreasing the time to maturity increases the price of a discount bond, all else constant. Increasing the coupon rate decreases the current yield, all else constant. -

Decreasing the time to maturity increases the price of a discount bond, all else constant.

Equivalent annual cost -

Decreasing which one of the following will increase the acceptability of a project?

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation?

Determining the amount of the dividend to be paid per share.

The new machine will generate positive operating cash flows. -

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 five-year life. The firm has a tax rate of 22 percent, uses straight-line depreciation over an asset's life, ignores bonus depreciation options, and has a positive net income. Given this, which one of the following statements is correct?

The internal rate of return is defined as the:

Discount rate which causes the net present value of a project to equal zero.

Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows?

Discounted cash flow valuation.

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the: -

Discounted payback period

Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model?

Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

We need to ask ourselves the following questions when evaluating capital budgeting decision rules -

Does the decision rule adjust for the time value of money? Does the decision rule adjust for risk? Does the decision rule provide information on whether we are creating value for the firm?

A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be:

Greater than 7 percent.

Thayer Farms stock has a beta of 1.38. The risk-free rate of return is 3.87 percent and the market risk premium is 9.03 percent. What is the expected rate of return on this stock? -

E(r) = .0387 + 1.38(.0903) E(r) = .1633 or 16.33

33) Browning, Inc. owns 50,000 shares of preferred stock in Omega, Inc. What percentage, if any, of the dividend income received by Browning, Inc. from this investment is excluded from federal income taxation in 2018? A) 0 percent B) 100 percent C) 25 percent D) 70 percent E) 50 percent -

E) 50 percent

28) Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings? A) Dual class B) Cumulative C) Non-cumulative D) Preferred E) Common -

E) Common

24) Which one of the following statements related to corporate dividends is correct? A) Dividends are nontaxable income to shareholders. B) Dividends reduce the taxable income of the corporation. C) The chief executive officer of a corporation is responsible for declaring dividends. D) The chief financial officer of a corporation determines the amount of dividend to be paid. E) Corporate shareholders may receive a tax break on a portion of their dividend income. -

E) Corporate shareholders may receive a tax break on a portion of their dividend income.

25) Which one of these statements related to preferred stock is correct? A) Preferred shareholders normally receive one vote per share of stock owned. B) Preferred shareholders determine the outcome of any election that involves a proxy fight. C) Preferred shareholders are considered to be the residual owners of a corporation. D) Preferred stock normally has a stated liquidating value of $1,000 per share. E) Cumulative preferred shares are more valuable than comparable noncumulative shares. -

E) Cumulative preferred shares are more valuable than comparable noncumulative shares.

17) Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model? A) No dividends for five years, then increasing dividends forever B) $1 per share annual dividend for two years, then $1.25 annual dividends forever C) Decreasing dividends for six years followed by one final liquidating dividend payment D) Dividends payments that increase by 2, 3, and 4 percent respectively for three years followed by a constant dividend thereafter E) Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter -

E) Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

51) Which one of the following statements applies to NASDAQ? A) Composed of four separate markets B) Exchange floor located in Chicago C) Provides two levels of information access D) Designated market maker system E) Multiple market maker system -

E) Multiple market maker system

34) Ernst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets? A) Private B) Auction C) Tertiary D) Secondary E) Primary -

E) Primary

21) Chemical Mines has 5,000 shareholders and is preparing to elect two new board members. You do not own enough shares to personally control the elections but are determined to oust the current leadership. Likewise, no other single shareholder owns sufficient shares to personally control the outcome of the election. Which one of the following is the most likely outcome of this situation given that some shareholders are happy with the existing management? A) Negotiated settlement where each side is granted control over one of the open seats B) Protracted legal battle over control of the board of directors C) Arbitrated settlement where the arbitrator determines who will be elected to the board D) Control of the board decided without your influence E) Proxy fight for control of the board -

E) Proxy fight for control of the board

12) 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.

31) You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called? A) Alternative voting B) Cumulative voting C) Straight voting D) Indenture voting E) Voting by proxy -

E) Voting by proxy

36) An agent who maintains an inventory from which he or she buys and sells securities is called a: A) broker. B) trader. C) capitalist. D) principal. E) dealer. -

E) dealer.

39) A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n): A) designated market maker. B) dealer. C) specialist. D) supplemental liquidity provider. E) floor broker. -

E) floor broker.

8) The dividend growth model: A) assumes dividends increase at a decreasing rate. B) only values stocks at Time 0. C) cannot be used to value constant dividend stocks. D) can be used to value both dividend-paying and non-dividend-paying stocks. E) requires the growth rate to be less than the required return. -

E) requires the growth rate to be less than the required return.

27) Preferred stock may have all of the following characteristics in common with bonds with the exception of: A) the lack of voting rights. B) a possible conversion option into common stock. C) annuity payments. D) a fixed liquidation value. E) tax-deductible payments. -

E) tax-deductible payments.

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:

Grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.

Which one of the following is an advantage of the average accounting return method of analysis?

Easy availability of information needed for the computation,

Advantages of Payback Period -

Easy to understand Adjusts for uncertainty of later cash flows Biased toward liquidity

Advantages of AAR: -

Easy to calculate Needed information will usually be available

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? -

Efficient capital market

the markets are continually reacting to new information. -

Efficient financial markets fluctuate continuously because: Multiple Choice the markets are continually reacting to old information as that information is absorbed. the markets are continually reacting to new information. arbitrage trading is limited. current trading systems require human intervention. investments produce varying levels of net present values.

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? -

Equivalent annual cost

overestimate; underestimate -

Estimates of the rate of return on a security based on the 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.

Which one of the following applies to the dividend growth model?

Even if the dividend amount and growth rate remain constant, the value of a stock can vary.

ineffective. -

Evidence seems to support the view that studying public information to identify mispriced stocks is:

A floor broker on the NYSE does which one of the following?

Executes orders on behalf of a commission broker.

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? -

Expected return

Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called? Coupon Face value Discount Yield Dirty price -

FV

Bert owns a bond that will pay him $45 each year in interest plus $1000 as a principal payment at maturity. What is the 1000$ called?

Face value

provided a positive annual rate of return. -

For the period 1926-2016, U.S. Treasury bills always: Multiple Choice provided an annual rate of return that exceeded the annual inflation rate. had an annual rate of return in excess of 1.2 percent. provided a positive annual rate of return. earned a higher annual rate of return than long-term government bonds. had a greater variation in returns year-over-year than did long-term government bonds.

between 0 and .25 percent. -

For the period 2009-2016, U.S. Treasury bills had an annual rate of return that was: Multiple Choice between .5 and 1 percent. between 1 and 2 percent. negative in at least one year. negative for two or more years. between 0 and .25 percent.

Selling furniture to appliance customers -

Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances?

sunk -

GL Plastics 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?

Treasury bonds are:

Generally issued as semiannual coupon bonds.

High standard deviation, large risk premium -

Generally speaking, which of the following best correspond to a wide frequency distribution?

how decisions concerning mutually exclusive projects are derived. -

Graphing the crossover point helps explain:

A zero coupon bond:

Has more interest rate risk than a comparable coupon bond.

Which bond would you generally expect to have the highest yield? Risk-free Treasury bond Nontaxable, highly liquid bond Long-term, high-quality, tax-free bond Short-term, inflation-adjusted bond Long-term, taxable junk bond -

Long-term, taxable junk bond

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur? Short-term; low coupon Short-term; high coupon Long-term; zero coupon Long-term; low coupon Long-term; high coupon -

Long-term; zero coupon

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?

Long-term; zero coupon.

Last year, you purchased a TIPS at par. Since that time, both market interest rates and the inflation rate have increased by .25 percent. Your bond has most likely done which one of the following since last year? Decreased in value due to the change in inflation rates Experienced an increase in its bond rating Maintained a fixed real rate of return Increased in value in response to the change in market rates Increased in value due to a decrease in time to maturity -

Maintained a fixed real rate of return

Last year, you purchased a TIPS at par. Since that time, both market interest rates and the inflation rate have increased by .25 percent. Your bond has most likely done which one of the following since last year?

Maintained a fixed real rate of return.

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:

Market price of the bond will decrease.

The expected rate of return on a stock portfolio is a weighted average where the weights are based on the: -

Market value of the investment in each stock

The secondary market is best defined by which one of the following?

Market where outstanding shares of stock are resold.

Which one of the following statements related to market efficiency tends to be supported by current evidence? -

Markets tend to respond quickly to new information.

Disadvantages of Profitability Index: -

May lead to incorrect decisions in comparisons of mutually exclusive investments

Disadvantages of Discounted Payback Period -

May reject positive NPV investments Requires an arbitrary cutoff point Ignores cash flows beyond the cutoff point Biased against longterm projects, such as R&D and new products

Which one of the following is a project acceptance indicator given an independent project with investing type cash flows?

Modified internal rate of return that exceeds the required return.

Which one of the following should not be included in the analysis of a new product? -

Money already spent for research and development of the new product

A bond that is payable to whomever has physical possession of the bond is said to be in:

bearer form

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:

Must still declare each dividend before it becomes an actual company liability.

both require the total use of the same limited resource. -

Mutually exclusive projects are best defined as competing projects that:

Who can access Level 3 of NASDAQ's information?

NASDAQ market makers

The Lunch Counter is expanding and expects operating cash flows of $49,500 a year for nine years as a result. This expansion requires $36,500 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $2,200 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 15.6 percent? -

NPV = -$36,500 - 2,200 + $49,500{[1 - (1/1.156^9)] / .156} + $2,200 / 1.156^9 NPV = $193,132.81

Since our goal is to increase owner wealth, -

NPV is a direct measure of how well this project will meet our goal.

You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?

NPV profile

Hunter's Hut is considering a project that will require additional inventory of $48,000 and will increase accounts payable by $22,000. Accounts receivable is currently $297,000 and is expected to increase by four percent if this project is accepted. What is the project's initial cash flow for net working capital? -

NWC requirement = −$48,000 + 22,000 − $297,000(.04) NWC requirement = −$37,880

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? -

Net income + Depreciation

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following? -

Net present value

Which one of the following indicates an accept decision for an independent project with conventional cash flows?

PI greater than 1.0.

Municipal bonds:

Pay interest that is federally tax free.

Which two methods of project analysis are the most biased towards short-term projects? -

Payback and discounted payback

Which two methods of project analysis are the most biased towards short-term projects?

Payback and discounted payback.

The length of time a firm must wait to recoup the money it has invested in a project is called the: -

Payback period

Suzie owns five different bonds and twelve different stocks. Which one of the following terms most applies to Suzie's investments? -

Portfolio

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? -

Portfolio weight

National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is:

Priced the same as a $1 perpetuity.

showing projected values for future time periods. -

Pro forma financial statements can best be described as financial statements:

include interest expense. -

Pro forma statements for a proposed project should generally do all of the following except: be compiled on a stand-alone basis. include all project-related fixed asset acquisitions and disposals. include all the incremental cash flows related to the project. include taxes. include interest expense.

A deferred call provision is which one of the following?

Prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date.

%Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which projects should be accepted based on the payback decision rule? -

Project A only

Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances? -

Selling furniture to appliance customers

Average Annual Returns vs. Risk Premiums Per Category: -

Small stocks: 16.6% Large stocks: 12.0% Long-term Corporate Bonds: 6.3% Long-term Government Bonds: 6.0% U.S. Treasury Bills: 3.4% Inflation: 3.0% Small stocks: 13.2 Large stocks: 8.6% Long-term Corporate Bonds: 2.9% Long-term Government Bonds: 2.6% U.S. Treasury Bills: 0.0

Which one of the following categories of securities had the highest average annual return for the period 1926-2016? -

Small-company stocks

Which one of the following categories of securities had the most volatile annual returns over the period 1926-2016? -

Small-company stocks

Which one of the following earned the highest risk premium over the period 1926-2016? -

Small-company stocks

The historical record for the period 1926-2016 supports which one of the following statements? -

Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year.

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:

Applying the discounted payback decision rule to all projects may cause:

Some positive net present value projects to be rejected.

Net present value -

Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods? Profitability index Internal rate of return Payback Net present value Accounting rate of return

Which one of the following statements concerning bond ratings is correct?

Split-rated bonds are called crossover bonds.

Which one of the following statements concerning bond ratings is correct? Investment grade bonds are rated BB or higher by Standard & Poor's. Bond ratings assess both interest rate risk and default risk. Split-rated bonds are called crossover bonds. The highest rating issued by Moody's is AAA. A "fallen angel" is a term applied to all "junk" bonds. -

Split-rated bonds are called crossover bonds.

The capital gains yield is positive. -

Stacy purchased a stock last year and sold it today for $4 a share more than her purchase price. She received a total of $1.15 per share in dividends. Which one of the following statements is correct in relation to this investment? Multiple Choice The dividend yield is expressed as a percentage of the par value. The capital gain would have been less had Stacy not received the dividends. The total dollar return per share is $2.85. The capital gains yield is positive. The dividend yield is greater than the capital gains yield.

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? -

Stand-alone principle

Volatility -

Standard deviation is a measure of which one of the following? Average rate of return Volatility Probability Risk premium Real returns

Which one of the following statements is correct?

Stocks can have negative growth rates.

strong form efficiency -

Strong form efficiency is the most stringent version of the efficient market hypothesis (EMH) investment theory, stating that all information in a market, whether public or private, is accounted for in a stock's price. Practitioners of strong form efficiency believe that even insider information cannot give an investor an advantage. This degree of market efficiency implies that profits exceeding normal returns cannot be realized regardless of the amount of research or information investors have access to. Example: A highly confidential meeting of the company is on. The CEO of ANY Aero-plane Corporation (whose share was selling for $200 seconds back) announces that the company has just bagged a very lucrative contract from DoD An executive excuses himself to go to the toilet, picks up his cell and calls his broker, and asks him to buy 50,000 shares of ANY @$200 "Are you kidding", says the broker, "The price just shot up to $230, as you guys have bagged a great DoD contract!"

Which one of the following is a risk that applies to most securities? -

Systematic

What type of security had the worst returns from 1925 - 2016? -

T-bills **However, T-Bills are less risky than other investment options and have more predictable behavior.

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?

The cash flow in year two is valued just as highly as the cash flow in year one.

Which one of the following best describes the concept of erosion? -

The cash flows of a new project that come at the expense of a firm's existing cash flows

Which one of these is a negative covenant that might be found in a bond indenture?

The company cannot lease any major assets without bondholder approval.

Tax due on the current salvage value of that asset -

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 $1,000 par value corporate bond that pays $60 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $996.20? The bond is currently selling at a premium. The current yield exceeds the coupon rate. The bond is selling at par value. The current yield exceeds the yield to maturity. The coupon rate has increased to 7 percent. -

The current yield exceeds the coupon rate.

A corporate bond with a 6 percent coupon was issued last year. Which one of these would apply to this bond today if the current yield to maturity is 7 percent?

The current yield exceeds the coupon rate.

amount of tax that is saved because of the depreciation expense. -

The depreciation tax shield is best defined as the:

incremental cash flows. -

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's:

NPV is... -

The difference between the market value of a project and its cost.

You are considering a project with conventional cash flows, an IRR of 11.63 percent, a PI of 1.04, an NPV of $987, and a payback period of 2.98 years. Which one of the following statements is correct given this information?

The discount rate used in computing the net present value was less than 11.63 percent.

Which one of these statements related to discounted payback is correct?

The discounted payback period decreases as the discount rate decreases.

Discounted payback period: -

The discounted payback period is the length of time until the sum of an investment's discounted cash flows equals its cost. The discounted payback period rule is to take an investment if the discounted payback is less than some cutoff. The discounted payback rule is flawed, primarily because it ignores cash flows after the cutoff.

costs of research conducted to identify equipment choices. -

The equivalent annual cost considers all of the following except the: required rate of return. operating costs. need for replacement. economic life. costs of research conducted to identify equipment choices.

which one of two machines should be purchased when the machines are mutually exclusive, have differing lives, and will be replaced at the end of their lives. -

The equivalent annual cost method is useful in determining: Multiple Choice which one of two machines to purchase if the machines are mutually exclusive, have differing lives, and are a one-time purchase. the operating cash flow for mutually exclusive projects ignoring any fixed asset acquisitions or dispositions. the minimum price that should be bid to earn a specified rate of return. which one of two investments to accept when the investments have differing required rates of return, differing costs, and will not be replaced once they wear out. which one of two machines should be purchased when the machines are mutually exclusive, have differing lives, and will be replaced at the end of their lives.

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

The excess return is computed as the: Multiple Choice 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.

Stand-alone principle -

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?

Net present value -

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?

How much value is created from undertaking an investment? -

The first step is to estimate the expected future cash flows. The second step is to estimate the required return for projects of this risk level. The third step is to find the present value of the cash flows and subtract the initial investment.

Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year. -

The historical record for the period 1926-2016 supports which one of the following statements? Multiple Choice When large-company stocks have a negative return, they will have a negative return for at least two consecutive years. The return on U.S. Treasury bills exceeds the inflation rate by at least .5 percent each year. There was only one year during the period when double-digit inflation occurred. Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year. The inflation rate was positive each year throughout the period.

Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient. -

The information was expected.

discount rate which causes the net present value of a project to equal zero. -

The internal rate of return is defined as the:

tedious to compute without the use of either a financial calculator or a computer. -

The internal rate of return is:

is easy to understand. -

The internal rate of return:

payback period. -

The length of time a firm must wait to recoup the money it has invested in a project is called the:

the aftertax salvage value of the fixed assets increases. -

The net present value of a project will increase if: the required rate of return increases. the initial capital requirement increases. some of the cash inflows are deferred until a later year.term-7 the aftertax salvage value of the fixed assets increases. the final cash inflow decreases.

Interest expense -

The operating cash flow for a project should exclude which one of the following? Taxes Variable costs Fixed costs Interest expense Depreciation tax shield

can be positive even though there are no sales. -

The operating cash flow of a cost-cutting project:

Opportunity cost -

The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following? Salvage value Wasted value Sunk cost Opportunity cost Erosion

Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of 15.1 percent, and a payback period of 3.2 years. The required return is 14.5 percent and the required payback period is 3.0 years. Which one of the following statements correctly applies to this project?

The payback decision rule could override the accept decision indicated by the net present value.

Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows?

The payback decision rule could override the net present value decision rule should cash availability be limited.

Payback period: -

The payback period is the length of time until the sum of an investment's cash flows equals its cost. The payback period rule is to take a project if its payback is less than some cutoff. The payback period is a flawed criterion, primarily because it ignores risk, the time value of money, and cash flows beyond the cutoff point.

profitability index. -

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

project future rates of return. -

The primary purpose of Blume's formula is to: Multiple Choice compute an accurate historical rate of return. determine a stock's true current value. consider compounding when estimating a rate of return. determine the actual real rate of return. project future rates of return.

Net present value -

The profitability index is most closely related to which one of the following?

If a project has a net present value equal to zero, then:

The project earns a return exactly equal to the discount rate.

Assume a project is independent with financing cash flows. Which one of these statements is correct?

The project is acceptable if the required return exceeds the IRR.

A project has a discounted payback period that is equal to the required payback period. Given this, which of the following statements must be true?

The project must have a profitability index that is equal to or greater than 1.0.

Swenson's is considering two mutually exclusive projects, Projects A and B, and has determined that the crossover rate for these projects is 11.7 percent. Given this you know that:

The project that is preferred at a discount rate of 11 percent will be the opposite project of that preferred at a discount rate of 12 percent.

Which one of the following statements is correct? The risk-free rate represents the change in purchasing power. Any return greater than the inflation rate represents the risk premium. Historical real rates of return must be positive. Nominal rates exceed real rates by the amount of the risk-free rate. The real rate must be less than the nominal rate given a positive rate of inflation. -

The real rate must be less than the nominal rate given a positive rate of inflation.

arithmetic -

The return earned in an average year over a multiyear period is called the _____ average return.

semi-strong form efficiency -

The semi-strong efficiency EMH form hypothesis contends that a security's price movements are a reflection of publicly-available material information. It suggests that fundamental and technical analysis are useless in predicting a stock's future price movement. Only material non-public Iinformation (MNPI) is considered useful for trading. Example: Suppose stock ABC is trading at $10, one day before it is scheduled to report earnings. A news report is published the evening before its earnings call that claims ABC's business has suffered in the last quarter due to adverse government regulation. When trading opens the next day, ABC's stock falls to $8, reflecting movement due to available public information. But the stock jumps to $11 after the call because the company reported positive results on the back of an effective cost-cutting strategy. The MNPI, in this case, is news of the cost-cutting strategy which, if available to investors, would have allowed them to profit handsomely.

Incremental -

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the following must be true?

The stock has a negative capital gains yield.

Which one of the following statements is false concerning the term structure of interest rates?

The term structure of interest rates and the time to maturity are always directly related.

Which one of the following statements is false concerning the term structure of interest rates? Expectations of lower inflation rates in the future tend to lower the slope of the term structure of interest rates. The term structure of interest rates includes both an inflation premium and an interest rate risk premium. The term structure of interest rates and the time to maturity are always directly related. The real rate of return has minimal, if any, effect on the slope of the term structure of interest rates. The interest rate risk premium increases as the time to maturity increases. -

The term structure of interest rates and the time to maturity are always directly related.

ignores noncash expenses. -

The top-down approach to computing the operating cash flow:

weak form efficiency -

The weak form efficiency theory, the most lenient of the bunch, argues that stock prices reflect all current information but also concedes that anomalies may be found by researching companies' financial statements thoroughly. Suppose David, a swing trader, sees Alphabet Inc. (GOOGL) continuously decline on Mondays and increase in value on Fridays. He may assume he can profit if he buys the stock at the beginning of the week and sells at the end of the week. If, however, Alphabet's price declines on Monday but does not increase on Friday, the market is considered weak form efficient.

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? The face value of the bond today is greater than it was when the bond was issued. The bond is worth less today than when it was issued. The yield to maturity is less than the coupon rate. The coupon rate is less than the current yield. The yield to maturity equals the current yield. -

The yield to maturity is less than the coupon rate.

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?

The yield-to-maturity is less than the coupon rate.

have multiple rates of return. -

There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:

Which one of the following events would be included in the expected return on Sussex stock? -

This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated.

Why are markets generally efficient? -

Thousands of trained analysts work on Wall Street Many of them work for big financial firms like Merrill, Morgan, Prudential, which have: -A lot of money, capital available to exploit any mispricing when and if it occurs -Similar, usually almost unlimited access to data -Time to wait until the mispricing occurs

Sale price + (Book value − Sale price)(TC) -

Three years ago, Knox Glass purchased a machine for a three-year project. The machine is being depreciated straight-line to zero over a five-year period. Assume the firm decided to forego any bonus depreciation. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (TC represents the relevant tax rate) Multiple Choice Sale price + (Sale price − Book value)(TC) Sale price + (Sale price − Book value)(1 − TC) Sale price + (Book value − Sale price)(TC) Sale price + (Book value − Sale price)(1 − TC) Sale price(1 − TC)

increase the risk premium. -

To convince investors to accept greater volatility, you must:

The rate of return on which type of security is normally used as the risk-free rate of return? -

Treasury bills

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2016? -

U.S. Treasury bills

Which one of the following had the least volatile annual returns over the period of 1926-2016? -

U.S. Treasury bills

Which one of the following statements is a correct reflection of the U.S. financial markets for the period 1926-2016? -

U.S. Treasury bills had an annual return in excess of 10 percent in three or more years.

A news flash just appeared that caused about a dozen stocks to suddenly increase in value by 12%. What type of risk does this news flash best represent? -

Unsystematic

Which one of the following risks is irrelevant to a well-diversified investor? -

Unsystematic risk

Standard deviation is a measure of which one of the following? -

Volatility

Which one of the following is the best example of two mutually exclusive projects?

Waiting until a machine finishes molding Product A before being able to mold Product B.

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst? -

Weak

The payback decision rule could override the accept decision indicated by the net present value. -

Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of 15.1 percent, and a payback period of 3.2 years. The required return is 14.5 percent and the required payback period is 3.0 years. Which one of the following statements correctly applies to this project?

Capital Budgeting Decision -

What fixed assets should be buy?

accepted because the profitability index is greater than 1. -

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

Weak -

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

Liquidity bias, ease of use -

Which of the following are advantages of the payback method of project analysis?

Bonds are generally a safer, or less risky, investment than are stocks. -

Which of the following statements are true based on the historical record for 1926-2016? Multiple Choice Risk-free securities produce a positive real rate of return each year. Bonds are generally a safer, or less risky, investment than are stocks. Risk and potential reward are inversely related. The normal distribution curve for large-company stocks is narrower than the curve for small-company stocks. Returns are more predictable over the short term than they are over the long term.

Capital gains yield and total return -

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

The average squared difference between the actual returns and the arithmetic average return -

Which one of the following best defines the variance of an investment's annual returns over a number of years? Multiple Choice The average squared difference between the arithmetic and the geometric average annual returns The squared summation of the differences between the actual returns and the average geometric return The average difference between the annual returns and the average return for the period The difference between the arithmetic average and the geometric average return for the period The average squared difference between the actual returns and the arithmetic average return

The cash flows of a new project that come at the expense of a firm's existing cash flows -

Which one of the following best describes the concept of erosion? Multiple Choice Expenses that have already been incurred and cannot be recovered Change in net working capital related to implementing a new project The cash flows of a new project that come at the expense of a firm's existing cash flows The alternative that is forfeited when a fixed asset is utilized by a project The differences in a firm's cash flows with and without a particular project

Selling fewer hot dogs because hamburgers were added to the menu -

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?

Small-company stocks -

Which one of the following categories of securities had the highest average annual return for the period 1926-2016?

U.S. Treasury bills -

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2016?

Small-company stocks -

Which one of the following categories of securities had the most volatile annual returns over the period 1926-2016? Long-term corporate bonds Large-company stocks Intermediate-term government bonds U.S. Treasury bills Small-company stocks

Prepaid services -

Which one of the following characteristics is most associated with financing type projects?

An equivalent annual cost that exceeds that of an alternative project -

Which one of the following would make a mutually exclusive project unacceptable?

Next year's annual dividend divided by today's stock price -

Which one of the following correctly describes the dividend yield? Multiple Choice Next year's annual dividend divided by today's stock price This year's annual dividend divided by today's stock price This year's annual dividend divided by next year's expected stock price Next year's annual dividend divided by this year's annual dividend The increase in next year's dividend over this year's dividend divided by this year's dividend

Sunk -

Which one of the following costs was incurred in the past and cannot be recouped?

Small-company stocks -

Which one of the following earned the highest risk premium over the period 1926-2016? Multiple Choice Long-term corporate bonds U.S. Treasury bills Small-company stocks Large-company stocks Long-term government bonds

U.S. Treasury bills -

Which one of the following had the least volatile annual returns over the period of 1926-2016? Multiple Choice Large-company stocks Inflation Long-term corporate bonds U.S. Treasury bills Intermediate-term government bonds

PI greater than 1.0 -

Which one of the following indicates an accept decision for an independent project with conventional cash flows?

Net income + Depreciation -

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?

Long-term government bonds, long-term corporate bonds, intermediate-term government bonds -

Which one of the following is a correct ranking of securities based on the volatility of their annual returns over the period of 1926-2016? Rank from highest to lowest. Multiple Choice Large-company stocks, U.S. Treasury bills, long-term government bonds Small-company stocks, long-term corporate bonds, large-company stocks Long-term government bonds, long-term corporate bonds, intermediate-term government bonds Large-company stocks, small-company stocks, long-term government bonds Intermediate-term government bonds, long-term corporate bonds, U.S. Treasury bills

Modified internal rate of return that exceeds the required return -

Which one of the following is a project acceptance indicator given an independent project with investing type cash flows? Profitability index that is less than 1.0 Project's internal rate of return that is less than the required return Discounted payback period that is greater than the required return Average accounting return that is less than the internal rate of return Modified internal rate of return that exceeds the required return

Decrease in inventory -

Which one of the following is a project cash inflow? Ignore any tax effects. Decrease in accounts payable Increase in accounts receivable Decrease in inventory Depreciation expense Equipment acquisition

Normal distribution -

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

Zero net present values for all stock investments -

Which one of the following is most indicative of a totally efficient stock market? Extraordinary returns earned on a routine basis Positive net present values on stock investments over the long-term Zero net present values for all stock investments Arbitrage opportunities which develop on a routine basis Realizing negative returns on a routine basis

Waiting until a machine finishes molding Product A before being able to mold Product B -

Which one of the following is the best example of two mutually exclusive projects? Building a furniture store beside a clothing outlet in the same shopping mall Producing both plastic forks and spoons on the same assembly line Using an empty warehouse to store both raw materials and finished goods Promoting two products during the same television commercial Waiting until a machine finishes molding Product A before being able to mold Product B

The information was expected. -

Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient.

Profitability index -

Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project?

Discounted cash flow valuation -

Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows?

Net present value -

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? Net present value Discounted payback Internal rate of return Profitability index Payback

Money already spent for research and development of the new product -

Which one of the following should not be included in the analysis of a new product? Increase in accounts payable for inventory purchases of the new product Reduction in sales for a current product once the new product is introduced Market value of a machine owned by the firm which will be used to produce the new product Money already spent for research and development of the new product Increase in accounts receivable needed to finance sales of the new product

All securities in an efficient market are zero net present value investments. -

Which one of the following statements best defines the efficient market hypothesis? Multiple Choice Efficient markets limit competition. Security prices in efficient markets remain steady as new information becomes available. Mispriced securities are common in efficient markets. All securities in an efficient market are zero net present value investments. All securities provide the same positive rate of return when the market is efficient.

Long-term corporate bonds outperformed long-term government bonds. -

Which one of the following statements correctly applies to the period 1926-2016? Multiple Choice Large-company stocks earned a higher average risk premium than did small-company stocks. The average inflation rate exceeded the average return on U.S. Treasury bills. Large-company stocks had an average annual return of 14.7 percent. Inflation averaged 2.6 percent for the period. Long-term corporate bonds outperformed long-term government bonds.

U.S. Treasury bills had an annual return in excess of 10 percent in three or more years. -

Which one of the following statements is a correct reflection of the U.S. financial markets for the period 1926-2016? Multiple Choice U.S. Treasury bill returns never exceeded a return of 9 percent in any one year. U.S. Treasury bills had an annual return in excess of 10 percent in three or more years. Inflation equaled or exceeded the return on U.S. Treasury bills every year during the period. Long-term government bonds outperformed U.S. Treasury bills every year during the period. National deflation occurred in at least one year during every decade during the period.

Long-term government bonds had a lower return but a higher standard deviation on average than did long-term corporate bonds. -

Which one of the following statements is correct based on the historical record for the period 1926-2016? Multiple Choice The standard deviation of returns for small-company stocks was double that of large-company stocks. U.S. Treasury bills had a zero standard deviation of returns because they are considered to be risk-free. Long-term government bonds had a lower return but a higher standard deviation on average than did long-term corporate bonds. Inflation was less volatile than the returns on U.S. Treasury bills. Long-term government bonds were less volatile than intermediate-term government bonds.

Long-term government bonds had more volatile annual returns than did the long-term corporate bonds. -

Which one of the following statements is correct based on the period 1926-2016? Multiple Choice Long-term government bonds had more volatile annual returns than did the long-term corporate bonds. The standard deviation of the annual rate of inflation was less than 3 percent. U.S Treasury bills have a zero variance in returns because they are risk-free. The risk premium on small-company stocks was less than 10 percent. The risk premium on all U.S. government securities is 0 percent.

A firm can submit a bid that is higher than the computed bid price and still break even. -

Which one of the following statements is correct concerning bid prices? Multiple Choice The bid price is the maximum price that a firm should bid. A firm can submit a bid that is higher than the computed bid price and still break even. A bid price ignores taxes. A bid price should be computed based solely on the operating cash flows of the project. A bid price should be computed based on a zero percent required rate of return.

A firm will generally receive a fair price when it issues new shares of stock if the market is efficient. -

Which one of the following statements is correct concerning market efficiency? Multiple Choice Real asset markets are more efficient than financial markets. If a market is efficient, arbitrage opportunities should be common. In an efficient market, some market participants will have an advantage over others. A firm will generally receive a fair price when it issues new shares of stock if the market is efficient. New information will gradually be reflected in a stock's price to avoid any sudden price changes in an efficient market.

A project can create a positive operating cash flow without affecting sales. -

Which one of the following statements is correct? Multiple Choice Project analysis should only include the cash flows that affect the income statement. A project can create a positive operating cash flow without affecting sales. The depreciation tax shield creates a cash outflow for a project. Interest expense should always be included when analyzing cost-cutting projects. A bid price maximizes profits on a project for the bidding firm.

An increase in an unrealized capital gain will increase the capital gains yield. -

Which one of the following statements related to capital gains is correct? Multiple Choice The capital gains yield includes only realized capital gains. An increase in an unrealized capital gain will increase the capital gains yield. The capital gains yield must be either positive or zero. The capital gains yield is expressed as a percentage of a security's total return. The capital gains yield represents the total return earned by an investor.

Markets tend to respond quickly to new information. -

Which one of the following statements related to market efficiency tends to be supported by current evidence? Multiple Choice It is easy for investors to earn abnormal returns. Short-run price movements are easy to predict. Markets are most likely only weak form efficient. Mispriced stocks are easy to identify. Markets tend to respond quickly to new information.

The IRR is equal to the required return when the net present value is equal to zero. -

Which one of the following statements related to the internal rate of return (IRR) is correct? The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. A project with an IRR equal to the required return would reduce the value of a firm if accepted. The IRR is equal to the required return when the net present value is equal to zero. Financing type projects should be accepted if the IRR exceeds the required return. The average accounting return is a better method of analysis than the IRR from a financial point of view.

The payback decision rule could override the net present value decision rule should cash availability be limited. -

Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows? The internal rate of return decision may contradict the net present value decision. Business practice dictates that independent projects should have three distinct accept indicators before a project is actually implemented. The payback decision rule could override the net present value decision rule should cash availability be limited. The profitability index rule cannot be applied in this situation. The projects cannot be accepted unless the average accounting return decision ruling is positive.

2014-2015 -

Which one of the following time periods is associated with low rates of inflation?

Increasing the project's initial cost at time zero -

Which one of the following will decrease the net present value of a project? Increasing the value of each of the project's discounted cash inflows Moving each cash inflow forward one time period, such as from Year 3 to Year 2 Decreasing the required discount rate Increasing the project's initial cost at time zero Increasing the amount of the final cash inflow

An increase in the required rate of return -

Which one of the following will increase a bid price? Multiple Choice A decrease in the fixed costs A reduction in the net working capital requirement A reduction in the firm's tax rate An increase in the salvage value An increase in the required rate of return

Discounted payback is biased towards short-term projects. -

Which one of these statements related to discounted payback is correct? Payback is a better method of analysis than discounted payback. Discounted payback is used more frequently in business than payback. Discounted payback does not require a cutoff point. Discounted payback is biased towards short-term projects. The discounted payback period increases as the discount rate decreases.

Payback and discounted payback -

Which two methods of project analysis are the most biased towards short-term projects?

The benefits of payback analysis usually outweigh the costs of the analysis. -

Why is payback often used as the sole method of analyzing a proposed small project?

The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the: coupon rate. face rate. call rate. yield to maturity. current yield. -

YTM

Should we consider the IRR for our primary decision criteria? -

Yes, second to NPV.

Which one of these equations applies to a bond that currently has a market price that exceeds par value? Market value < Face value Yield to maturity = Current yield Market value = Face value Current yield > Coupon rate Yield to maturity < Coupon rate -

Yield to maturity < Coupon rate

A bond has a market price that exceeds its face value. Which one of these features currently applies to this bond?

Yield to maturity less than the coupon rate.

semistrong -

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.

always accept Project A if the required return exceeds the crossover rate. -

You are comparing two mutually exclusive projects. The crossover point is 12.3 percent. You have determined that you should accept project A if the required return is 13.1 percent. This implies you should: always accept Project A. be indifferent to the projects at any discount rate above 13.1 percent. always accept Project A if the required return exceeds the crossover rate. accept Project B only when the required return is equal to the crossover rate. accept Project B if the required return is less than 13.1 percent.

The discount rate used in computing the net present value was less than 11.63 percent. -

You are considering a project with conventional cash flows, an IRR of 11.63 percent, a PI of 1.04, an NPV of $987, and a payback period of 2.98 years. Which one of the following statements is correct given this information?

lowest equivalent annual cost. -

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that 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 that has the:

You should not use IRR; use a different method of analysis. -

You are considering two mutually exclusive projects. Project A has cash flows of −$125,000, $51,400, $52,900, and $63,300 for Years 0 to 3, respectively. Project B has cash flows of −$85,000, $23,100, $28,200, and $69,800 for Years 0 to 3, respectively. Project A has a required return of 9 percent while Project B's required return is 11 percent. Should you accept or reject these mutually exclusive projects based on IRR analysis?

You own a bond that has a 6 percent annual coupon and matures five years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent?

You will realize a capital gain on the bond if you sell it today.

You own a bond that pays an annual coupon of 6 percent that matures five years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent? The current yield to maturity is greater than 6 percent. The current yield is 6 percent. The next interest payment will be $30. The bond is currently valued at one-half of its issue price. You will realize a capital gain on the bond if you sell it today. -

You will realize a capital gain on the bond if you sell it today.

Which one of the following is most indicative of a totally efficient stock market? -

Zero net present values for all stock investments

The taxability risk premium compensates bondholders for which one of the following?

a bond's unfavorable tax status

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

a discount; less than

Accept the project if it pays -

back on a discounted basis within the specified time.

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. a premium; less than a premium; equal to a discount; less than a discount; higher than par; less than -

a discount; less than

• If the NPV is positive, -

accept the project.

A project's average net income divided by its average book value is referred to as the project's average:

accounting return

NYSE designated market makers:

act as dealers

The depreciation tax shield is best defined as the: -

amount of tax that is saved because of the depreciation expense.

A note is generally defined as: a secured bond with an initial maturity of 10 years or more. a secured bond that initially matures in less than 10 years. any bond secured by a blanket mortgage. an unsecured bond with an initial maturity of 10 years or less. -

an unsecured bond with an initial maturity of 10 years or less.

Bonds issued by the U.S. government: are considered to be free of interest rate risk. generally have higher coupons than comparable bonds issued by a corporation. are considered to be free of default risk. pay interest that is exempt from federal income taxes. are called "munis." -

are considered to be free of default risk.

Protective covenants: apply to short-term debt issues but not to long-term debt issues. only apply to privately issued bonds. are a feature found only in government-issued bond indentures. only apply to bonds that have a deferred call provision. are primarily designed to protect bondholders. -

are primarily designed to protect bondholders.

US Treasury Bonds: are highly illiquid. are quoted as a percentage of par. are quoted at the dirty price. pay interest that is federally tax-exempt. must be held until maturity. -

are quoted as a percentage of par.

U. S. Treasury bonds:

are quotes as a percentage of par

The return earned in an average year over a multiyear period is called the ________ average return. -

arithmetic

Which one of the following is the price at which a dealer will sell a bond?

asked price

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected? Default risk Taxability Liquidity Inflation Interest rate risk -

default risk

A market maker who acts as a dealer in one or more securities on the floor of the NYSE is called a:

designated market maker.

Rosita paid a total of $1,189, including accrued interest, to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the: quoted price. spread price. clean price. dirty price. -

dirty

Rosita paid a total of $1,189 to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the:

dirty price

Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today?

dirty price

Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today? Clean price Dirty price Asked price Quoted price Bid price -

dirty price

A decrease in which of the following will increase the current value of a stock according to the dividend growth model?

discount rate

What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?

dividend growth / constant-growth model

Which one of the following is computed by dividing next year's annual dividend by the current stock price?

dividend yield

What are the distributions of either cash or stock to shareholders by a corporation called?

dividends

A sinking fund is managed by a trustee for which of the following purposes?

early bond redemption

A sinking fund is managed by a trustee for which one of the following purposes?

early bond redemption

A sinking fund is managed by a trustee for which one of the following purposes? Paying bond interest payments Early bond redemption Converting bonds into equity securities Paying preferred dividends Reducing bond coupon rates -

early bond redemption

Constant research on companies keep the market _____ -

efficient

Samantha owns a reverse convertible bond. At maturity, the principal amount will be repaid in: shares of stock. cash while the interest is paid in shares of stock. the form of a newly issued bond. either shares of stock or a newly issued bond. either cash or shares of stock. -

either cash or shares of stock.

A forward PE is based on:

estimated future earnings

Which one of the following statements related to the NYSE is correct?

exchange members must purchase trading licenses

A bond's coupon rate is equal to the annual interest divided by which one of the following?

face value

Treasury bonds are: issued by any governmental agency in the U.S. issued only on the first day of each fiscal year by the U.S. Department of Treasury. bonds that offer the best tax benefits of any bonds currently available. generally issued as semiannual coupon bonds. totally risk free. -

generally issued as semiannual coupon bonds.

The average compound return earned per year over a multiyear period is called the ________ average return. -

geometric

A zero coupon bond:

has more interest rate risk than a comparable coupon bond

A zero coupon bond: is sold at a large premium. pays interest that is tax deductible to the issuer at the time of payment. can only be issued by the U.S. Treasury. has more interest rate risk than a comparable coupon bond. provides no taxable income to the bondholder until the bond matures. -

has more interest rate risk than a comparable coupon bond.

Callable bonds generally: grant the bondholder the option to call the bond any time after the deferment period. are callable at par as soon as the call-protection period ends. are called when market interest rates increase. are called within the first three years after issuance. have a sinking fund provision. -

have a sinking fund provision.

The riskier an asset, the ______ the return is. -

higher

Road Hazards has 12-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:

in registered form

Road hazards has 12 year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. these direct payments are a clear indication that the bonds can accurately be defined as being issued:

in registered form

Road Hazards has 12-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued: at par. in registered form. in street form. as debentures. as callable bonds. -

in registered form.

Pro forma statements for a proposed project should generally do all of the following except: -

include interest expense

To convince investors to accept greater volatility, you must: -

increase the risk premium

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk: increases at an increasing rate. increases at a decreasing rate. increases at a constant rate. decreases at an increasing rate. decreases at a decreasing rate. -

increases at a decreasing rate

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's: -

incremental cash flows

The current yield is defined as the annual interest on a bond divided by the: coupon rate. face value. market price. call price. par value. -

market price

The current yield is defined as the annual interest on a bond divided by which one of the following?

market price

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the: coupon rate will also increase. current yield will decrease. yield to maturity will be less than the coupon rate. market price of the bond will decrease. -

market price of the bond will decrease.

A Treasury yield curve plots Treasury interest rates relative to which one of the following?

maturity

A bond's principal is repaid on the ____ date. coupon yield maturity dirty clean -

maturity

A bonds principal is repaid on the ___ date

maturity

The bond principal is repaid on which one of these dates?

maturity due

If a stock portfolio is well diversified, then the portfolio variance: -

may be less than the variance of the least risky stock in the portfolio

The owner of a trading license for the NYSE is called a:

member

A project's cash flow is equal to the project's operating cash flow: -

minus both the project's change in net working capital and capital spending

Which one of the following statements applies to NASDAQ?

multiple market maker system

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

mutually exclusive

A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called?

net present value

Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods?

net present value

The profitability index is most closely related to which one of the following?

net present value

Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm?

net present value

_____ is reflected in security prices almost instantaneously. -

news

Interest rates that include an inflation premium are referred to as:

nominal rates

Interest rates that include an inflation premium are referred to as: annual percentage rates. stripped rates. effective annual rates. real rates. nominal rates. -

nominal rates

It is convenient in Finance to assume that the distribution of returns is ______. -

normal described by two parameters: Mean Standard Deviation **it allows us to estimate the likelihood/probability of different occurrences for the returns

Last year, Lexington Homes issued $1 million in unsecured, noncallable debt. This debt pays an annual interest payment of $55 and matures six years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt?

note

Last year, Lexington Homes issued $1 million in unsecured, noncallable debt. This debt pays an annual interest payment of $55 and matures six years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt? Semiannual coupon Discount bond Note Trust deed Collateralized -

note

The stream of customer orders coming in to the NYSE trading floor is called the:

order flow

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market?

over-the-counter

Estimates of the rate of return on a security based on the 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. -

overestimate; underestimate

Municipal bonds:

pay interest that is federally tax free

Municipal bonds: are totally risk free. generally have higher coupon rates than corporate bonds. pay interest that is federally tax free. are rarely callable. are free of default risk. -

pay interest that is federally tax free.

Kristi wants to start training her most junior assistant, Amy, in the art of project analysis. Amy has just started college and has no experience or background in business finance. To get her started, Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze. Which method is Kristi most apt to ask Amy to use in making her initial decisions?

payback

The length of time a firm must wait to recoup the money it has invested in a project is called the:

payback period

The counter area on the floor of the NYSE where a designated market maker operates is called a:

post

Which one of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities?

preferred stock

Which one of the following characteristics is most associated with financing type projects?

prepaid services

Emst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets?

primary

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

profitability index

Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project?

profitability index

A deferred call provision: requires the bond issuer to pay the current market price, minus any accrued interest, should the bond be called. allows the bond issuer to delay repaying a bond until after the maturity date should the issuer so opt. prohibits the issuer from ever redeeming bonds prior to maturity. prohibits the bond issuer from redeeming callable bonds prior to a specified date. requires the bond issuer pay a call premium that is equal to or greater than one year's coupon should the bond be called. -

prohibits the bond issuer from redeeming callable bonds prior to a specified date.

A deferred call provision:

prohibits the bond issuer from redeeming callable conds prior to a specified date

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule?

project A only

The primary purpose of Blume's formula is to: -

project future rates of return.

The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the:

protective covenants

The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the: trustee relationships. bylaws. legal bounds. trust deed. protective covenants. -

protective covenants

For the period 1926-2016, U.S. Treasury bills always: -

provided a positive annual rate of return.

Chemical Mines has 5,000 shareholders and is preparing to elect two new board members. You do not own enough shares to personally control the elections but are determined to oust the current leadership. Likewise, no other single shareholder owns sufficient shares to personally control the outcome of the election. Which one of the following is the most likely outcome of this situation given that some shareholders are happy with the existing management?

proxy fight for control of the board

Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond?

real rate

Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond? Risk-free rate Realized rate Nominal rate Real rate Current rate -

real rate

Debt Securities -

represents money that is borrowed and must be repaid, with terms that stipulates the size of the loan, interest rate, and maturity or renewal date. Debt securities, which include government and corporate bonds, certificates of deposit (CDs) and collateralized securities (such as CDOs​ and CMOs​), generally entitle their holder to the regular payment of interest and repayment of principal (regardless of the issuer's performance), along with any other stipulated contractual rights (which do not include voting rights). They are typically issued for a fixed term, at the end of which they can be redeemed by the issuer. Debt securities can be secured (backed by collateral) or unsecured, and, if unsecured, may be contractually prioritized over other unsecured, subordinated debt in the case of a bankruptcy.

Equity Securities -

represents ownership interest held by shareholders in an entity (a company, partnership or trust), realized in the form of shares of capital stock, which includes shares of both common and preferred stock. Holders of equity securities are typically not entitled to regular payments—although equity securities often do pay out dividends—but they are able to profit from capital gains when they sell the securities (assuming they've increased in value, naturally). Equity securities do entitle the holder to some control of the company on a pro rata basis, via voting rights. In the case of bankruptcy, they share only in residual interest after all obligations have been paid out to creditors. They are sometimes offered as payment-in-kind.

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?

required rate of return

Accept the project if the IRR is greater than the -

required return.

The excess return is computed as the: -

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

IRR is the -

return that makes the NPV = 0.

Financial markets also provide us with information about the ________ that are required for various levels of risk -

returns

The "reward" for bearing risk of an asset and receiving returns on it, is called ______. -

risk premium

The expected risk premium on a stock is equal to the expected return on the stock minus the: -

risk-free rate

The IRR rule accounts for -

risk.

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. -

semistrong

Pro forma financial statements can best be described as financial statements: -

showing projected values for future time periods

You want to be on the board of directors of Uptown Communications. Since you are the only shareholder who will vote for you, you will need to own more than half of the outstanding shares of stock if you are to be elected to the board. What is the type of voting called that requires this level of stock ownership to be successfully elected?

straight

Capital Budgeting is also known as -

strategic asset allocation.

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. -

strong

Inside information has the least value when financial markets are: -

strong form efficient.

Sue is considering purchasing a bond that will only return its principal at maturity if the stock market declines. However, if the stock market increases in value during the bond term, at maturity, she will receive both the bond principal and a percentage of the stock market gain. What type of bond is this?

structured note

A highly illiquid bond that pays no interest but might entitle its holder to rental income from an asset is most apt to be a: NoNo bond. put bond. contingent callable bond. structured note. sukuk. -

sukuk

a highly illiquid bond that pays no interest but might entitle its holder to rental income from an asset is most apt to be a:

sukuk

Which one of the following is the electronic system used by the NYSE for directly transmitting orders to specialists?

superDOT

Preferred stock may have all of the following characteristics in common with bonds with the exception of:

tax-deductible payments

The yields on a corporate bond differ from those on a comparable Treasury security primarily because of:

taxes and default risk

The yields on a corporate bond differ from those on a comparable Treasury security primarily because of: interest rate risk and taxes. taxes and default risk. default and interest rate risks. liquidity and inflation rate risks. default, inflation, and interest rate risks. -

taxes and default risk

the yeilds on a corporate bond differ from those on a comparable treasury security primarily because of:

taxes and default risk

The internal rate of return is: -

tedious to compute without the use of either a financial calculator or a computer.

The pure time value of money is known as the: liquidity effect. Fisher effect. term structure of interest rates. inflation factor. interest rate factor. -

term structure of interest rates.

discounted payback period. -

the length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:

Efficient financial markets fluctuate continuously because: -

the markets are continually reacting to new information.

Which of the following statement is correct?

the real rate must be less than the nominal rate given a positive rate of inflation

NASDAQ has:

three separate markets

A Treasury yield curve plots Treasury interest rates relative to: market rates. comparable corporate bond rates. the risk-free rate. inflation rates. time to maturity. -

time to maturity

IRR accounts for -

time value of money.

Financial markets allow companies, governments, and individuals to increase their utility by allowing: -

to defer consumption and earn a return to compensate them for doing so -Borrowers have better access to the capital that is available so that they can invest in productive assets

A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today?

two month's interest

A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today? No difference One months' interest Two months' interest Four months' interest Five months' interest -

two months interest

How are long-run returns measure? -

via the geometric mean

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?

voting by proxy

Kurt has researched T-Tek and believes the firm is poised to vastly increase in value. He has decided to purchase T-Tek bonds as he needs a steady stream of income. However, he still wishes that he could share in the firm's success along with the shareholders. Which one of the following bond features will help him fulfill his wish?

warrant

Kurt has researched T-Tek and believes the firm is poised to vastly increase in value. He has decided to purchase T-Tek bonds as he needs a steady stream of income. However, he still wishes that he could share in the firm's success along with the shareholders. Which one of the following bond features will help him fulfill his wish? Put provision Positive covenant Warrant Crossover rating Call provision -

warrant

A company that utilizes the MACRS system of depreciation but does not use bonus depreciation: -

will have a greater depreciation tax shield in Year 2 than in Year 1.

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds?

zero coupon

Advantages of Profitability Index: -

• Advantages Closely related to NPV, generally leading to identical decisions Easy to understand and communicate May be useful when available investment funds are limited

DCF Criteria IRR -

• Internal rate of return Discount rate that makes NPV = 0 Take the project if the IRR is greater than the required return Same decision as NPV with conventional cash flows IRR is unreliable with nonconventional cash flows or mutually exclusive projects

Advantages of IRR: -

• Knowing a return is intuitively appealing • It is a simple way to communicate the value of a project to someone who doesn't know all the estimation details • If the IRR is high enough, you may not need to estimate a required return, which is often a difficult task

Profitability Index Details: -

• Measures the benefit per unit cost, based on the time value of money • A profitability index of 1.1 implies that for every $1 of investment, we create an additional $0.10 in value • This measure can be very useful in situations in which we have limited capital

DCF Criteria NPV -

• Net present value Difference between market value and cost Take the project if the NPV is positive Has no serious problems Preferred decision criterion

Summary-Payback Period -

• Payback period Length of time until initial investment is recovered Take the project if it pays back within some specified period Doesn't account for time value of money, and there is an arbitrary cutoff period

DCF Criteria Profitability Index -

• Profitability Index Benefit-cost ratio Take investment if PI > 1 Cannot be used to rank mutually exclusive projects May be used to rank projects in the presence of capital rationing 9

Capital budgeting in practice: -

• We should consider several investment criteria when making decisions • NPV and IRR are the most commonly used primary investment criteria • Payback is a commonly used secondary investment criteria


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