Finance Test 2
what is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities
NPV
a specialist is a
NYSE member who functions as a dealer for a limited number of securities
T or F a decrease in a firm's WACC will increase the attractiveness of the firm's investment options
True
T or F the higher the expected rate of return, the wider the distribution of returns
True
T or F the payback method is biased towards short-term projects
True
a firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions. by doing so the firm
automatically gives preferential treatment in the allocation of funds to its riskiest division
an efficient capital market is best defined as a market in which security prices reflect what
available information
a broker is an agent who
brings buyers and sellers together
which one of the following types of securities has no priority in a bankruptcy proceeding
common stock
what generally pays a fixed dividend, receives first priority in dividend payment, and maintains the right to a dividend payment, even if that payment is deferred?
cumulative preferred
an agent who buys and sells securities from inventory is called
dealer
which one of the following defines the internal rate of return for a project
discount rate which results in a zero net present value for the project
what best refers to the practice of investing in a variety of diverse assets as a means of reducing risk
diversification
what is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project
erosion
the security market line is a linear function which is graphed by plotting data points based on the relationship between which two variables
expected return and beta
what is defined as the average compound return earned each year over a multiyear period
geometric average return
what is an example of systematic risk
increase in consumption created by a reduction in personal tax rates
any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as what
incremental cash flows
the profitability index reflects the value created per dollar
invested
the cost of preferred stock
is equal to the stock's dividend yield
inside quotes are defined as the
lowest asked and highest bid offers
systematic risk principle states that the expected return on a risky asset depends on what
market risk
what is the slope of the security market line
market risk premium
assume you own a portfolio of diverse securities which are each correctly priced. given this, the reward-to-risk ratio
of each security must equal the slope of the security market line
what is the best option that is foregone when a particular investment is selected
opportunity cost
what indicates that a project is expected to create value for its owners
positive net present value
newly issued securities are sold to investors in which one of the following markets
primary
arithmetic average return
return earned in average year over a multiyear period
systematic risk
risk that affects a large number of assets
what has the widest frequency distribution of returns for the period 1926-2008
small company stocks
what is the most apt to have the largest risk premium in the future based on the historical record for 1926-2008
small-company stocks
if the financial markets are efficient then
stock prices should only respond to unexpected news and events
a cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost
sunk
the risk premium for an individual security is based on which risk
systematic
beta measures...
systematic risk
an investment has conventional cash flows and a profitability index of 1.0. given this, what must be true
the NPV is equal to zero
over the period of 1926-2008
the risk premium on stocks exceeded the risk premium on bonds
standard deviation measures...
total risk
what best exemplifies unsystematic risk
unexpected increase in the variable costs for a firm
portfolio diversification eliminates what
unsystematic risk
what represents the rate of return a firm must earn on its assets if it is to maintain the current value of its securities
weighted average cost of capital
what is the pre-tax cost of debt
weighted averaged yield-to-maturity on the firm's outstanding debt
what represents the amount of compensation an investor should expect to receive for accepting the unsystematic risk associated with an individual security
zero
what method of analysis ignores cash flows
AAR
what method of analysis is most similar to computing the return on assets
AAR