financial management final

The Treasury bills used in the Ibbotson-Sinquefield studies had maturities of ___.

1 month

computation of variance

1. compute expected return 2. squared deviation of expected return 3. multiply each squared deviation by its probability 4. variance is the result

Of the options listed below, which is the best measure of systematic risk?

Beta

Which of the following are considered relevant cash flows?

Cash flows from beneficial spillover effects Cash flows from erosion effects Cash flows from opportunity costs

Which of the following are components used in the construction of the WACC?

Cost of preferred stock Cost of debt Cost of common stock

The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as _____ costs.

DIRECT Bankruptcy

Which of the following are ways to make money by investing in stocks? (Select all that apply.)

Dividends Capital gains

A sunk cost is an example of a relevant incremental cash flow.

False

Which of the following items are included when calculating the expected return on a portfolio? I. Percentage of the portfolio invested in each individual security II. Projected states of the economy III. The performance of each security given various economic states IV. Probability of occurrence for each state of the economy

I, II, III, and IV

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

Incremental

What is a risk premium?

It is additional compensation for taking risk, over and above the risk-free rate.

What is the definition of expected return?

It is the return that an investor expects to earn on a risky asset in the future.

Which one of the following correctly describes the dividend yield?

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

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

A capital gain on a share is counted as part of the total return whether or not the gain is realised from selling the share. True false question.

True

The return an investor in a security receives is equal to the cost of the security to the company that issued it.

True

When developing cash flows for capital budgeting, it is easy to overlook important items. True false question.

True

The cost of capital depends primarily on the sourceBlank 1Blank 1 source , Incorrect (use/source) of fund

USE

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

Volatility

What does WACC stand for?

Weighted average cost of capital

When analyzing a project, sunk costs ____ incremental cash outflows. Multiple choice question.

are not

The dividend yield for a 1-year period is equal to the annual dividend amount divided by the ______.

beginning stock price

Opportunity costs are ____.

benefits lost due to taking on a particular project

Percentage returns are more convenient than dollar returns because they ____.

can be applied to any number

Net working capital:

can create either an initial cash inflow or outflow.

The ________ explains the relationship between the expected return on a security and the level of that security's systematic risk.

capital asset pricing model

If you buy a stock for $10 and later sell it for $16, you will have a ____.

capital gain of $6

The total dollar return is the sum of dividends and __________.

capital gains or losses

Ignoring taxes, at the break-even point between a levered and an unlevered capital structure, the:

company is earning just enough to pay for the cost of the debt.

The rate used to discount project cash flows is known as the ___.

cost of capital discount rate required return

The value of a firm is equal to the value of its _____.

debt plus equity

Financial risk is:

dependent upon a company's capital structure.

Historically, there is a(n) ______ relationship between risk and expected return in the stock market.

direct

Incremental cash flows come about as a(n) ________ consequence of taking a project under consideration.

direct

One method for estimating the cost of equity is based on the ______ model.

dividend growth

The two potential ways to make money as a stockholder are through ______ and capital appreciation.

dividends

The total dollar return on a stock is the sum of the ____ and the _____.

dividends; capital gains

Roger Ibbotson and Rex Sinquefield's research on historical rates of return:

does not adjust returns for inflation or taxes.

Financial leverage affects the performance of a firm because the range of possible values for ___.

earnings per share is wider

Stock Alpha has a beta of .79 and a reward-to-risk ratio that is less than the reward-to-risk ratio of Stock Omega. Omega has a beta of 1.12. This information implies that:

either Alpha is overpriced or Omega is underpriced or both.

The return an investor in a security receives is ______ the cost of the security to the company that issued it.

equal to

return that an investor will probably earn on a risky asset in the future.

expected return

________ risk is the type of equity risk related to a firm's capital structure policy.

financial

______ is the term that describes the capital structure when debt is used to finance assets.

financial leverage

Sunk costs are costs that ____

have already occurred and are not affected by accepting or rejecting a project

With ____, an investor is able to replicate a corporation's capital structure by borrowing funds and using those funds along with her own money to buy the company's stock.

homemade leverage

Dividends are the ______ component of the total return from investing in a stock.

income

The manager of a firm should change the capital structure if and only if ___.

it increases value of the firm

The WACC is the minimum return a company needs to earn to satisfy _____.

its stockholders its bondholders

The value of the firm is maximized when the weighted average cost of capital (WACC) is _____.

minimized

Studying market history can reward us by demonstrating that _____.

on average, investors will earn a reward for bearing risk the greater the potential reward is, the greater the risk

If investors are risk averse, it is reasonable to assume that the risk premium for the stock market will be _____.

positive

Erosion will ______ the sales of existing products.

reduce

Opportunity costs are classified as ______ costs in project analysis.

relevant

The first step in estimating cash flow is to determine the _________ cash flows.

relevant

A project should only be accepted if its return is above what is ___.

required by investors

Volatility or ______ increases for equity holders when leverage increases.

risk

If a security is fairly priced, its ________ divided by its beta will equal the slope of the security market line.

risk premium

To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return.

risk-free rate

Which one of the following categories of securities had the most volatile annual returns over the period 1926-2019?

small company stocks

The standard deviation

square root of the variance

According to the _________ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "minifirm." Multiple choice question.

stand-alone

A capital gain on a stock results from an increase in ______.

stock price

When an investor is diversified only ________ risk matters.

systematic

The principle of diversification tells us that, to a diversified investor, the only type of risk that matters is

systematic risk

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

test marketing expenses

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

that state projected values for future time periods.

A firm's capital structure refers to ___.

the firm's mix of debt and equity

A beneficial rule to follow is to set the firm's capital structure so that

the firm's value is maximized

The portfolio weight is _____.

the percentage of the total value that is invested in an asset

According to ________, a company borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs.

the static theory of capital structure

Finding a firm's overall cost of equity is difficult because _____.

there is no way of directly observing the return that the firm's equity investors require on their investment

The cost of capital depends on the _____ of funds, not the _____ of funds.

use; source

In general, the capital structures of U.S. firms:

vary significantly across industries.

The expected return of a stock, based on the likelihood of various economic outcomes, equals the:

weighted average of the returns for each economic state.

The optimal capital structure:

will vary over time as taxes and market conditions change.

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.

Which of the following are examples of a portfolio?

Investing $100,000 in a combination of U.S. and Asian stocks Holding $100,000 investment in a combination of stocks and bonds Investing $100,000 in the stocks of 50 publicly traded corporations

When a company declares a dividend, shareholders generally receive ______.

cash

A company should select the capital structure that _____.

maximizes the company's value