Exam 3- Finance

in order to use a firm's WACC to evaluate its future project's glow, which of the following must hold? A. The project will be financed with the same proportion of debt and equity as the firm. B. The systematic risk of the project is the same as the overall systematic risk of the firm. C. The project should have conventional cash flows. D. Both A and B choices are correct.

Both A and B. the project will be financed with the same proportion of debt and equity as the firm AND the systematic risk is the same overall.

Corporate overhead allocations should only be taken into account on a project analysis if: A)the firm is currently covering all of its overhead allocations. B)the firm is currently unable to cover all of its overhead allocations. C)the overhead allocations involve cash expenditures. D)None of the above.

None of the above

What is the measures total risk?

Standard deviation

Describe and justify what the value of the beta of a U.S. Treasury bill should be.

T-bills have no systematic risk therefore the beta is zero

Describe the Capital Asset Pricing Model (CAPM) and what it tells us.

The CAPM describes the relation between systematic risk and the expected return. The model tells us that the expected return on an asset with no systematic risk equals the risk-free rate. As systematic risk increases, the expected return increases linearly with beta.

holding all other things constant, does a decrease in the marginal tax rate for a firm provide incentive for managers of a firm to increase of decrease its use of debt?

a decrease in marginal tax rate for a firm provides incentive for managers of a firm to DECREASE its use of debt.

systematic risk

a measure of the relationship between the returns on the individual asset and the returns on the market

market risk

a term commonly used to refer to nondiversifiable or systematic risk

which of the following is the best measure of the systematic risk in a portfolio? a) variance b) beta c) standard deviation d)covariance

beta

who faces systematic risks?

diversified investors

a portfolio with a level of systematic risk that is the same as that of the market has a beta that is

equal to one

a portfolio with no systematic risk has a beta that is

equal to zero

a portfolio with a level of systematic risk that is greater than that of the market has a beta that is

greater than on (b>1)

if a company's weighted avg cost of capital is less than the required return on equity, then the firm...

has debt in its capital structure

If a firm has the option of leasing some factory space to another firm or utilizing it for another product line, then if the firm chose the product line how should it handle the lost lease payments on the factory space?

include it as an opportunity cost

which of the following statements is correct? A)Incremental net operating profits after-tax should exclude the effects of financing costs associated with a project. B)Incremental net operating profits after-tax should include sunk costs associated with a project. C)Incremental net operating profits after-tax should include the effects of financing costs associated with a project. D)Incremental net operating profits after-tax should exclude the effects of depreciation costs associated with a project.

incremental net operating profits after tax should EXCLUDE the effects of financing costs associated with a project

what is systematic risk

it is the only risk that cannot be diversified away

a portfolio with a level of systematic risk that is less than that of the market has a beta that is

less than one (b<1)

what is the relationship between the expected return systematic risk ( beta)

linear and positive relationship

if an asset's expected return plots below the security market line, the asset is considered

overpriced

diversification

reducing risk by investing in two or more assets whose values do not always move in the same direction at the same time

the CAPM model describes the relation between

risk and expected return on a stock

which of the following should NOT be included in a schedule of cash flows from operations when evaluating a capital project?

sunk costs should NOT be included

Susan is expecting the returns on the market portfolio to be negative in the near term. Since she is managing a stock mutual fund, she must remain invested in a portfolio of stocks. However, she is allowed to adjust the beta of her portfolio. What kind of beta would you recommend for Susan's portfolio?

susan should construct a very low beta portfolio

portfolios that are not diversified face

systematic risk plus unsystematic risk

the recommended to estimate the cost of common equity for a firm is

the capital asset pricing model (CAPM)

portfolio

the collection of assets an investor owns

market portfolio

the portfolio of all assets

the finance balance sheet is

the same as the accounting balance sheet, but it is based on market value

what represents a plot of the relation between expected return and systematic risk?

the security market line

which of the following represents a plot on the relation between expected return and systemic risk? a)the covariance of returns line b)the security market line c)variance d)the beta coefficient

the security market line

Describe how investing in more than one asset can reduce risk through diversification.

the values of two or more assets don always move in the same direction therefore cancelling each other out

if an asset's expected return plots above the security market line, the asset is considered

underpriced

how is systematic risk measured?

using Beta or slope of a line

diversified investors are

willing to pay higher prices for individual assets than other investors because they face less risk