EXAM 3 STUDY

Webster's has sales of $649,000 and a profit margin of 7.2 percent. The annual depreciation expense is $102,600. What is the amount of the operating cash flow if the company has no long-term debt? A. $55,872 B. $39,341 C. $74,240 D. $149,328 E. $104,760

$149,328

Hot and Cold has annual sales of $982,000, annual depreciation of $127,000, and net working capital of $243,000. The tax rate is 34 percent and the profit margin is 6 percent. The firm has no interest expense. What is the amount of the operating cash flow? A. $98,520 B. $185,920 C. $210,220 D. $268,480 E. $691,300

$185,920

Jefferson & Sons is evaluating a project that will increase annual sales by $145,000 and annual cash costs by $94,000. The project will initially require $110,000 in fixed assets that will be depreciated straight-line to a zero book value over the four-year life of the project. The applicable tax rate is 32 percent. What is the operating cash flow for this project? A. $11,220 B. $29,920 C. $43,480 D. $46,480 E. $46,620

$43,480

Kwik Dogs is considering the installation of a new computerized pressure cooker that will cut annual operating costs by $18,400. The system will cost $42,900 to purchase and install and will be depreciated to zero using straight-line depreciation over its four-year life. What is the amount of the earnings before interest and taxes for this project? A. $10,725 B. $7,675 C. $5,525 D. $6,900 E. $29,125

$7,675

When McDonald's decides to build a new restaurant at a particular location, which of the following competitors might also be temped to locate new facilities in the same area?

*Burger King *Wendy's

The average compound return earned per year over a multiyear period is called the _____ average return. A. Arithmetic B. Standard C. Variant D. Geometric E. Real

Geometric

A firm with a higher operating leverage will have ____ fixed costs relative to a firm with low operating leverage.

High

Which one of the following is represented by the slope of the security market line? A. Reward-to-risk ratio B. Market standard deviation C. Beta coefficient D. Risk-free interest rate E. Market risk premium

Market risk premium

The expected risk premium on a stock is equal to the expected return on the stock minus the: A. Expected market rate of return. B. Risk-free rate. C. Inflation rate. D. Standard deviation. E. Variance

Risk-free rate

What is scenario analysis?

Scenario analysis determines the impact on NVP of a set of events relating to a specific scenario.

In a competitive market, positive NPV projects are:

Uncommon

A news flash just appeared that caused about a dozen stocks to suddenly drop in value by 20 percent. What type of risk does this news flash best represent? A. Portfolio B. Non diversifiable C. Market D. Unsystematic E. Total

Unsystematic

An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis. A. Forecasting B. Scenario C. Sensitivity D. Simulation E. Break-even

sensitivity

In a simulation, there are various possibilities. If the computer randomly picks industry sales of 10 million units, what will the price be based on the following pricing model? Price + $10 + $0.05 x Industry Sales in Millions?

$15 Unit Price + $10 + (0.05 x 10)

The possibility that error in projected cash flows will lead to incorrect decisions is known as:

*Forecasting risk *Estimation risk

How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio? A. 5 B. 10 C. 25 D. 50 E. 75

10

Based on the period 1926-2013, the actual real return on large-company stocks has been around: A. 8.3 percent B. 8.7 percent C. 10.4 percent D. 12.3 percent E. 14.8 percent

8.3 percent

The Alpha Division of Beta Corporation has been allocated $4 million for capital spending but has identified $4.6 million in positive NVP projects. Alpha's manager doesn't believe she can convince the company to fund the additional $0.6 million dollars because Omega is using ____ rationing because of a severe downturn in the company's overall prospects.

Hard

For all practical purposes, it is easier to:

Increase operating leverage than to decrease it

The primary purpose of Blume's formula is to: A. Compute an accurate historical rate of return. B. Determine a stock's true current value. C. Consider compounding when estimating a rate of return. D. Determine the actual real rate of return. E. Project future rates of return.

project future rates of return

Nelson Mfg. owns a manufacturing facility that is currently sitting idle. The facility is located on a piece of land that originally cost $159,000. The facility itself cost $1,390,000 to build. As of now, the book value of the land and the facility are $159,000 and $458,000, respectively. The firm owes no debt on either the land or the facility at the present time. The firm received a bid of $1,700,000 for the land and facility last week. The firm's management rejected this bid even though they were told that it is a reasonable offer in today's market. If the firm was to consider using this land and facility in a new project, what cost, if any, should it include in the project analysis? A. $0 B. $617,000 C. $1,083,000 D. $1,700,000 E. $1,619,000

$1,700,000

The Lunch Counter is expanding and expects operating cash flows of $32,500 a year for seven years as a result. This expansion requires $28,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $2,800 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 14 percent? A. $111,369.91 B. $121,033.33 C. $98,288.70 D. $108,569.91 E. $109,688.89

$109,688.89

Ausel's is considering a seven- year project that will require $854,000 for new fixed assets that will be depreciated straight-line to a zero book value over the seven years. At the end of the project, the fixed assets can be sold for 20 percent of their original cost. The project is expected to generate annual sales of $928,000 and costs of $721,000. The tax rate is 35 percent and the required rate of return is 14.6 percent. What is the amount of the aftertax salvage value? A. $205,496 B. $111,020 C. $104,400 D. $87,600 E. $170,800

$111,020

63. Better Beverages purchased some fixed assets classified as five-year property for MACRS. The assets cost $108,000. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for years 1 to 6, respectively. What will the accumulated depreciation be at the end of year 4? A. $101,779.20 B. $25,056.67 C. $42,002.89 D. $48,755.09 E. $89,337.60

$89,337.60

Hunter's Hut is considering a project that will require additional inventory of $176,000 and will increase accounts payable by $148,000. Accounts receivable is currently $305,000 and is expected to increase by 11 percent if this project is accepted. What is the project's initial cash flow for net working capital? A. -$61,550 B. -$5,550 C. -$112,250 D. -$366,550 E. -$357,550

-$61,550

Scenario analysis is defined as the: A. Determination of the initial cash outlay required to implement a project. B. Determination of changes in NPV estimates when what-if questions are posed. C. Isolation of the effect that a single variable has on the NPV of a project. D. Separation of a project's sunk costs from its opportunity costs. E. Analysis of the effects that a project's terminal cash flows has on the project's NPV.

Determinaton of changes in NPV estimates when what-if questions are posed.

If Kellog's introduces a new brand of cereal, it will most likely lead to ____ in its sales of existing cereals.

Erosion, i.e., a decrease

Opportunity costs are irrelevant costs when doing capital budgeting analysis.

False

Which of the following statements concerning risk are correct? I. Non diversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for non diversifiable risk. IV. Diversifiable risks are market risks you cannot avoid. A. I and III only. B. II and IV only. C. I and II only. D. III and IV only. E. I, II, and III only.

I and III only

The expected return on a portfolio: I Can never exceed the expected return of the best performing security in the portfolio. II Must be equal to or greater than the expected return of the worst performing security in the portfolio. III Is independent of the unsystematic risks of the individual securities held in the portfolio. IV Is independent of the allocation of the portfolio amongst individual securities. A. I and III only. B. II and IV only C. I and II only. D. I, II, and III only. E. I, II, III, and IV.

I, II, and III only

The capital asset pricing model (CAPM) assumes which of the following? I. A risk-free asset has no systematic risk. II. Beta is a reliable estimate of total risk. III. The reward-to-risk ratio is constant. IV. The market rate of return can be approximated. A. I and III only. B. II and IV only. C. I, III, and IV only. D. II, III, and IV only. E. I, II, III, and IV.

I, III, and IV only

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

Include interest expense

To convince investors to accept greater volatility, you must: A. Decrease the risk premium. B. Increase the risk premium. C. Decrease the real return. D. Decrease the risk-free rate. E. Increase the risk-free rate.

Increase the risk premium

In the context of capital budgeting, what does sensitivity analysis do?

It examines how sensitive a particular NVP calculation is to changes in underlying assumptions.

Which one of the following statements is correct based on the period 1926-2013? A. Long-term government bonds had more volatile annual returns than did the long-term corporate bonds. B. The standard deviation of the annual rate of inflation was less than 3 percent. C. The geometric average annual return on large-company stocks was higher than the average arithmetic return on those same stocks. D. The risk premium on small-company stocks was less than 10 percent. E. The risk Premium on all U.S. government securities is 0 percent. Refer to sections 12.3 and 12.4.

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

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: A. Longest life. B. Highest annual operating cost. C. Lowest annual operating cost. D. Highest equivalent annual cost. E. Lowest equivalent annual cost.

Lowest equivalent annual cost

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

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

Which one of the following is defined by its mean and its standard deviation? A. Arithmetic nominal return B. Geometric real return C. Normal distribution D. Variance E. Risk premium

Normal Distribution

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? A. Salvage value. B. Wasted value. C. Sunk cost. D. Opportunity cost. E. Erosion.

Opportunity Costs

The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly. A. Real return B. Actual return C. Nominal return D. Risk premium E. Expected return

Risk premium

The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the: A. Market risk premium. B. Risk premium. C. Systematic return. D. Total return. E. Real rate of return.

Risk premium

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. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate) A. Sale price + (Sale price - Book value) ×T B. Sale price + (Sale price - Book value) ×(1 - T) C. Sale price + (Book value - Sale price) ×T D. Sale price + (Book value - Sale price) ×(1 - T) E. Sale price ×(1 - T)

Sale Price / (Book value- Sale price) X T

Steve is fairly cautious when analyzing a new project and thus he projects the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected. Which type of analysis is Steve using? A. Simulation testing. B. Sensitivity analysis. C. Break-even analysis. D. Rationing analysis. E. Scenario analysis.

Scenario analysis

Which one of the following types of analysis is the most complex to conduct? A. Scenario B. Break-even C. Sensitivity D. Degree of operating leverage E. Simulation

Simulation

Which one of the following categories of securities had the most volatile annual returns over the period 1926-2013? A. Long-term corporate bonds B. Large-company stocks C. Intermediate-term government bonds D. U.S. Treasury bills E. Small-company stocks

Small-company stocks

Which one of the following should earn the most risk premium based on CAPM? A. Diversified portfolio with returns similar to the overall market. B. Stock with a beta of 1.38. C. Stock with a beta of 0.74. D. U.S. Treasury bill. E. Portfolio with a beta of 1.01.

Stock with a beta of 1.38

You own some equipment that you purchased four years ago at a cost of $287,000. The equipment is five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, .0576, for years 1 to 6, respectively. You are considering selling the equipment today for $99,000. Which one of the following statements is correct if your tax rate is 35 percent? A. The tax due on the sale is $17,357.76. B. The book value today is $49,406.40. C. The accumulated depreciation to date is $270,468.80. D. The taxable amount on the sale is $49,593.60. E. The aftertax salvage value is $81,707.76.

The after tax salvage value is $81,707.76

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 semi strong form efficient. A. Company insiders were aware of the information prior to the announcement B. Investors do not pay attention to daily news C. Investors tend to overreact D. The news was positive E. The information was expected

The information was expected

Capital rationing exists when a company has identified positive NVP projects but can't find:

The necessary financing

Which of the following is an opportunity cost in the context of a vacant building that a firm currently owns?

The potential rental income lost by using the empty building for a project

Standard deviation measures which type of risk? A. Total B. Non diversifiable C. Unsystematic D. Systematic E. Economic

Total

The basic approach to evaluating cash flow and NVP estimates involves asking:

What-if questions

A company that utilizes the MACRS system of depreciation: A. Will have equal depreciation costs each year of an asset's life. B. Will have a greater depreciation tax shield in year 2 than in year 1. C. Can depreciate the cost of land. D. Will expense less than the entire cost of an asset. E. Will fully depreciate a MACRS 5-year asset within 5 years.

Will have a greater depcreciation tax shield in year 2 than in year 1.

The systematic risk of the market is measured by: A. A beta of 1.0. B. A beta of 0.0. C. A standard deviation of 1.0. D. A standard deviation of 0.0. E. A variance of 1.0.

a beta of 1.0

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 to occur as a result? A. Increase in the risk premium B. Increase in the average long-term rate of return C. Decrease in the 68 percent probability range of returns D. Increase in the standard deviation E. Increase in the geometric average rate of return

decrease in the 68 percent probability range of returns

Bayside Marina just announced it is decreasing its annual dividend from $1.64 per share to $1.50 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price: A. Was unaffected by the announcement. B. Increased proportionately with the dividend decrease. C. Decreased proportionately with the dividend decrease. D. Decreased by $.14 per share. E. Increased by $.14 per share.

decreased proportionately with the dividend decrease

Scenario analysis is best suited to accomplishing which one of the following when analyzing a project? A. Determining how fixed costs affect NPV. B. Estimating the residual value of fixed assets. C. Identifying the potential range of reasonable outcomes. D. Determining the minimal level of sales required to breakeven on an accounting basis. E. Determining the minimal level of sales required to breakeven on a financial basis.

identifying the potential range of reasonable outcomes

Evidence seems to support the view that studying public information to identify mispriced stocks is: A. Effective as long as the market is only semi strong form efficient. B. Effective provided the market is only weak form efficient. C. Ineffective . D. Effective only in strong form efficient markets. E. Ineffective only in strong form efficient markets.

ineffective

The market rate of return is 11 percent and the risk-free rate of return is 3 percent. Lexant stock has 3 percent less systematic risk than the market and has an actual return of 12 percent. This stock: A. Is underpriced. B. Is correctly priced. C. Will plot below the security market line. D. Will plot on the security market line. E. Will plot to the right of the overall market on a security market line graph.

is under priced

As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return. A. Greater than. B. Equal to. C. Less than. D. Greater than or equal to. E. Unrelated to.

less than

An analysis that combines scenario analysis with sensitivity analysis is called _____ analysis. A. Forecasting B. Combined C. Complex D. Simulation E. Break-even

simulation

Small-company stocks, as the term is used in the textbook, are best defined as the: A. 500 newest corporations in the U.S. B. Firms whose stock trades otc. C. Smallest twenty percent of the firms listed on the NYSE. D. Smallest twenty-five percent of the firms listed on NASDAQ. E. Firms whose stock is listed on NASDAQ.

smallest twenty percent of the firms listed on the NYSE

Which one of the following is a risk that applies to most securities? A. Unsystematic B. Diversifiable C. Systematic D. Asset-specific E. Total

systematic

Which one of the following statements concerning U.S. Treasury bills is correct for the period 1926- 2013? A. The annual rate of return always exceeded the annual inflation rate. B. The average risk premium was .2 percent. C. The annual rate of return was always positive. D. The average excess return was 1.1 percent. E. The average real rate of return was zero.

the annual rate of return was always positive

The bottom-up approach to computing the operating cash flow applies only when: A. Both the depreciation expense and the interest expense are equal to zero. B. The interest expense is equal to zero. C. The project is a cost-cutting project. D. No fixed assets are required for a project. E. Both taxes and the interest expense are equal to zero.

the interest expense is equal to zero

Which one of the following risks is irrelevant to a well-diversified investor? A. Systematic risk. B. Unsystematic risk. C. Market risk. D. Non diversifiable risk. E. Systematic portion of a surprise

unsystematic risk

Standard deviation is a measure of which one of the following? A. Average rate of return B. Volatility C. Probability D. Risk premium E. Real returns

volatility

The maintenance expenses on a rental house you own average $200 a month. The house cost $219,000 when you purchased it four years ago. A recent appraisal on the house valued it at $239,000. If you sell the house you will incur $14,000 in real estate fees. The annual property taxes are $4,000. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office? A. $211,800 B. $221,000 C. $225,000 D. $235,000 E. $239,000

$225,000

What are the two main drawbacks of sensitivity analysis?

*It does not consider interaction among variables *It may increase the false sense of security among managers if all pessimistic estimates of NVP are positive

High Breeze currently produces boat sails and is considering expanding into awnings for homes and travel trailers. The company owns land that could be used for the expansion. This land was purchased fiveat a cost of $319,000 and is valued today at $395,000. The company has some unused equipment that it currently owns valued at $38,000. This equipment could be used for producing awnings if $12,000 is spent for equipment modifications. Other equipment costing $138,000 will also be required. What is the amount of the initial cash flow for this expansion project? A. -$571,000 B. -$469,000 C. -$583,000 D. -$507,000 E. -$545,000

-$583,000

Country Breads uses specialized ovens to bake its bread. One oven costs $189,000 and lasts about seven years before it needs to be replaced. The annual operating cost per oven is $23,800. What is the equivalent annual cost of an oven if the required rate of return is 11 percent? A. -$63,908.69 B. -$48,313.04 C. -$52,407.49 D. -$50,561.10 E. -$96,210.00

-$63,908.69

If fixed costs are $3,500 and the operating cash flow is $4,500, then the degree of operating leverage (DOL) is:

1.78 DOL = 1FC/OCF = 1 3500/4500 = 1.78

8. Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset? A. Beta B. Reward-to-risk ratio C. Risk ratio D. Standard deviation E. Price-earnings ratio

Beta

Systematic risk is measured by: A. The mean. B. Beta. C. The geometric average. D. The standard deviation. E. The arithmetic average.

Beta

What was the highest annual rate of inflation during the period 1926-2013? A. Between 0 and 3 percent B. Between 3 and 5 percent C. Between 5 and 10 percent D. Between 10 and 15 percent E. Between 15 and 20 percent

Between 15 and 20 percent

The primary purpose of portfolio diversification is to: A. Increase returns and risks. B. Eliminate all risks. C. Eliminate asset-specific risk. D. Eliminate systematic risk. E. Lower both returns and risks.

Eliminate systematic risk

Decreasing which one of the following will increase the acceptability of a project? A. Sunk costs. B. Salvage value. C. Depreciation tax shield. D. Equivalent annual cost. E. Accounts payable requirement.

Equivalent annual cost

According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the: A. Amount of total risk assumed and the market risk premium. B. Market risk premium and the amount of systematic risk inherent in the security. C. Risk free rate, the market rate of return, and the standard deviation of the security. D. Beta of the security and the market rate of return. E. Standard deviation of the security and the risk-free rate of return.

Market risk premium and the amount of systematic risk inherent in the security

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? A. EBIT + Depreciation B. EBIT - Taxes C. Net income + Depreciation D. (Sales - Costs) ×(1 - Depreciation) ×(1- Taxes) E. (Sales - Costs) ×(1 - Taxes)

Net Income/ depreciation

Evans Corporation estimated that the cash flows last year from a particular project would be $40,000, but the actual cash flow turned out to be $37,500. Evans Corporations should:

Not expect cash flow estimates to be exactly right every time

Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total. Which one of the following terms most applies to Suzie's investments? A. Index B. Portfolio C. Collection D. Grouping E. Risk-free

Portfolio

In a simulation, the average NVP and the spread of NVPs around the average are determined by:

Repeated random drawings

Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas? A. Reward-to-risk matrix B. Portfolio weight graph C. Normal distribution D. Security market line E. Market real returns

Security Market Line

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? A. Providing both ketchup and mustard for customers' use. B. Repairing the roof of the hot dog stand because of water damage. C. Selling fewer hot dogs because hamburgers were added to the menu. D. Offering French fries but not onion rings. E. Losing sales due to bad weather.

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

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

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

Stacy purchased a stock last year and sold it today for $3 a share more than her purchase price. She received a total of $.75 in dividends. Which one of the following statements is correct in relation to this investment? A. The dividend yield is expressed as a percentage of the selling price. B. The capital gain would have been less had Stacy not received the dividends. C. The total dollar return per share is $3. D. The capital gains yield is positive. E. The dividend yield is greater than the capital gains yield.

The capital gains yield is positive

The bid price is: A. An aftertax price. B. The aftertax contribution margin. C. The highest price you should charge if you want to win the bid. D. The only price you can bid if the project is to be profitable. E. The minimum price that will provide your target rate of return.

The minimum price that will provide your target rate of return

While performing sensitivity analysis, we recompute NVP several times by changing one input variable at a time.

True

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2013? A. Long-term government bonds B. Small company stocks C. Large company stocks D. Long-term corporate bonds E. U.S. Treasury bills

U.S Treasury bills

Which one of the following statements correctly applies to the period 1926-2013? A. Large-company stocks earned a higher average risk premium than did small-company stocks. B. The average inflation rate exceeded the average return on U.S. Treasury bills. C. Large-company stocks had an average annual return of 14.7 percent. D. Inflation averaged 2.6 percent for the period. E. U.S. Treasury bills had a positive average real rate of return.

U.S Treasury bills had a positive average real rate of return

Which one of the following had the least volatile annual returns over the period of 1926-2013? A. Large-company stocks B. Inflation C. Long-term corporate bonds D. U.S. Treasury bills E. Intermediate-term government bonds

US treasury bills

Which one of the following indicates a portfolio is being effectively diversified? A. An increase in the portfolio beta. B. A decrease in the portfolio beta. C. An increase in the portfolio rate of return. D. An increase in the portfolio standard deviation. E. A decrease in the portfolio standard deviation.

a decrease in the portfolio standard deviation

Which one of the following is the best example of a diversifiable risk? A. Interest rates increase. B. Energy costs increase. C. Core inflation increases. D. A firm's sales decrease. E. Taxes decrease.

a firms sales decrease

The standard deviation of a portfolio: A. Is a measure of that portfolio's systematic risk. B. Is a weighted average of the standard deviations of the individual securities held in that portfolio. C. Measures the amount of diversifiable risk inherent in the portfolio. D. Serves as the basis for computing the appropriate risk premium for that portfolio. E. Can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

can be less than the weighte average of the standard deviations of the individual securities held in that portfolio

13. Which of the following yields on a stock can be negative? A. Dividend yield B. Capital gains yield C. Capital gains yield and total return D. Dividend, capital gains, and total return E. Dividend yield and total return

capital gains yield and total return

The equivalent annual cost considers all of the following except the: A. Required rate of return. B. Operating costs. C. Need for replacement. D. Economic life. E. Costs of research conducted to identify equipment choices.

costs of research conducted to identify equipment choices

Sensitivity analysis determines the: A. Range of possible outcomes given that most variables are reliable only within a stated range. B. Degree to which the net present value reacts to changes in a single variable. C. Net present value range that can be realized from a proposed project. D. Degree to which a project relies on its fixed costs. E. Ideal ratio of variable costs to fixed costs for profit maximization.

degree to which the net present value reacts to changes in a single variable

1. Forecasting risk is defined as the possibility that: A. Some proposed projects will be rejected. B. Some proposed projects will be temporarily delayed. C. Incorrect decisions will be made due to erroneous cash flow projections. D. Some projects will be mutually exclusive. E. Tax rates could change over the life of a project.

incorrect decisions will be made due to erroneous cash flow projections

Which one of the following is an example of systematic risk? A. Investors panic causing security prices around the globe to fall precipitously. B. A flood washes away a firm's warehouse. C. A city imposes an additional one percent sales tax on all products. D. A toymaker has to recall its top-selling toy. E. Corn prices increase due to increased demand for alternative fuels.

investors panic causing security prices around the globe to fall precipitously.

50. Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly? A. Variance B. Standard deviation C. Reward-to-risk ratio D. Beta E. Risk premium

reward-to risk-ratio

Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return? A. Risk premium B. Geometric return C. Arithmetic D. Standard deviation E. Variance

risk premium

Which one of the following statements concerning scenario analysis is correct? A. The pessimistic case scenario determines the maximum loss, in current dollars, that a firm could possibly incur from a given project. B. Scenario analysis defines the entire range of results that could be realized from a proposed investment project. C. Scenario analysis determines which variable has the greatest impact on a project's final outcome. D. Scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions. E. Management is guaranteed a positive outcome for a project when the worst- case scenario produces a positive NPV.

scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions

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. A. Weak B. Semi weak C. Semi strong D. Strong E. Perfect

semi strong

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

the net present value of the project is zero.

Which one of the following is an example of a sunk cost? A. $1,500 of lost sales because an item was out of stock. B. $1,200 paid to repair a machine last year. C. $20,000 project that must be forfeited if another project is accepted. D. $4,500 reduction in current shoe sales if a store commences selling sandals. E. $1,800 increase in comic book sales if a store ceases selling puzzles.

$1200 paid to repair a machine last year

In a simulation, there are various possibilities. If the computer randomly picks industry sales of 10 million units and a market share of 25%, calculate total revenue based on the following two equations: Price=$100 + 0.05 x Industry Unit in millions, and Revenue - Market Share Percentage x Industry Unit Sales x Price

$262.5 million Total Revenue = {$100+(0.05x10)} x (0.25x10 million) =

What are the two main benefits of performing sensitivity analysis?

*It identifies the variable that has the most effect in NVP *It reduces a false sense of security by giving a range of values for NVP instead of a single value

Which of the following are reasons why NPV is considered a superior capital budgeting technique?

*NVP considers time value of money *NVP considers all the cash flows

Which of the following is a legitimate reason for a project to have a positive NVP for Palmer Corporation?

*Palmer can produce the product more cheaply than it competition *Palmer has a better distribution channel than its competition *Palmer has a better product than its competition

When we estimate the best-case, worst-case, and base-case cash flows and calculate the corresponding NPVs, we are engaging in:

*Scenario analysis *Asking what-if questions

Kelly's Corner Bakery purchased a lot in Oil City six years ago at a cost of $278,000. Today, that lot has a market value of $264,000. At the time of the purchase, the company spent $6,000 to level the lot and another $8,000 to install storm drains. The company now wants to build a new facility on that site. The building cost is estimated at $1.03 million. What amount should be used as the initial cash flow for this project? A. -$1,308,000 B. -$1,294,000 C. -$1,322,000 D. -$1,308,000 E. -$1,045,000

-$1,294,000

What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average? A. 1.0 percent B. 2.5 percent C. 5.0 percent D. 16 percent E. 32 percent

16 percent

Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk? A. Capital asset pricing model B. Time value of money equation C. Unsystematic risk equation D. Market performance equation E. Expected risk formula

Capital asset pricing model

Which one of the following is an example of unsystematic risk? A. Income taxes are increased across the board. . B. A national sales tax is adopted. C. Inflation decreases at the national level. D. An increased feeling of prosperity is felt around the globe. E. Consumer spending on entertainment decreased nationally.

Consumer spending on entertainment decreased nationally

At a minimum, which of the following would you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset? I. Asset's standard deviation. II. Asset's beta. III. Risk-free rate of return. IV. Market risk premium. A. I and III only. B. II and IV only. C. III and IV only. D. I, III, and IV only. E. I, II, III, and IV.

II and IV

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs? A. Sunk. B. Total. C. Variable. D. Incremental. E. Fixed.

Incremental

The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's: A. Incremental cash flows. B. Internal cash flows. C. External cash flows. D. Erosion effects. E. Financing cash flows.

Incremental Cash Flows

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

Initial investment in inventory to support the project

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

Interest Expense

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? A. Portfolio return B. Portfolio weight C. Degree of risk D. Price-earnings ratio E. Index value

Portfolio weight

West Corporation estimated cash flows for a project, evaluated those cash flows using NPV, and determined that the project was acceptable. Unfortunately West Corporation lost money on the project. This may have been avoided had they assessed the ____ of the cash flow estimates.

Reliability

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

Research and development expense incurred in the past

The NPVs in the table below were generated using sensitivity analysis. Where should managers focus their attention? Pessimistic Expected Market Share -$1,310 $2,000 Variable Costs $1,000 $2,000 Fixed Costs $1,800 $2,000 Initial Costs $1,850 $2,000

Retaining Market Share

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? A. Moving furniture to provide floor space for the appliances. B. Paying the rent for the store. C. Selling furniture to appliance customers. D. Having the current store manager oversee appliance sales. E. Using the store's billing system for appliance sales.

Selling furniture to appliance customers

When using ____ all of the variables except one are frozen in order to determine how sensitive the NVP estimate is to changes in that particular variable.

Sensitivity analysis

Which one of the following categories of securities had the highest average return for the period 1926-2013? A. U.S. Treasury bills B. Large-company stocks C. Small company stocks D. Long-term corporate bonds E. Long-term government bonds

Small company stocks

Which one of the following earned the highest risk premium over the period 1926-2013? A. Long-term corporate bonds B. U.S. Treasury bills C. Small-company stocks D. Large-company stocks E. Long-term government bonds

Small-company stocks

47. Inside information has the least value when financial markets are: A. Weak form efficient. B. Semi weak form efficient. C. Semi strong form efficient. D. Strong form efficient. E. Inefficient.

Strong form efficient

Which one of the following statements is a correct reflection of the U.S. markets for the period 1926-2013? A. U.S. Treasury bill returns never exceeded a 9 percent return in any one year during the period. B. U.S. Treasury bills provided a positive rate of return each and every year during the period. C. Inflation equaled or exceeded the return on U.S. Treasury bills every year during the period. D. Long-term government bonds outperformed U.S. Treasury bills every year during the period. E. National deflation occurred at least once every decade during the period.

US treasury bills provided a positive rate of return each and every year during the period.

Which one of the following statements related to unexpected returns is correct? A. All announcements by a firm affect that firm's unexpected returns. B. Unexpected returns over time have a negative effect on the total return of a firm. C. Unexpected returns are relatively predictable in the short-term. D. Unexpected returns generally cause the actual return to vary significantly from the expected return over the long-term. E. Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.

Unexpected returns an be either positive or negative in the short term but tend to be zero over the long-term.

Which one of the following would make a mutually exclusive project unacceptable? A. Cash inflow for net working capital at time zero. B. Requiring fixed assets that would have no salvage value. C. An equivalent annual cost that exceeds that of an alternative project. D. Lack of revenue generation. E. A depreciation tax shield that exceeds the value of the interest expense.

an equivalent annual cost that exceeds that of an alternative project

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

an increase in the required rate of retun

Changes in the net working capital requirements: A. Can affect the cash flows of a project every year of the project's life. B. Only affect the initial cash flows of a project. C. Only affect the initial and final cash flows of a project. D. Are generally excluded from project analysis due to their irrelevance to the total project. E. Are excluded from the analysis as long as they are recovered when the project ends.

can affect the cash flows of a project every year of the projects life.

Unsystematic risk: A. Can be effectively eliminated by portfolio diversification. B. Is compensated for by the risk premium. C. Is measured by beta. D. Is measured by standard deviation. E. Is related to the overall economy.

can be effectively eliminated by portfolio diversification

31. Which one of the following statements is correct concerning unsystematic risk? A. An investor is rewarded for assuming unsystematic risk. B. Eliminating unsystematic risk is the responsibility of the individual investor. C. Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk. D. Beta measures the level of unsystematic risk inherent in an individual security. E. Standard deviation is a measure of unsystematic risk.

eliminating unsystematic risk is the responsibility of the individual investor

The top-down approach to computing the operating cash flow: A. Ignores noncash expenses. B. Applies only if a project affects sales. C. Applies only to cost cutting projects. D. Is equal to sales - costs - taxes + depreciation. E. Is used solely to compute a bid price.

ignores noncash expenses

Which one of the following statements is correct based on the historical record for the period 1926-2013? A. The standard deviation of returns for small-company stocks was double that of large-company stocks. B. U.S. Treasury bills had a zero standard deviation of returns because they are considered to be risk-free. C. Long-term government bonds had a lower return but a higher standard deviation on average than did long-term corporate bonds. D. Inflation was less volatile than the returns on U.S. Treasury bills. E. Long-term government bonds underperformed intermediate-term government bonds.

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

The real rate of return on a stock is approximately equal to the nominal rate of return: A. Multiplied by (1 + inflation rate). B. Plus the inflation rate. C. Minus the inflation rate. D. Divided by (1 + inflation rate). E. Divided by (1 - inflation rate).

minus the inflation rate

Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project? A. Scenario B. Simulation C. Break-even D. Sensitivity E. Cash flow

sensitivity

A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the key aspect of each project in an attempt to maximize their firm's value. Given this specific desire, which type of analysis should they require for each project and why? A. Sensitivity analysis; to identify the key variable that affects a project's profitability. B. Scenario analysis; to guarantee each project will be profitable. C. Cash breakeven; to ensure the firm recoups its initial investment. D. Accounting breakeven; to ensure each project earns its required rate of return. E. Financial breakeven; to ensure each project has a positive NPV.

sensitivity analysis; to identify the key variable that affects a projects profitability.

Total risk is measured by _____ and systematic risk is measured by _____. A. Beta; alpha. B. Beta; standard deviation. C. Alpha; beta. D. Standard deviation; beta. E. Standard deviation; variance.

standard deviation; beta

The market risk premium is computed by: A. Adding the risk-free rate of return to the inflation rate. B. Adding the risk-free rate of return to the market rate of return. C. Subtracting the risk-free rate of return from the inflation rate. D. Subtracting the risk-free rate of return from the market rate of return. E. Multiplying the risk-free rate of return by a beta of 1.0.

subtracting the risk-free rate of return from the market rate of return

The expected return on a stock given various states of the economy is equal to the: A. Highest expected return given any economic state. B. Arithmetic average of the returns for each economic state. C. Summation of the individual expected rates of return. D. Weighted average of the returns for each economic state. E. Return for the economic state with the highest probability of occurrence.

weighted average of the returns for each economic state.

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

which one of two machines should be purchases when the machines are mutually exclusive, have different lives, and will be replaced at the end of their lives

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

zero net present values on stock investments over the long-term

Gateway Communications is considering a project with an initial fixed asset cost of $2.872 million which will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $300,000. The project will not directly produce any sales but will reduce operating costs by $714,000 a year. The tax rate is 35 percent. The project will require $52,000 of inventory which will be recouped when the project ends. What is the net present value at the required rate of return of 13.6 percent? A. $68,019.24 B. $101,414.14 C. $152,108.10 D. $70,475.57 E. $136,691.88

$136,691.88

Russell's is considering purchasing $388,000 of equipment for a four-year project. The equipment falls in the five-year MACRS class with annual percentages of .2, .32, .192, .1152, .1152, and .0576 for years 1 to 6, respectively. At the end of the project the equipment can be sold for an estimated $174,000. The required return is 14.6 percent and the tax rate is 34 percent. What is the amount of the aftertax salvage value of the equipment? A. $114,750.21 B. $137,635.78 C. $118,804.30 D. $138,666.67 E. $143,001.29

$137,635.78

The Fluffy Feather sells customized handbags. Currently, it sells 18,000 handbags annually at an average price of $89 each. It is considering adding a lower-priced line of handbags that sell for $59 each. The firm estimates it can sell 7,000 of the lower-priced handbags but will sell 3,000 less of the higher-priced handbags by doing so. What is the amount of the sales that should be used when evaluating the addition of the lower-priced handbags? A. $146,000 B. $275,000 C. $413,000 D. $623,000 E. $680,000

$146,000

Pre-Fab purchased some machinery two years ago for $337,600. These assets are classified as five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, .0576, for years 1 to 6, respectively. The company is currently replacing this equipment with newer models at a cost of $528,000. The old equipment is being sold for $149,000. What is the aftertax salvage value from this sale if the tax rate is 35 percent? A. 144,433.20 B. $140,287.09 C. $142,311.12 D. $153,566.80 E. $149,000.00

$153,566.80

What is a sunk cost?

A cost incurred in the past that is irrelevant to the capital investment decision process.

The depreciation tax shield is best defined as the: A. Amount of tax that is saved when an asset is purchased. B. Tax that is avoided when an asset is sold as salvage. C. Amount of tax that is due when an asset is sold. D. Amount of tax that is saved because of the depreciation expense. E. Amount by which the aftertax depreciation expense lowers net income.

Amount of tax that is due when an asset is sold.

Which one of the following best describes pro forma financial statements? A. Financial statements expressed in a foreign currency. B. Financial statements where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales. C. Financial statements showing projected values for future time periods. D. Financial statements expressed in real dollars, given a stated base year. E. Financial statements where all accounts are expressed as a percentage of last year's values.

Financial Statements showing projected values for future time periods.

Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights? A. Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market. B. The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved. C. Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio. D. The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified. E. Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.

Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market

Generally speaking, which of the following most correspond to a wide frequency distribution? I. relatively low risk II. relatively low rate of return III. relatively high standard deviation IV. relatively large risk premium A. High standard deviation, low rate of return B. Low rate of return, large risk premium C. Small risk premium, high rate of return D. Small risk premium, low standard deviation E. High standard deviation, large risk premium

High Standard deviation, large risk premium

The excess return is computed as the: A. Return on a security minus the inflation rate. B. Return on a risky security minus the risk-free rate. C. Risk premium on a risky security minus the risk-free rate. D. Risk-free rate plus the inflation rate. E. Risk-free rate minus the inflation rate.

Return on a risky security minus the risk-free rate

The historical record for the period 1926-2013 supports which one of the following statements? A. When large-company stocks have a negative return, they will have a negative return for at least two consecutive years. B. The return on U.S. Treasury bills exceeds the inflation rate by at least .5 percent each year. C. There was only one year during the period when double-digit inflation occurred. D. Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year. E. The inflation rate was positive each year throughout the period.

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

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

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

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? A. Differing costs with no replacement at end of life. B. Differing lives and planned replacement at end of life. C. Differing lives with no replacement at end of life. D. Differing manufacturers and differing operating costs. E. Differing required returns with no replacement at end of life.

differing lives and planned replacement at end of life

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? A. Internal rate of return. B. Net present value. C. Equivalent annual cost. D. Depreciation tax shield. E. Bottom-up operating cash flow.

equivalent annual cost

Which one of the following is most directly affected by the level of systematic risk in a security? A. Variance of the returns. B. Standard deviation of the returns. C. Expected rate of return. D. Risk-free rate. E. Market risk premium.

expected rate of return

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? A. Arithmetic return B. Historical return C. Expected return D. Geometric return E. Required return

expected return

The expected rate of return on a stock portfolio is a weighted average where the weights are based on the: A. Number of shares owned of each stock. B. Market price per share of each stock. C. Market value of the investment in each stock. D. Original amount invested in each stock. E. Cost per share of each stock held.

market value of the investment in each stock.

Corner Market is considering adding a new product line that is expected to increase annual sales by $418,000 and cash expenses by $337,000. The initial investment will require $237,000 in fixed assets that will be depreciated using the straight-line method to a zero book value over the five-year life of the project. The company has a marginal tax rate of 34 percent. What is the annual value of the depreciation tax shield? A. $16,116 B. $13,160 C. $80,580 D. $32,560 E. $69,576

$16,116

61. A proposed expansion project is expected to increase sales of JJ's Store by $58,000 and increase cash expenses by $36,100. The project will require $36,900 of fixed assets that will be depreciated using straight-line depreciation to a zero book value over the three-year life of the project. The store has a marginal tax rate of 35 percent. What is the operating cash flow of the project using the tax shield approach? A. $25,600 B. $17,900 C. $18,540 D. $22,800 E. $14,600

$18,540

You are working on a bid to build two apartment buildings a year for the next three years. This project requires the purchase of $1,089,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the project's life. The equipment can be sold at the end of the project for $815,000. You will also need $280,000 in net working capital over the life of the project. The fixed costs will be $528,000 a year and the variable costs will be $1,640,000 per building. Your required rate of return is 18 percent for this project and your tax rate is 35 percent. What is the minimal amount, rounded to the nearest $100, you should bid per building? A. $4,233,000 B. $4,489,500 C. $2,116,200 D. $2,780,600 E. $2,244,800

$2,116,200

Cool Comfort currently sells 300 Class A spas, 450 Class C spas, and 200 deluxe model spas each year. The firm is considering adding a mid-class spa and expects that, if it does, it can sell 375 of them. However, if the new spa is added, Class A sales are expected to decline to 225 units while the Class C sales are expected to decline to 200. The sales of the deluxe model will not be affected. Class A spas sell for an average of $12,000 each. Class C spas are priced at $6,000 and the deluxe model sells for $17,000 each. The new mid-range spa will sell for $8,000. What is the value of the erosion? A. $600,000 B. $1,200,000 C. $1,800,000 D. $2,400,000 E. $3,900,000

$2,400,000

Marie's Fashions is considering a project that will require $41,000 in net working capital and $64,000 in fixed assets. The project is expected to produce annual sales of $62,000 with associated cash costs of $41,000. The project has a three-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 34 percent. What is the operating cash flow for this project? A. -$220.00 B. -$17,580.00 C. $16,421.15 D. $25,760.00 E. $21,113.33

$21,113.33

Dependable Motors just purchased some MACRS 5-year property at a cost of $216,000. The MACRS rates are .2, .32, and .192 for years 1 to 3, respectively. Which one of the following will correctly give you the book value of this equipment at the end of year 2? A. $216,000 / (1 + .2 + .32) B. $216,000 ×(1 - .2 - .32) C. $216,000 ×(.20 + .32) D. [$216,000 ×(1 - .20)] ×(1 - .32) E. $216,000 / [(1 + .20)(1 + .32)]

$216,000 X (1- .2- .32)

You are working on a bid to build two city parks a year for the next three years. This project requires the purchase of $218,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the three-year project life. The equipment can be sold at the end of the project for $65,000. You will also need $12,000 in net working capital for the duration of the project. The fixed costs will be $22,000 a year and the variable costs will be $171,000 per park. Your required rate of return is 16 percent and your tax rate is 34 percent. What is the minimal amount you should bid per park? (Round your answer to the nearest $100) A. $232,500 B. $178,600 C. $154,300 D. $189,100 E. $229,000

$229,00

A new molding machine is expected to produce operating cash flows of $68,000 a year for six years. At the beginning of the project, inventory will decrease by $14,700, accounts receivables will increase by $5,500, and accounts payable will increase by $3,200. All net working capital will be recovered at the end of the project. The initial cost of the molding machine is $279,000. 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 13 percent? A. $24,061.87 B. -$418.80 C. $28,336.01 D. $22,863.16 E. $7,925.54

$24,061.87

Colors and More is considering replacing the equipment it uses to produce crayons. The equipment would cost $1.37 million, have a 12-year life, and lower manufacturing costs by an estimated $310,000 a year. The equipment will be depreciated over 12 years using straight-line depreciation to a book value of zero. The required rate of return is 15 percent and the tax rate is 35 percent. What is the annual operating cash flow? A. $156,947.92 B. $40,211.24 C. $266,441.67 D. $241,458.33 E. $136,709.48

$241,458.33

Pet Supply purchased some fixed assets two years ago at a cost of $43,800. It no longer needs these assets so it is going to sell them today for $32,500. The assets are classified as five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, .0576, for years 1 to 6, respectively. What is the net cash flow from this sale if the firm's tax rate is 35 percent? A. $36,516.60 B. $18,576.00 C. $7,459.40 D. $28,483.40 E. $25,211.09

$28,483.40

Winnebagel Corp. currently sells 28,200 motor homes per year at $42,300 each, and 11,280 luxury motor coaches per year at $79,900 each. The company wants to introduce a new portable camper to fill out its product line. It hopes to sell 19,740 of these campers per year at $11,280 each. An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 4,700 units per year, and reduce the sales of its motor coaches by 1,222 units per year. What is the amount that should be used as the annual sales figure when evaluating this project? A. $297,613,400 B. $301,002,300 C. $314,141,800 D. $323,839,400 E. $327,289,500

$323,839,400

A proposed three-year project will require $627,000 for fixed assets, $169,000 for inventory, and $43,000 for accounts receivable. Accounts payable are expected to increase by $178,000. The fixed assets will be depreciated straight-line to a zero book value over five years. At the end of the project, the fixed assets can be sold for $225,000. The net working capital returns to its original level at the end of the project. The operating cash flow per year is $62,000. The tax rate is 35 percent and the discount rate is 12 percent. What is the total cash flow in the final year of the project? A. $292,250 B. $321,000 C. $330,030 D. $311,970 E. $322,770

$330,030

Broadband, Inc. has estimated preliminary cash flows for a project and found that the NVP for those cash flows is $400,000. The company now plans to perform a scenario analysis on the cash flow and NPV estimates. It will use an NPV of ____ as the base case.

$400,000

Keyser Mining is considering a project that will require the purchase of $875,000 of equipment. The equipment will be depreciated straight-line to a zero book value over the seven-year life of the project after which it will be worthless. The required return is 13 percent and the tax rate is 34 percent. What is the value of the depreciation tax shield in year 4 of the project? A. $42,500 B. $52,200 C. $68,600 D. $71,400 E. $76,500

$42,500

65. Overland Trucking just purchased some fixed assets that are classified as three-year property for MACRS. The MACRS rates are .3333, .4445, .1481, and .0741 for years 1 to 4, respectively. What is the amount of the depreciation expense in year 3 if the initial cost is $387,950? A. $28,747.10 B. $122,399.29 C. $57,455.40 D. $119,929.11 E. $42,177.56

$57,455.40

The Card Shoppe needs to maintain 18 percent of its sales in net working capital. Currently, the store is considering a four -year project that will increase sales from its current level of $279,000 to $308,000 the first year and to $314,000 a year for the following three years of the project. What amount should be included in the project analysis for net working capital in year 4 of the project? A. -$6,300 B. -$720 C. $0 D. $720 E. $6,300

$6,300

You just purchased some equipment that is classified as five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for Years 1 to 6, respectively. The equipment cost $218,000. What will the book value of this equipment be at the end of three years should you decide to resell the equipment at that point in time? A. $58,467.20 B. $62,784.00 C. $42,336.67 D. $67,670.40 E. $38,532.80

$62,784.00

P.A. Petroleum just purchased some equipment at a cost of $67,000. The equipment is classified as MACRS 5-year property. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for years 1 to 6, respectively. What is the proper methodology for computing the depreciation expense for year 2? A. $67,000 ×(1 - .20) ×.32 B. $67,000 / (1 - .20 - .32) C. $67,000 ×(1 + .32) D. $67,000 ×(1 - .32) E. $67,000 ×.32

$67,000 X (1/ .32)

Houston's is considering a project that will produce incremental annual sales of $234,000 and increase cash expenses by $148,000. If the project is implemented, taxes will increase from $31,000 to $34,000, and depreciation will increase from $41,000 to $46,000. The company is debt-free. What is the amount of the operating cash flow using the top-down approach? A. $88,000 B. $83,000 C. $87,000 D. $89,000 E. $84,000

$83,000

Mason Farms purchased a building for $689,000 eight years ago. Six years ago, repairs costing $136,000 were made to the building. The annual taxes on the property are $11,000. The building has a current market value of $840,000 and a current book value of $494,000. The building is totally paid for and solely owned by the firm. If the company decides to use this building for a new project, what value, if any, should be included in the initial cash flow of the project for this building? A. $0 B. $582,000 C. $840,000 D. $865,000 E. $953,000

$840,000

Webster & Moore paid $148,000, in cash, for equipment three years ago. At the beginning of last year, the company spent $21,000 to update the equipment with the latest technology. The company no longer uses this equipment in its current operations and has received an offer of $96,000 from a firm that would like to purchase it. The firm is debating whether to sell the equipment or to expand its operations so that the equipment can be used. The equipment, including the updates, has a book value of $44,500. When evaluating the expansion option, what value, if any, should the firm assign to this equipment as an initial cost of the project? A. $0 B. $44,500 C. $96,000 D. $124,500 E. $160,000

$96,000

A project will produce an operating cash flow of $31,200 a year for 7 years. The initial fixed asset investment in the project will be $204,900. The net aftertax salvage value is estimated at $62,000 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 11 percent? A. -$22,627.54 B. -$28,016.66 C. $4,120.52 D. $9,070.26 E. $21,040.83

-$28,016.66

Home Furnishings is expanding its product offerings to reach a wider range of customers. The expansion project includes increasing floor inventory by $656,000 and increasing its debt to suppliers by 85 percent of that amount. The company will also spend $1,110,000 for a building contractor to expand the size of its showroom. As part of the expansion plan, the company will be offering credit to its customers and thus expects accounts receivable to rise by $275,000. For the project analysis, what amount should be used as the initial cash flow for net working capital? A. -$239,900 B. -$176,600 C. -$156,000 D. -$373,400 E. -$391,000

-$373,400

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. A. Weak B. Semi weak C. Semi strong D. Strong E. Perfect

Strong

ALUM, Inc. uses high-tech equipment to produce specialized aluminum products for its customers. Each one of these machines costs $1,520,000 to purchase plus an additional $48,000 a year to operate. The machines have a five-year life after which they are worthless. What is the equivalent annual cost of one these machines if the required return is 15.5 percent? A. -$506,819.32 B. -$427,109.10 C. -$335,803.37 D. -$295,666.67 E. -$556,947.08

-$506,819.32

A project will require $543,000 for fixed assets, $218,000 for inventory, and $42,000 for accounts receivable. Short-term debt is expected to increase by $165,000. The project has a six-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. The project is expected to generate annual sales of $905,000 with costs of $730,000. The tax rate is 35 percent and the required rate of return is 14 percent. What is the project's cash flow at Time 0? A. -$536,000 B. -$638,000 C. -$720,000 D. -$779,000 E. -$944,000

-$638,000

Which one of the following time periods is associated with low rates of inflation? A. 1941-1942 B. 1974-1976 C. 2010-2013 D. 1980-1984 E. 1988-1990

2010-2013

The average annual return on small-company stocks was about _____ percent greater than the average annual return on large-company stocks over the period 1926-2013. A. 3 B. 5 C. 7 D. 9 E. 11

5

Which one of the following statements is correct? A. Project analysis should only include the cash flows that affect the income statement. B. A project can create a positive operating cash flow without affecting sales. C. The depreciation tax shield creates a cash outflow for a project. D. Interest expense should always be included as a cash outflow when analyzing a project. E. The opportunity cost of a company-owned building that is going to be used in a new project should be included as a cash inflow to the project.

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

Precision Dyes is analyzing two machines to determine which one it should purchase. The company requires a rate of return of 14 percent and uses straight-line depreciation to a zero book value over the life of its equipment. Machine A has a cost of $512,000, annual operating costs of $34,200, and a four-year life. Machine B costs $798,000, has annual operating costs of $21,500, and has a six-year life. Whichever machine is purchased will be replaced at the end of its useful life. The firm should purchase Machine _____ because it lowers the firm's annual costs by approximately _______ as compared to the other machine. A. A; $16,791 B. A; $17,404 C. B; $16,791 D. B; $17,404 E. B; $17,521

A, $16,791

Which one of the following is the depreciation method that allows accelerated write-offs of property under various lifetime classifications? A. IRR. B. ACRS. C. AAR. D. Straight-line to zero. E. Straight-line with salvage.

ACRS

Which one of the following statements best defines the efficient market hypothesis? A. Efficient markets limit competition. B. Security prices in efficient markets remain steady as new information becomes available. C. Mispriced securities are common in efficient markets. D. All securities in an efficient market are zero net present value investments. E. Profits are removed as a market incentive when markets become efficient.

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

The return earned in an average year over a multiyear period is called the _____ average return. A. Arithmetic B. Standard C. Variant D. Geometric E. Real

Arithmetic

From a managerial perspective, highly uncertain projects can be dealt with by keeping the degree of operating leverage:

As low as possible

What was the average rate of inflation over the period of 1926-2013? A. Less than 2.0 percent B. Between 2.0 and 2.4 percent C. Between 2.4 and 2.8 percent D. Between 2.8 and 3.2 percent E. Greater than 3.2 percent

Between 2.8 and 3.2 percent

Assume you invest in a portfolio of U. S. Treasury bills and that the portfolio will earn a rate of return similar to the average return on U.S. Treasury bills for the period 1926-2013. What rate of return should you expect to earn? A. Less than 2 percent B. Between 2 and 3 percent C. Between 3 and 4 percent D. Between 4 and 5 percent E. More than 5 percent

Between 3 and 4 percent

Which of the following statements are true based on the historical record for 1926-2013? A. Risk-free securities produce a positive real rate of return each year. B. Bonds are generally a safer investment than are stocks. C. Risk and potential reward are inversely related. D. The normal distribution curve for large-company stocks is narrower than the curve for small-company stocks. E. Returns are more predictable over the short term than they are over the long term.

Bonds are generally a safer investment than are stocks

21. The standard deviation of a portfolio: A. Is a weighted average of the standard deviations of the individual securities held in the portfolio. B. Can never be less than the standard deviation of the most risky security in the portfolio. C. Must be equal to or greater than the lowest standard deviation of any single security held in the portfolio. D. Is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio. E. Can be less than the standard deviation of the least risky security in the portfolio.

Can be less than the standard deviation of the least risky security in the portfolio.

The operating cash flow of a cost-cutting project: A. Is equal to the depreciation tax shield. B. Is equal to zero because there is no incremental sales. C. Can only be analyzed by projecting the sales and costs for a firm's entire operations. D. Includes any changes that occur in the current accounts. E. Can be positive even though there are no sales.

Can be positive even though there are no sales

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

Can create either an initial cash inflow or outflow

Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the: A. Average arithmetic return. B. Expected return. C. Market rate of return. D. Internal rate of return. E. Cost of capital.

Cost of capital

Which one of the following is a project cash inflow? Ignore any tax effects. A. Decrease in accounts payable. B. Increase in inventory. C. Decrease in accounts receivable. D. Depreciation expense based on MACRS. E. Equipment acquisition.

Decrease in accounts receivable

The net book value of equipment will: A. Remain constant over the life of the equipment. B. Vary in response to changes in the market value. C. Decrease at a constant rate when MACRS depreciation is used. D. Increase over the taxable life of an asset. E. Decrease slower under straight-line depreciation than under MACRS.

Decrease slower under straight-line depreciation than under MACRS

Increasing which one of the following will increase the operating cash flow assuming that the bottom-up approach is used to compute the operating cash flow? A. Erosion effects. B. Taxes. C. Fixed expenses. D. Salaries. E. Depreciation expense.

Depreciation expense

Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions? A. Riskless market B. Evenly distributed market C. Zero volatility market D. Blume's market E. Efficient capital market

Efficient capital market

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? A. Yearly incremental costs. B. Sunk costs. C. Opportunity costs. D. Erosion cost. E. Equivalent annual cost.

Equivalent annual costs

Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The firm 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? A. Storing supplies in the same space currently used for materials storage. B. Utilizing the basket manager to oversee wreath production. C. Hiring additional employees to handle the increased workload should the firm accept the wreath project. D. Researching the market to determine if wreath sales might be profitable before deciding to proceed. E. Planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt.

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

Which of the following statements are correct concerning diversifiable risks? I. Diversifiable risks can be essentially eliminated by investing in 30 unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk. A. I and III only. B. II and IV only. C. I and IV only. D. I, II and III only. E. I, II, III, and IV.

I, II, III only

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. A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

I, II, III, IV

If a stock portfolio is well diversified, then the portfolio variance: A. Will equal the variance of the most volatile stock in the portfolio. B. May be less than the variance of the least risky stock in the portfolio. C. Must be equal to or greater than the variance of the least risky stock in the portfolio. D. Will be a weighted average of the variances of the individual securities in the portfolio. E. Will be an arithmetic average of the variances of the individual securities in the portfolio.

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

The Omega Division of Alpha Corporation has been allocated $4 million for capital spending but has identified $4.6 million in positive NVP projects. Omega's manager thinks he can convince the company to fund the additional $0.6 million dollars because Omega uses ____ rationing to control overall spending.

Soft

The principle of diversification tells us that: A. Concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk. B. Concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. C. Spreading an investment across five diverse companies will not lower the total risk. D. Spreading an investment across many diverse assets will eliminate all of the systematic risk. E. Spreading an investment across many diverse assets will eliminate some of the total risk.

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

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? A. Underlying value principle. B. Stand-alone principle. C. Equivalent cost principle. D. Salvage principle. E. Fundamental principle.

Stand-Alone Principle

G & L Plastic Molders 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? A. Opportunity B. Fixed C. Incremental D. Erosion E. Sunk

Sunk

Which one of the following costs was incurred in the past and cannot be recouped? A. Incremental. B. Side. C. Sunk. D. Opportunity. E. Erosion.

Sunk

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk. A. Efficient markets hypothesis B. Systematic risk principle C. Open markets theorem D. Law of one price E. Principle of diversification

Systematic risk principal

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. Depreciation tax shield. B. Tax due on the salvage value of that asset. C. Current year's operating cash flow. D. Change in net working capital. E. MACRS depreciation for the current year.

Tax Due on the salvage value of that asset.

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

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

A stock with an actual return that lies above the security market line has: A. More systematic risk than the overall market. B. More risk than that warranted by CAPM. C. A higher return than expected for the level of risk assumed. D. Less systematic risk than the overall market. E. A return equivalent to the level of risk assumed.

a higher return than expected for the level of risk assumed

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

a increase is an unrealized capital gain will increase the capital gains yield.

The expected return on a stock computed using economic probabilities is: A. Guaranteed to equal the actual average return on the stock for the next five years. B. Guaranteed to be the minimal rate of return on the stock over the next two years. C. Guaranteed to equal the actual return for the immediate twelve month period. D. A mathematical expectation based on a weighted average and not an actual anticipated outcome. E. The actual return you should anticipate as long as the economic forecast remains constant.

a mathematical expectation based on a weighted average and not an actual anticipated outcome.

Which one of the following statements is correct concerning a portfolio beta? A. Portfolio betas range between -1.0 and +1.0. B. A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio. C. A portfolio beta cannot be computed from the betas of the individual securities comprising the portfolio because some risk is eliminated via diversification. D. A portfolio of U.S. Treasury bills will have a beta of +1.0. E. The beta of a market portfolio is equal to zero.

a portfolio beta is a weighted average of the betas of the individual contained in the portfolio

Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the: A. Method of analysis used to make the decision. B. Initial cash outflow. C. Ability to recoup any investment in net working capital. D. Accuracy of the projected cash flows. E. Length of the project.

accuracy of the projected cash flows

As the degree of sensitivity of a project to a single variable rises, the: A. Less important the variable is to the final outcome of the project. B. Less volatile the project's net present value is to that variable. C. Greater is the importance of accurately predicting the value of that variable. D. Greater is the sensitivity of the project to the other variable inputs. E. Less volatile is the project's outcome.

greater is the importance of accurately predicting the value of that variable

Which one of the following is a correct ranking of securities based on the volatility of their annual returns over the period of 1926-2013? Rank from highest to lowest. A. Large-company stocks, U.S. Treasury bills, long-term government bonds B. Small-company stocks, long-term corporate bonds, large-company stocks C. Long-term government bonds, long-term corporate bonds, intermediate-term government bonds D. Large-company stocks, small-company stocks, long-term government bonds E. Intermediate-term government bonds, long-term corporate bonds, U.S. Treasury bills

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

Individual investors who continually monitor the financial markets seeking mispriced securities: A. Earn excess profits on all of their investments. B. Make the markets increasingly more efficient. C. Are never able to find a security that is temporarily mispriced. D. Are overwhelmingly successful in earning abnormal profits. E. Are always quite successful using only historical price information as their basis of evaluation.

make the markets increasingly more efficient

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

markets tend to respond quickly to new information

Which one of the following correctly describes the dividend yield? A. Next year's annual dividend divided by today's stock price. B. This year's annual dividend divided by today's stock price. C. This year's annual dividend divided by next year's expected stock price. D. Next year's annual dividend divided by this year's annual dividend. E. The increase in next year's dividend over this year's dividend divided by this year's dividend.

next years annual dividend by todays stock price

Which one of the following statements is correct? A. The unexpected return is always negative. B. The expected return minus the unexpected return is equal to the total return. C. Over time, the average return is equal to the unexpected return. D. The expected return includes the surprise portion of news announcements. E. Over time, the average unexpected return will be zero.

over time, the average unexpected return will be zero.

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. A. Overestimate; overestimate B. Overestimate; underestimate C. Underestimate; overestimate D. Underestimate; underestimate E. Accurately; accurately

overestimate; underestimate

Which one of the following is least apt to reduce the unsystematic risk of a portfolio? A. Reducing the number of stocks held in the portfolio. B. Adding bonds to a stock portfolio. C. Adding international securities into a portfolio of U.S. stocks. D. Adding U.S. treasury bills to a risky portfolio. E. Adding technology stocks to a portfolio of industrial stocks.

reducing the number of stocks held in the portfolio

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

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

Efficient financial markets fluctuate continuously because: A. The markets are continually reacting to old information as that information is absorbed. B. The markets are continually reacting to new information. C. Arbitrage trading is limited. D. Current trading systems require human intervention. E. Investments produce varying levels of net present values.

the markets are continually reacting to new information

The intercept point of the security market line is the rate of return which corresponds to: A. The risk-free rate. B. The market rate. C. A return of zero. D. A return of 1.0 percent. E. The market risk premium.

the risk-free rate

Which one of the following statements related to risk is correct? A. The beta of a portfolio must increase when a stock with a high standard deviation is added to the portfolio. B. Every portfolio that contains 25 or more securities is free of unsystematic risk. C. The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio. D. Adding five additional stocks to a diversified portfolio will lower the portfolio's beta. E. Stocks that move in tandem with the overall market have zero betas.

the systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio

Which one of the following events would be included in the expected return on Sussex stock? A. The chief financial officer of Sussex unexpectedly resigned. B. The labor union representing Sussex's employees unexpectedly called a strike. C. This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated. D. The price of Sussex stock suddenly declined in value because researchers accidentally discovered that one of the firm's products can be toxic to household pets. E. The board of directors made an unprecedented decision to give sizeable bonuses to the firm's internal auditors for their efforts in uncovering wasteful spending.

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

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst? A. Weak B. Semi weak C. Semi strong D. Strong E. Perfect

weak

Simulation analysis is based on assigning a _____ and analyzing the results. A. Narrow range of values to a single variable. B. Narrow range of values to multiple variables simultaneously. C. Wide range of values to a single variable. D. Wide range of values to multiple variables simultaneously. E. Single value to each of the variables.

wide range of values to multiple variables simultaneously.