Exam FINC 303
If the profitability index equals 1, then: The IRR will equal the required return and the NPV will equal zero. The NPV will be negative and the IRR will be less that the required return. The IRR will be greater than the required return and the NPV will be negative. The IRR will equal zero and the NPV will equal 1.
The IRR will equal the required return and the NPV will equal zero.
The beta of the risk-free asset is always equal to: 0 1 -1 10
0
The beta of the market is always equal to: 0 10 1 -1
1
What is the required return of a portfolio consisting of 40% of the asset above (ER 16%) and the rest in an asset with the same risk as the market? 14.3% 12% 13.6% 16%
13.6%
The risk-free rate is 4%, and the required return on the market is 12%. What is the required return on an asset with a beta of 1.5? 12% 16% 8% 28% 24%
16%
The risk-free rate is 4%, and the required return on the market is 12%. The beta of the asset is 1.5. What is the reward/risk ratio in equilibrium? 16% 12% 8% 28% 24%
8%
Which of the following indicates a portfolio is being effectively diversified? An increase in the portfolio's beta. An increase in the portfolio's standard deviation. A decrease in the portfolio's beta. A decrease in the portfolio's standard deviation.
A decrease in the portfolio's standard deviation.
Systematic risk is measured by: Expected return Beta Variance Standard deviation
Beta
The market risk premium is the Risk-free rate - expected return of the market Expected return of the market - risk-free rate Systematic risk - unsystematic risk
Expected return of the market - risk-free rate
Sensitivity analysis involves changing many variables at the same time. True False
False
Soft rationing occurs when a firm cannot raise financing for a project and hard rationing is when units in a business are allocated a set amount of financing for capital budgeting. True False
False
Sunk costs should be included in a project's cash flows because they have accrued in the past. True False
False
When interest rates rise bond prices will also rise. True False
False
Under what circumstances will the geometric average return exceed the arithmetic average return? When all the rates of return in the set of returns are equal to each other. When the set of returns has a very narrow frequency distribution. When the set of returns includes only risk-free rates. When the set of returns has a wide frequency of distribution. Never
Never
Decision Criteria Test: Does the Payback Period rule provide an indication about the increase in value of the firm? Yes No
No
Decision Criteria Test: Should we consider the Payback Period rule for our primary decision rule? Yes No
No
Security C has a standard deviation of 20% and a beta of 1.25 and Security K has a standard deviation of 30% and a beta of 0.95. Which security has more systematic risk? Security C Security K
Security C
Security C has a standard deviation of 20% and a beta of 1.25 and Security K has a standard deviation of 30% and a beta of 0.95. Which security should have the higher expected return? Security C Security K
Security C
Security C has a standard deviation of 20% and a beta of 1.25 and Security K has a standard deviation of 30% and a beta of 0.95. Which security has more total risk? Security C Security K
Security K
Which of the following investments we discussed have the highest average return? Large cap stocks Small cap stocks Long-term corporate bonds Long-term government bonds U.S. Treasury bills
Small cap stocks
Which of the investments discussed have the highest risk premium? Large cap stocks Small cap stocks Long-term corporate bonds Long-term government bonds U.S. Treasury bills
Small cap stocks
Total risk is measured by: Expected return Beta Variance Standard deviation
Standard deviation
Unsystematic risk is represented by which of the following: The effect of an economy facing recession. The effect of the Federal Reserve raising interest rates. The effect of the crash of the global housing market. The effect of a strike by auto workers on Chrysler-Fiat.
The effect of a strike by auto workers on Chrysler-Fiat.
Systematic risk is represented by which of the following: The effect of a decrease in natural gas prices on the utilities industry. The effect of an economy facing inflation. The effect of the emissions scandal on Volkswagen. The effect of store closings on JC Penneys.
The effect of an economy facing inflation.
The risk premium is all of the following except: The "extra" return earned for taking on risk The return over and above the risk-free rate. The return on Treasury bills. The difference between the return on the asset and the return on a risk-free Treasury security.
The return on Treasury bills.
Depreciation decreases net income, decreases taxes, and increases operating cash flow. True False
True
Expected returns are based on the probabilities of possible outcomes. True False
True
Forecasting risk arises when errors are made in projected future cash flows. True False
True
High risk assets will have higher returns and lower prices than assets with lower risk. True False
True
Net working capital can create either a cash inflow or cash outflow at time zero of a project. True False
True
Operating cash flow minus the change in net working capital minus net capital spending equals cash flow from assets for each year of the project. These cash flows are used to calculate the net present value of the project. True False
True
Risk and return move in the same direction. True False
True
Scenario analysis involves asking "what-if" questions. True False
True
Standard deviation is a measure of total risk. True False
True
The IRR is an unreliable indicator of whether a project should be accepted when cash flows are unconventional, or the project is mutually exclusive with another project under consideration. True False
True
The IRR is the discount rate where the NPV equals zero and the profitability index equals 1. True False
True
The Stand Alone Principle allows us to analyze each project in isolation from the firm simply by focusing on incremental cash flows. True False
True
The beta of a portfolio cannot be lower than the lowest individual beta in the portfolio nor greater than the highest individual beta in the portfolio. True False
True
The expected return on a portfolio of assets is the sum of the weighted averages of the returns of each of the assets in the portfolio. True False
True
The higher the expected return on an asset the higher the risk. True False
True
The inclusion of changes in net working capital, accounts for changes in inventory, accounts receivable, and accounts payable needed to get the project started. True False
True
The market risk premium is the same as the reward to risk ratio of an asset in equilibrium. True False
True
The risk premium is the reward an investor receives for taking on added risk. True False
True
The yield to maturity is the market return on a bond. True False
True
Variance and standard deviation measure the volatility of returns. True False
True
Which of the investments discussed have the lowest risk premium? Large cap stocks Small cap stocks Long-term corporate bonds Long-term government bonds U.S. Treasury bills
U.S. Treasury bills
Decision Criteria Test: Does the IRR rule account for the risk of the cash flows? Yes No
Yes
Decision Criteria Test: Does the IRR rule account for the time value of money? Yes No
Yes
Decision Criteria Test: Does the IRR rule provide an indication about the increase in value of the firm? Yes No
Yes
Decision Criteria Test: Should we consider the IRR rule for our primary decision rule? Yes No
Yes
