FI 302 Shamar Stewart
• If the discount rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.
False
• If you borrow all the money you need for a project at 6%, the appropriate cost of capital for this project is 6%.
False
• One reliable estimate of a privately held firm's equity beta is the average of the equity betas of several publicly held companies.
False
• Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse.
False
• The Internal Rate of Return can be defined as the discount rate at which an investments NPV equals its initial cost.
False
• The best way to estimate the cost of debt capital for a firm is to divide the interest expense on the income statement by the interest-bearing debt on the balance sheet.
False
• The payback period and accounting rate of return directly take into consideration the time value of money.
False
The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation
False
• A company is considering a project that would use an old machine that is not going to otherwise be used by the company. The company should consider the cost of the machine in their decision of whether to fund the project.
False
• A dollar is worth the same regardless of whether you receive it today or tomorrow.
False
• A firm's unsystematic risk represents the part of the stock's variance that is attributed to overall market volatility.
False
• An earthquake damaging a ravine in New Orleans is an example of systematic risk.
False
• Diversification will always reduce the riskiness of portfolio stocks.
False
• Employment taxes increasing nationally is an example of unsystematic risk.
False
• IF you can borrow all the money you need for a project at 6%, the cost of capital for this project is 6%.
False
• The tighter the probability distribution of expected future returns, the greater the risk of a given investment as measured by its standard deviation.
False
• Using the same risk-adjusted discount rate to discount all future cash flows ignores the fact that the more distant cash flows are often riskier than cash flows occurring sooner.
False
• When adding a randomly chosen new stock to an existing portfolio, the higher ( or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk.
False
• When investment returns are less than perfectly positively correlated, the resulting diversification effect means that spreading an investment across many diverse assets will eliminate all of the total risk.
False
• A standard way to estimate an asset's beta is to regress its returns against those of a well-diversified portfolio.
True
• Beta measures diversifiable risks.
True
• Disregarding risk, when assessing the time value of money, it is impossible for the present value of a given sum to exceed its future value.
True
• Diversifiable risks are generally associated with an individual firm or industry.
True
• Diversifiable risks can be largely eliminated by investing in thirty unrelated securities.
True
• Equity beta will rise with an increase in financial leverage.
True
• Forward contracts can be used to limit some risk exposures that businesses encounter, such as currency exchange risk.
True
• If the IRR exceeds the WACC, value should be created.
True
• The CAPM encourages that you hold the market portfolio.
True
• The Internal Rate of Return and Net Present Value directly take into consideration the time value of money
True
• The best measure for an asset held in a diversified portfolio is the correlation coefficient.
True
• The best measure of risk for a single asset held in isolation is the Standard Deviation.
True
• The best way to estimate the cost of debt for a firm is to observe the yield to maturity on a firm's existing debt.
True
• The beta of the market portfolio is always 1.
True
• The capital asset pricing model states that a linear relationship exists between systematic and expected return.
True
• The cost of capital, or WACC, is not the correct discount rate to use for all projects undertaken by a firm.
True
• The cost of debt is best approximated by the yield to maturity on the existing debt; this is the rate of return investors demand today on new debt.
True
• The federal government imposes an additional 1,000 fee on all cigarette manufactures is an example of systematic risk.
True
• The slope of the regression line is the beta estimate.
True
• There is no reward for accepting diversifiable risks.
True
• Toymakers requiring improved safety standards is an example of unsystematic risk.
True
• When evaluating investments under capital rationing that are independent and can be acquired fractionally, ranking by the BCR is the appropriate technique.
True
