FIN Final Exam Practice Exam
Which one of the following portfolios will have a beta of zero? A portfolio with a zero variance of returns No portfolio can have a beta of zero A portfolio that is equally as risky as the overall market A portfolio that consists of a single stock A portfolio comprised solely of U. S. Treasury bills
A portfolio comprised solely of U.S. Treasury bills
Which one of the following statements is accurate for a levered firm? A firm's WACC will decrease whenever the firm's tax rate decreases. WACC should be used as the required return for all proposed investments. A reduction in the risk level of a firm will tend to decrease the firm's WACC An increase in the market risk premium will decrease a firm's WACC. The subjective approach totally ignores a firm's own WACC.
A reduction in the risk level of a firm will tend to decrease the firm's WACC
The variance is the average squared difference between which of the following? Average return and the standard deviation Actual return and the real return Actual return and (average return/N - 1) Actual return and average return Actual return and the risk-free rate
Actual return and average return
Of the following, which is NOT a source of funds for a company? Commercial banks Common shareholders Preferred stockholders All are sources of funds for companies.
All are sources of funds for companies
The weighted average cost of capital is ________. made up of three financing components: the cost of debt, the cost of preferred stock, and the cost of equity the cost of capital for the firm as a whole All of the above the average of the cost of each financing component, weighted by the proportion of each component
All of the above
Which one of the following methods of analysis is most similar to computing the return on assets (ROA)? Net present value Internal rate of return Profitability index Payback Average accounting return
Average accounting return
________ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings. Capital structure NPV Working capital management Cost of capital
Capital structure
Katie owns 100 shares of ABC stock. Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC? Pure play cost Cost of debt Cost of equity Subjective cost Weighted average cost of capital
Cost of equity
CrossTown Builders is considering remodeling an old building it currently owns. The building was purchased ten years ago for $1.2 million. Over the past ten years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $1.9 million. The company is considering remodeling the building into industrial-type apartments at an estimated cost of $1.6 million. The estimated present value of the future income from these apartments is $4.1 million. Which one of the following defines the opportunity cost of the remodeling project? Initial cost of the building plus the remodeling costs Cost of the remodeling Current market value of the building plus the remodeling costs Present value of the future income Current market value of the building
Current market value of the building
Which one of the following combinations will always result in an increased dividend yield? Decrease in the stock price combined with a lower dividend amount Decrease in the stock price combined with a higher dividend amount Increase in the stock price combined with a higher dividend amount Increase in the stock price combined with a constant dividend amount Increase in the stock price combined with a lower dividend amount
Decrease in the stock price combined with a higher dividend amount
Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk? Diversification Security market line Capital asset pricing model Systematic Unsystematic
Diversification
Flo is considering three mutually exclusive options for the additional space she plans to add to her specialty women's tore. The cost of the expansion will be $148,000. She can use this additional space to add children's clothing, an exclusive gifts department, or a home décor section. She estimates the present value of the cash inflows from these projects are $121,000 for children's clothing, $178,000 for exclusive gifts, and $145,000 fordecorator items. Which option(s), if any, should she accept? Exclusive gifts and decorator items only All three options Children's clothing only Exclusive gifts only None of these options
Exclusive gifts only
Which of the following are tax-deductible expenses for corporations? Preferred stock dividends Interest expenses Common stock dividends All are tax-deductible for corporations.
Interest expenses
Which one of the following is most closely related to the net present value profile? Discounted payback Profitability index Payback Internal rate of return Average accounting return
Internal rate of return
Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently? Payback and net present value Internal rate of return and net present value Profitability index and internal rate of return Payback and internal rate of return Net present value and profitability index
Internal rate of return and net present value
Security that on average is riskier than market would have a beat: Equal to 1 Less than zero Larger than 1 Larger than 2 Less than 1
Larger than 1
Generally speaking, payback is best used to evaluate which type of projects? Low-cost, long-term Any size of long-term project High-cost, short-term Low-cost, short-term High-cost, long-term
Low-cost, short-term
Which one of the following is a correct value to use if you are conducting a best-case scenario analysis? Lowest expected value for fixed costs Lowest expected salvage value Sales price that is most likely to occur Highest expected need for net working capital Lowest expected level of sales quantity
Lowest expected value for fixed costs
Which one of the following is most apt to cause a wise manager to increase a project's cost of capital? Assume the firm is levered. The aftertax cost of debt just decreased. Manager learns the project is riskier than previously believed. The project's life is shortened. The initial cash outlay requirement is reduced. Management decides to issue new stock to finance the project.
Manager learns the project is riskier than previously believed.
Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of five years. Engine tune-up that is scheduled for this afternoon Costs of repairs needed so the truck can pass inspection next month New tires that will be purchased this winter Money spent last month repairing a damaged front fender Cost for a truck driver for the remainder of the truck's useful life
Money spent last month repairing a damaged front fender
Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B? Dual return Mutually exclusive Crosswise Multiple choice Conventional
Mutually exclusive
Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation? Net present value Profitability index Payback Internal rate of return Average accounting rate of return
Net present value
Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities? Profitability index Payback Accounting rate of return Internal rate of return Net present value
Net present value
Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive? Average accounting return Net present value Profitability index Internal rate of return Modified internal rate of return
Net present value
Which one of the following is defined as a bell-shaped frequency distribution that is defined by its average and its standard deviation? Probability curve Variance Standard deviation Arithmetic average return Normal distribution
Normal distribution
Turner Industries started a new project three months ago. Sales arising from this project are significantly less than anticipated. Given this, which one of the following is management most apt to implement? Option to wait Option to delay Option to expand Soft rationing Option to abandon
Option to abandon
Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent? Portfolio standard deviation Portfolio variance Portfolio expected return Portfolio beta Portfolio weight
Portfolio weight
Which one of the following indicates that a project is expected to create value for its owners? Profitability index less than 1.0 Positive net present value Positive average accounting rate of return Internal rate of return that is less than the requirement Payback period greater than the requirem
Positive net present value
Which of the items below is sometimes termed hybrid equity financing? Callable bonds Retained earnings Variable rate bonds Preferred stock
Preferred stock
You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests? Profitability index Payback Net present value Internal rate of return Modified internal rate of return
Profitability index
Which one of the following best describes an arithmetic average return? Average compound return earned per year over a multiyear period Return earned in an average year over a multiyear period Positive square root of the average compound return Total compound return divided by the number of individual returns Total return divided by N- 1, where N equals the number of individual returns
Return earned in an average year over a multiyear period
Ted is trying to decide what cost of capital he should assign to a project. Which one of the following should be his primary consideration in this decision? Amount of debt used to finance the project Use, or lack, of preferred stock as a financing option Mix of funds used to finance the project Length of the project's life Risk level of the project
Risk level of the project
Over the period of 1926-2014, which one of the following investment classes had the highest volatility of returns? Large-company stocks Small-company stocks Long-term government bonds U.S. Treasury bills Long-term corporate bonds
Small-company stocks
Which one of the following could cause the total return on an investment to be a negative rate? Constant annual dividend amount Increase in the annual dividend amount Stock price that remains constant over the investment period Stock price that increases over the investment period Stock price that declines over the investment period
Stock price that declines over the investment period
When calculating the after-tax weighted average cost of capital (WACC), which of the following costs are adjusted for taxes in the equation? The before-tax cost of equity The before-tax cost of debt The before-tax cost of preferred stock The after-tax cost of debt
The before-tax cost of debt
Which one of the following statements is correct? Risk premiums are inversely related to the standard deviation of returns The risk-free rate of return has a risk premium of 1.0 Risks and expected return are inversely related The reward for bearing risk is called the standard deviation The higher the expected rate of return, the wider the distribution of returns
The higher the expected rate of return, the wider the distribution of returns
Kelly's uses the firm's WACC as the required return for some of its projects. For other projects, the firms uses a rate equal to WACC plus one percent, while another set of projects is assigned rates equal to WACC minus some amount. Which one of the following factors should be the key factor the firm uses to determine the amount of the adjustment it will make when assigning a discount rate to a specific project? The perceived risk level of project The firm's current debt-equity ratio The current market rate of interest The division within the firm that will be assigned to manage the project Actual source of funds used to finance the project
The perceived risk level of project
Consider a portfolio comprised of four risky securities. Assume the economy has three economic states with varying probabilities of occurrence. Which one of the following will guarantee that the portfolio variance will equal zero? The portfolio expected rate of return must be the same for each economic state The portfolio beta must be 1.0 There must be equal probabilities that the state of the economy will be a boom or a bust The portfolio risk premium must equal zero The portfolio expected rate of return must equal the expected market rate of return
The portfolio expected rate of return must be the same for each economic state
New Labs just announced that it has received a patent for a product that will eliminate all flu viruses. This news is totally unexpected and viewed as a major medical advancement. Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient? The value of all stocks suddenly increase and then level off at their higher values. The price of New Labs stock remains unchanged The price of New Labs stock increases rapidly and then settles back to its pre-announcement level. All stocks quickly increase in value and then all but New Labs stock fall back to their original values. The price of New Labs stock increases rapidly to a higher price and then remains at that price.
The price of New Labs stock increases rapidly to a higher price and then remains at that price
Which one of the following statements concerning capital structure weights is correct? The issuance of additional shares of common stock will increase the weight of both the common and preferred stock An increase in the debt-equity ratio will increase the weight of the common stock. Target capital structure rates for a firm are irrelevant to individual projects. The repurchase of preferred stock will increase the weight of debt. The weights are unaffected when a bond issue matures.
The repurchase of preferred stock will increase the weight of debt.
The rate of return on which one of the following has a risk premium of 0%? Long-term corporate bonds U.S. Treasury bills Emerging market government bonds Large-company stocks Preferred stock
U.S. Treasury bills
Which one of the following statements is true regarding the period 1926-2014? The risk-free rate of return remained constant over the time period Bonds had an average rate of return that exceeded the average return on stocks The returns on small-company stocks were less volatile than the returns on large-company stocks. The inflation rate was just as volatile as the return on long-term bonds U.S. Treasury bills had a positive average real rate of return
U.S. Treasury bills had a positive average real rate of return
A proposed project will increase a firm's accounts payables. This increase is generally: a cash inflow at Time zero and a cash outflow at the end of the project. a cash outflow at Time zero and a cash inflow at the end of the project. a sunk cost and should be ignored. treated as an opportunity cost. treated as an erosion cost.
a cash inflow at Time zero and a cash outflow at the end of the project.
A portfolio is: an investment in a risk-free security a single risky security a group of assets held by an investor any new issue of stock any security that is equally as risky as the overall market
a group of assets held by an investor
Lake City Plastics currently produces plastic plates and silverware. The company is considering expanding its product offerings to include plastic serving trays. All of the following are relevant costs to this project with the exception of: any change in the expected sales of plates and silverware gained from offering trays also. the additional plastic raw materials that would be required. the cost to acquire the forms needed to mold the trays. the cost of additional utilities required to operate the serving tray production operation. a percentage of the current operating overhead.
a percentage of the current operating overhead.
The average net income of a project divided by the project's average book value is referred to as the project's: average accounting return required return internal rate of return market rate of return discounted rate of return
average accounting return
The pro forma income statements for a proposed investment should include all of the following except: forecasted sales fixed costs depreciation expense changes in net working capital taxes
changes in net working capital
The reinvestment approach to the modified internal rate of return: reinvests all the cash flows, including the initial cash flow, to the end of the project. discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project. discounts all negative cash flows back to the present and combines them with the initial cost. individually discounts each separate cash flow back to the present. compounds all of the cash flows, except for the initial cash flow, to the end of the project.
compounds all of the cash flows, except to the initial cash flow, to the end of the project
The net present value of an investment represents the difference between the investment's: cash inflows and outflows assets and liabilities cash flows and its profits cost and its net profit cost and its market value
cost and its market value
The ________ is the cost of each financing component multiplied by that component's percent of the total funding amount. IRR cost of debt NPV cost of capital
cost of capital
When a company borrows money from a bank or sells bonds, it is called ________. debt financing stock financing capital structure financing equity financing
debt financing
The security market line is a linear function that is graphed by plotting data points based on the relationship between the: risk-free rate and the market rate of return market rate of return and beta risk-free rate and beta expected return and beta market rate of return and the risk-free rate
expected return and beta
Dismal Outlook is unable to obtain financing for any new projects under any circumstances. This company is faced with: hard rationing soft rationing real options contingency planning sunk costs
hard rationing
Scenario analysis: determines the absolute worst and absolute best outcome that could ever occur. determines the impact a $1 change in sales has on a project's internal rate of return. determines which variable has the greatest impact on a project's net present value. evaluates a project's net present value while sensitivity analysis evaluates a project's internal rate of return. helps determine the reasonable range of expectations for a project's anticipated outcome.
helps determine the reasonable range of expectations for a project's anticipated outcome.
Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as: directly impacted flows incremental cash flows deviated projections opportunity cash flows eroded cash flows
incremental cash flows
The profitability index reflects the value created per dollar: of taxable income invested of net income of sales of shareholders' equity
invested
The cost of retained earnings ________. is all of the above is the cost of issuing new common stock without the flotation costs is the appropriate cost of capital for the shareholders is the loss of the dividend option for the owners
is all of the above
The cost of preferred stock: increases when a firm's tax rate decreases is constant over time is equal to the stock's dividend yield increases as the price of the stock increases is unaffected by changes in the market price of the stock
is equal to the stock's dividend yield
The ability to delay an investment: ensures that the investment will have an expected net present value that is positive. is commonly referred to as the best-case scenario. is valuable provided there are conditions under which the investment will have a positive net present value. offsets the need to conduct sensitivity analysis. is referred to as the option to abandon.
is valuable provided there are conditions under which the investment will have a positive net present value.
The lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk. insufficient information higher; higher lower; lower lower; higher higher; lower
lower; lower
The addition of a risky security to a fully diversified portfolio: must decrease the portfolio's expected return will have no effect on the portfolio beta or its expected return will increase the unsystematic risk of the portfolio must increase the portfolio beta may or may not affect the portfolio beta
may or may not affect the portfolio beta
If a security plots to the right and below the security market line, then the security has ___________________ systematic risk than the market and is ___________________. more; underpriced more; overpriced less; correctly priced less; underpriced more; underpriced
more; overpriced
If the financial markets are semistrong form efficient, then: only the most talented analysts can determine the true value of a security. only individuals with private information have a marketplace advantage. every security offers the same rate of return. no one individual has an advantage in the marketplace. technical analysis provides the best tool to use to gain a marketplace advantage.
only individuals with private information have a marketplace advantage
Investors ________ for estimating the WACC. prefer book value to market value are indifferent between using market and book value prefer market value to book value prefer a mix of book and market value
prefer market value to book value
A pro forma financial statement is a financial statement that: projects future years' operating results. expresses all values as a percentage of either total assets or total sales. compares the performance of a firm to its industry. values all assets based on their current market values. compares actual results to the budgeted amounts.
projects future years' operating results
The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to: offset its total expenses offset its fixed expenses recoup its initial cost produce a positive annual cash flow. produce a positive cash flow from assets
recoup its initial cost
The net working capital invested in a project is generally: treated as an opportunity cost recouped in the first year of the project depreciated to a zero balance over the life of the project treated as an erosion cost recouped at the end of the project
recouped at the end of the project
The net working capital invested in a project is generally: recouped in the first year of the project. treated as an opportunity cost. treated as an erosion cost. recouped at the end of the project. depreciated to a zero balance over the life of the project.
recouped at the end of the project.
The expected return on a security is not affected by the: market rate of return security's unique risks risk-free rate security's risk premium security's beta
security's unique risks
To value a non-dividend-paying firm, the terminal value used in the valuation calculation will most likely be based on a(n): pure play rate of return subjective value determined by the firm's senior managers. salvage value of zero. target ratio. expected book value of equity
target ratio
For a risky security to have a positive expected return but less risk than the overall market, the security must have a beta: that is > 1 of zero that is > 0 but < 1 that is infinite of one
that is > 0 but < 1
The cost of capital is ________. All of the above the cost of debt in a firm that finances with both debt and equity. another name for the IRR. the cost of each financing component multiplied by that component's percent of the total borrowed.
the cost of each financing competent multiplied by that component's percent of the total borrowed
All else constant, an increase in a firm's cost of debt: could be caused by an increase in the firm's tax rate. will lower the firm's weighted average cost of capital. will lower the firm's cost of equity. will result in an increase in the firm's cost of capital. will increase the firm's capital structure weight of debt
will result in an increase in the firm's cost of capital
Which one of the following is the computation of the risk premium for an individual security? E(R) is the expected return on the security, Rf is the risk-free rate, β is the security's beta, and E(RM) is the expected rate of return on the market. E(R) - [E(RM) + Rf] E(R) - E(RM) β[E(RM) -Rf] E(RM) -Rf β[E(R) -Rf]
β[E(RM) -Rf]
