FIN320F Exam 2 - Smart Book
By definition, what is the beta of the average asset equal to?
1
What are the steps involved in issuing securities to the public in chronological order.
1. Obtain approval from the firm's board of directors 2. Prepare and file a registration statement 3. Prepare and distribute preliminary prospectus copies 4. Determine a selling price 5. Prepare and distribute a final prospectus
If an analyst's forecast for a firm's earning growth is 7%, and its dividend yield is 3%, it's cost of equity will be ____________.
10% 3+7
What is an ADR (American Depository Receipt)?
A security issued in the US that represents shares of a foreign stock
The PI rule for an independent project is to _____________ the project if the PI is greater than 1
Accept
A project should be ________________ if its NPV is greater than zero
Accepted
What is true about the venture capital (VC) market?
Access to venture capital is very limited Personal contacts are important in gaining access to the VC market
The following are advantages of the SML approach
Adjusts for risk Does not require the company to pay a dividend
Cash flows should always be considered on a(n) _______________ basis.
After-tax
Cash flows used in project estimation should always reflect:
After-tax cash flows Cash flows when they occur
What is the price of a stock at the end of one year (P1) if the dividend for year 2 (D2) is $5, the price for year 2 (P2) is $20, and the discount rate is 10%.
$22.73
Historically, the real return on Treasury bills has been:
quite low
When an investor is diversified only ___________ risk matters.
systematic
A firm's registration statement to issue-securities will typically include everything except:
the proposed price for the security
A person who brings buyers and sellers together is called a(n) _____________
Broker
Capital __________ is the decision making process for accepting and rejecting projects.
Budgeting
The use of local financing from the government of the foreign country where the operation is located _________.
Can reduce political risk
A positive NPV exists when the market value of a project exceeds its cost. Unfortunately, most of the time the market value of a project:
Cannot be observed
Which of the following are fixed costs? Cost of Equipment Rent on a Production Facility Inventory Costs Net Working Capital
Cost of Equipment Rent on a Production Facility
Which of the following are components used in the construction of the WACC?
Cost of common stock Cost of Debt Cost of preferred Stock
The Profitability Index is also called the __________ ratio.
Cost-Benefit
Which of the following is tax-deductible to the firm?
Coupon interest paid on bonds
The constant-growth model assumes that _______
Dividends change at a constant rate
Which of the following are important considerations when choosing between venture capitalists? Exit Strategy SEC Affiliation Financial Strength Style Tombstones
Exit Strategy Financial Strength Style
We underestimate NPV because of the option(s) to _____________.
Expand (or Abandon)
For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed. T/F
False Neither dividends nor capital gains are fixed or guaranteed
Unsystematic Risk will affect
Firms in a single industry A specific firm
The risk-return relationship states that a riskier investment should demand a ____________ return
Higher
What are the two main benefits of performing sensitivity analysis?
Identifies the variable that has the most effect on NPV It reduces a false sense of security by giving a range of values for NPV instead of a single value
Which of the following are reasons why NPV is considered a superior capital budgeting technique? It considers time value of money It considers the riskiness of the project It properly discounts earnings It considers all the cash flows It properly chooses among mutually exclusive projects
It considers time value of money It considers the riskiness of the project It considers all the cash flows It properly chooses among mutually exclusive projects
What is true concerning triangle arbitrage?
It helps keep the currency market in equilibrium It is a profitable situation involving three separate currency exchange transactions
Systematic risk is also called ________ risk
Market
What is a Eurocurrency?
Money deposited in a financial center outside of the country with the involved currency.
What is the required return on a stock (Re), according to the constant dividend growth model, if the growth rate (g) is zero?
Re=D1/P0
The formula for calculating the cost of equity capital that is based on the dividend discount model is:
Re=D1/P0+g
An option on a real asset rather than a financial asset is known as:
Real Option or Managerial Option
The growth rate of dividends can be found using:
Security Analysts' Forecasts Historical Dividend Growth Rates
When using ________________, all of the variables except one are frozen in order to determine how sensitive the NPV estimate is to changes in that particular variable.
Sensitivity Analysis
New York Stock Exchange Designated Market Makers (DMMs) were formerly called ___________
Specialists
An agreement to trade currencies within two business days at today's exchange rate is called a ____________.
Spot Trade
According to the _________ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "minifirm"
Stand-Alone
Private equity firms provide financing for firms that otherwise would have difficulty raising capital such as:
Start-up firms, Distressed Firms, Closely held Private Firms
Some important characteristics of the normal distribution are that it is:
Symmetrical & Bell-Shaped
___________________ risk is the only risk important to the well diversified investor.
Systematic
Which of the following types of risk is not reduced by diversification?
Systematic, or market risk
Beta tells us the amount of ___________ risk of an asset or portfolio relative to ____________.
Systematic; an average risky asset
Operating Cash Flow is a Function of:
Taxes, Earnings Before Interest and Taxes (EBIT), Depreciation
The dividend yield is determined by dividing the expected dividend (D1) by ________
The Current Price (P0)
What is a cross-rate?
The implicit exchange rate between two currencies quoted in a third currency
What is the slope of the security market line (SML)?
The market-risk premium
Among the three main sources of cash flow, which source of cash flow is the most important and also the most difficult to forecast?
The operating cash flows from net sales over the life of the project
Which of the following qualify as "managerial options"? The option to change the cost of capital The option to Wait The option to Expand The option to Abandon
The option to Wait The option to Expand The option to Abandon
According to the CAPM, what is the expected return on a stock if its beta is equal to zero?
The risk-free rate
What is the intercept of the security market line (SML)?
The risk-free rate
According to the capital asset pricing model (CAPM), what is the expected return on a security with a beta of zero?
The risk-free rate of return
How are the unsystematic risks of two different companies in two different industries related?
There is no relationship
Financing by wealthy individuals or private investment groups is referred to as _______________.
Venture Capital Private Equity
If the growth rate (g) is zero, the capital gains yield is _______
Zero
The IRR is the discount rate that makes NPV equal to ________________.
Zero
According to the average accounting return rule, a project is acceptable if its average accounting return exceeds:
a target average accounting return
Dividends paid to common stockholders _________ be deducted from the payer's taxable income for tax purposes
cannot
The percentage change in the price of a stock over a period of time is called its:
capital gain yield
The value of a firm is derived using the firm's _______ rate and its ______ rate
growth; discount
An increase in depreciation expense will _____________ cash flow from operations.
Increase
Synergy will _____ the sales of existing products
Increase
The stand-alone principle assumes that evaluation of a project may be based on the project's _________________ cash flows
Incremental
The difference between a firm's cash flows with a project versus without the project is called _______________.
Incremental Cash Flows
If a firm uses its overall cost of capital to discount cash flows from projects in higher risk divisions, it will accept _____________ projects.
Too Many
When a US company calculates its accounting net income, it must report all income, including income from foreign operations, in dollars. This leads to _________ exposure to exchange rate risk.
Translation
If an all-equity firm discounts a project's cash flows with the firm's overall weighted average cost of capital even though the project's beta is less than the firm's overall beta, it is possible that the project might be:
Rejected, when it should be accepted
One of the most important steps in estimating cash flow is to determine the ____________ cash flows
Relevant
Using a benchmark PE ratio against current earning yields a forecasted price called a ______ price.
Target
The systematic risk principles argues that the market does not reward risks:
That are borne unnecessarily That are diversifiable
The rules for depreciating assets for tax purposes are based upon provisions in the:
1986 Tax Reform Act
The price of a share of common stock is equal to the present value of all ________ future dividends.
Expected
True or False: An advantage of the AAR is that it is based on book values, not market values.
False
True/False: Political Risk refers only to problems for US companies caused by foreign governments
False
An interest rate swap involves swapping a _______ payment for a __________ payment.
Floating Rate; Fixed Rate Fixed Rate; Floating Rate
To estimate the dividend yield of a particular stock, we need:
Forecasts of the Dividend Growth Rate, g The Last Dividend paid, D0 The current stock price
A PE Ratio that is based on estimated future earnings is known as a __________ PE ratio.
Forward
The profitability index is calculated by dividing the PV of the ______________ cash inflows by the initial investment.
Future
The second lesson from studying capital market history is that risk is...
handsomely rewarded
According to Graham and Harvey's 1999 survey of 392 CFOs (published in 2001), which of the following two capital budgeting methods are widely used by firms in the US and Canada?
Internal Rate of Return Net Present Value
Stock Price Reporting has increasingly moved from traditional print media to the ____________ in recent years.
Internet
Investment in net working capital arises when ___________.
Inventory is purchased Cash is kept for unexpected expenditures Credit Sales are Made
Components of the WACC include funds that come from ____________
Investors
Though depreciation is a non-cash expense, it is important to capital budgeting for these reasons
It determines the book value of assets which affects net salvage value It determines taxes owed on fixed assets when they are sold It affects a firms annual tax liability
In the context of capital budgeting, what does sensitivity analysis do?
It examines how sensitive a particular NPV calculation is to changes in underlying assumptions
The payback period can lead to foolish decisions if it used too literally because:
It ignores cash flows after the cutoff date
What is an important drawback of traditional NPV analysis?
It ignores managerial options in investment decisions
What is a risk premium?
It is additional compensation for taking risk, over and above the risk-free rate
As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk?
It is likely to decrease It may eventually be almost totally eliminated
What is an uncertain or risky return?
It is the portion of return that depends on information that is currently unknown.
What is the definition of expected return?
It is the return that an investor expects to earn on a risky asset in the future
What are the two main drawbacks of sensitivity analysis?
It may increase the false sense of security among managers if all pessimistic estimates of NPV are positive It doesn't consider interaction among variables
The most appropriate weights to use in the WACC are the ______________ weights
Market Value
When is a new issue usually priced?
On the last day of the registration period
A manager has estimated a positive NPV for a project. What could drive this result? Overly optimistic management The project is a good investment The cash flow estimations are inaccurate Management rationality
Overly optimistic management The project is a good investment The cash flow estimations are inaccurate
Initial public offerings of stock occur in the _________ market.
Primary
The second lesson from studying capital market history states that the _________ the potential reward, the _____________ the risk
Greater;Greater Less;Less
A(n) ___________ project does not rely on the acceptance or rejection of another project.
Independent
The present value of the future cash inflows are divided by the ____________ to calculate the profitability index
Initial Investment
If an international firm borrows money in the foreign country where it has operations it can reduce _________.
Long-run exchange rate exposure
Unanticipated changes in relative economic conditions that affect the value of a foreign operations ae known as:
Long-term exposures to exchange rate risk
If a project has multiple internal rates of return, which of the following methods should be used? IRR NPV MIRR
MIRR & NPV
A positive NPV exists when the market-value of a project exceeds its cost. Which of these two values is the most difficult to establish?
Market Value
Corporations with significant foreign operations are often called __________.
Multinationals
If a firm is evaluating two possible projects, both of which require the use of the same production facilities, and taking one project means that we cannot take the other, these projects would be considered _________________.
Mutually Exclusive
Which of the following present problems when using the IRR method? Mutually exclusive projects A High discount rate Non-conventional cash flows Larger cash flows later in the project
Mutually Exclusive Non-Conventional Cash Flows
The two most important stock markets in the U.S. are the New York Stock Exchange and _________ .
NASDAQ
In capital budgeting, ___________ determines the dollar value of a project to the company.
Net Present Value
Which of the following techniques will provide the most consistently correct result? Internal Rate of Return Payback Average Accounting Return Net Present Value
Net Present Value
The difference between a firm's current assets and its current liabilities is known as the _____________.
Net Working Capital
If a company's growth for years 1 through 3 is 20% but stabilizes at 5% beginning in year 2, its growth pattern would be described as ______
Non-Constant
Systematic risk will ______ when securities are added to a portfolio
Not Change
What is the formula for the present value of a growing perpetuity where C1, is the net cash flow, R is the required return and g is the growth rate? P=C1/(R-g)^2 P=C1/(R-g) R=P-C1/g P=C1-g/R
P=C1/(R-g)
The ___________ method evaluates a project by determining the time needed to recoup the initial investment.
Payback
Preferred stock has preference over common stock in the: Number of Votes given Payment of Dividends Distribution of Corporate Assets Portfolios of Individual Investors
Payment of Dividends Distribution of Corporate Assets
Preferred stock ____________
Pays a constant dividend Pays dividends in perpetuity
If investors are risk averse, it is reasonable to assume that the risk premium for the stock market will be:
Positive
The security market line (SML) shows that the relationship between a security's expected return and its beta is _____________.
Positive
The NPV is __________ if the required return is less than the IRR, and it is ____________ if the required return is greater than the IRR
Positive, Negative
Shares of stock are first brought to the market and sold to investors in the ____________ market.
Primary
What is an example of a sunk cost?
Project consultation fee
The preliminary prospectus, which contains much of the information found in the registration statement and is distributed to potential investors, is called a
Red Herring
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
Opportunity costs are ___________.
Benefits lost due to taking on a particular project
Which of the following statements regarding the relationship between book value, sales price, and taxes are true when a firm sells a fixed asset? Book value represents the purchase price minus the accumulated depreciation Taxes are based on the difference between the purchase prices and sales price of the asset Taxes are based on the difference between the book value and the sales price There will be a tax savings if the book value exceeds the sales price.
Book value represents the purchase price minus the accumulated depreciation Taxes are based on the difference between the book value and the sales price There will be a tax savings if the book value exceeds the sales price
Which of the following are true? Book values are often similar to market values for debt Ideally, we should use market values in the WACC Book values are often similar to market values for equity Ideally, we should use book values in the WACC
Book values are often similar to market values for debt Ideally, we should use market values in the WACC
What is a disadvantage of the Profitability Index?
Cannot rank mutually exclusive projects
If you buy a stock for $10 and later sell it for $16, you will have a __________.
Capital Gain for $6
WACC is used to discount
Cash Flows
Which of the following are considered relevant cash flows? Cash Flows from Beneficial Spillover Effects Cash Flows from Sunk Costs Cash Flows from Erosion Effects Cash Flows from External Costs
Cash Flows from beneficial spillover effects Cash flows from erosion effects Cash flows from external costs
Which of the following are weaknesses of the payback method? Cash flows are received after the payback period are ignored All cash flows are included in the payback period The cutoff date is arbitrary Time value of Money principles are ignored
Cash flows received after the payback period are ignored The cutoff date is arbitrary Time value of money principles are ignored
The Combination MIRR method is used by the Excel MIRR function and uses which of the following? Compounding Cash INFLOWS to the end of the project A single discount rate for both discounting and compounding A financing rate for discounting A reinvestment rate for compounding Compounding ALL cash flows to the end of the project Discounting ALL cash inflows to time 0 Discounting all cash OUTFLOWS to time 0
Compounding cash INFLOWS to the end of the project A financing rate for discounting A reinvestment rate for compounding Discounting all cash OUTFLOWS to time 0
NASDAQ has which of these features? Computer network of securities dealers Single DMM System Multiple Market Maker System Physical Trading Floor
Computer Network of Securities Dealers Multiple Market Maker System
If the Japanese Yen is less expensive in the forward market than it is today, it is said to be selling at a(n) _________________.
Discount
The rate used to discount project cash flows is known as the ___________
Discount Rate; Required Return; Cost of Capital
Which of the following represents the valuation of stock using a zero-growth model? (Dividend)^discount rate = D^R Dividend X Discount Rate = D x R Dividend/Discount Rate = D/R Discount Rate / Dividend = R/D
Dividend/Discount Rate = D/R
The dividend growth model is applicable to companies that pay ______________.
Dividends
Which of the following are cash flows to investors in stocks? Fees Interest Dividends Capital Gains
Dividends Capital Gains
Which of the following is true of dividend growth patterns? May grow at a constant rate Always reduce at a differential rate Never Grow Never has a zero growth rate
Dividends may grow at a constant rate
What can we say about the dividends paid to common and preferred stockholders?
Dividends to common stockholders are not fixed Dividends to preferred stockholders are fixed
Websites that allow investors to trade directly with one another are termed _______.
ECNs
The return an investor in a security receives is ___________ ____________ the cost of the security to the company that issued it.
Equal To
In general, NPV is ________ Positive for discount rates above the IRR Equal to Zero when the discount rate equals the IRR Negative for Discount rates above the IRR Positive for Discount Rates below the IRR
Equal to zero when the discount rate equals the IRR Negative for Discount Rates above the IRR Positive for Discount Rates below the IRR
If the firm is all-equity, the discount rate is equal to the firm's cost of ________________ capital.
Equity
Side effects from investing in a project refer to cash flows from:
Erosion Effects Beneficial Spillover Effects
The possibility that errors in projected cash flows will lead to incorrect decisions is known as: Estimation Risk Guess and Bless Forecasting Risk Managerial Incompetence
Estimation Risk Forecasting Risk
The natural consequences of international operations in a world where relative currency values move up and down is called _______.
Exchange Rate Risk
Three special case patterns of dividend growth discussed in the text include: Constant Zero Discounted Negative Non-Constant Fast
Constant, Zero, and Non-Constant
The appropriate discount rate to use to evaluate a new project is the _________________.
Cost of Capital
The minimum required return on a new project is known as the:
Cost of Capital
If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called _______ dividends.
Cumulative
All else constant, the dividend yield will increase if the stock price ________
Decreases Ex: suppose a company pays a $2.50 dividend and the stock price is $50 - the dividend yield is $2.50/$50 = 5%. Suppose the stock price increases to $60- then the dividend yield decreases to $2.50/$60 = 4.17%. Alternatively, if the stock price drops to $40, the dividend yield increases to $2.50/$40 = 6.25%
Incremental Cash Flows comes about as an ________________ consequence of taking a project under consideration
Direct
Which of the following are reasons why IRR continues to be used in practice? The IRR of a proposal can be calculated without knowing the appropriate discount rate It is easier to communicate information about a proposal with an IRR The IRR allows the correct ranking of projects Businesspeople prefer to talk about rates of return
The IRR of a proposal can be calculated without knowing the appropriate discount rate It is easier to communicate information about a proposal with an IRR Businesspeople prefer to talk about rates of return
In a competitive market, positive NPV projects are:
Uncommon
The basic NPC investment rule is: (select all that apply) accept a project if the NPV is less than zero accept a project if the discount rate is above zero if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference reject a project if its NPV is less than zero accept a project if the NPV is greater than zero
if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference reject a project is its NPV is less than zero accept a project if the NPV is greater than zero
Interest Expenses incurred on debt financing are __________ when computing cash flows from a project
ignored
The capital gain yield can be found by finding the difference between the ending stock price and the initial stock price and dividing it by the:
initial stock price
Finding a firm's overall cost of equity is difficult because:
it cannot be observed directly
Capital budgeting is probably the most important of the three key areas of concern to the financial manager because _________.
it defines the business of the firm
Private equity financing AFTER ground floor financing is termed _________________ financing
mezzanine
A benchmark PE ratio can be determined using: the constant growth model the PEs of similar companies Bank of Canada estimates a company's own historical PEs
the PEs of similar companies a company's own historical PEs
The market for venture capital refers to:
the private financial marketplace for new, high-risk firms
Suppose a project's operating cash flow is $150. The firm anticipates a $30 investment in net working capital and $80 in capital spending. What is the projects' cash flow?
$40 150-(30+80) = 40
What is the NPV of a project with in initial investment of $95, a cash flow in one year of $107, and a discount rate of 6%
$5.94
What is the depreciation tax shield if EBIT is $600, depreciation is $1800, and the tax rate is 30%
$540 $1800 x .3 = $540
If a firm's variable cost per unit estimate used in its base case analysis is $50 per unit and they anticipate the upper and lower bounds to be +/- 10%, what is the "worst case" for variable cost per unit?
$55 1.10 x $50 = $55 Worst case for costs is always higher
Given the Following Data, what is the operating cash flow? EBIT = $80 Depreciation = $20 Taxes = $30
$70 EBIT+Depreciation-Taxes
Including preferred stock in the WACC formula adds which term if P is the market value of preferred stock and Rp is the cost of preferred?
(P/V) x Rp
Arrange the following investment from lowest historical risk premium to highest historical risk premium Large Company Stocks US Treasury Bills Small Company Stocks Long-term Corporate Bonds
1. US Treasury Bills 2. Long-term Corporate Bonds 3. Large-Company Stocks 4. Small-Company Stocks
What is the total return for a stock that currently sells for $100, is expected to pay a dividend in one year of $2, and has a constant growth rate of 8%?
10% R = ($2/$100)+0.08 = 10%
If a new project requires an investment in net working capital when it is launched, then at the end of the project, NWC will be ....
100% Reversed
What is the total return for a stock that currently sells for $50, just paid a $1.75 dividend, and has a constant growth rate of 8%?
11.78% R - ($1.75 x (1.08)/$50)+0.08 = 11.78
What is the expected return of a security with a beta of 1.2 if the risk-free rate is 4% and the expected return on the market is 12%.
13.6 4% + 1.2(12%-4%) = 13.6%
One year ago, Ernie purchased shares of RTF common stock for $100 a share. Today the stock paid a dividend of $1 per share. If the stock currently sells for $114 per share, what is Ernie's total return?
15% ($114-100+1)/$100 = 15%
If stock ABC has a mean return of 10% with a standard deviation of 5%, then the probability of earning a return greater than 15% is about ____________%.
16%
What is the profitability index for a project with an initial cash outflow of $30 and subsequent cash inflows of $80 in year one and $20 in year two if the discount rate is 12%
2.91 =PV(future cash flows)/Initial Cost = ((80/1.12)+ (20/1.12^2))/30
A zero-growth stock pays a dividend of $2 per share and has a discount rate of 10%. What will the stock's price be?
20.00 P0 = $2/0/10 = $20
ABC has a beta of 2.5 and XYZ has a beta of 1.5. The risk-free rate is 4% and the market risk premium is 9%. What is the expected return on a portfolio that is equally invested in ABC and XYZ?
22%
If Joan owns 100 shares of ABC company and the company is electing 4 directors, under cumulative voting, Joan would usually have ______ votes.
400
What is the IRR for a project with an initial investment of $250 and subsequent cash inflows of $100 per year for 3 years?
9.70%
The NYSE differs from the NASDAQ primarily because the NYSE has: brokers a faster network a face-to-face auction market a physical location
A Face-to-Face Auction Market A Physical Location
What is a Eurobond?
A bond issued in multiple countries but denominated in a single currency
The Average Accounting Return is defined as:
Average Net Income/Average Book Value
Which of the following is an example of an opportunity cost? Rental income likely to be lost by using a vacant building for an upcoming project Lowering taxes by increasing depreciation expenses Money spent on advertising to take advantage of opportunities in the market
Rental income likely to be lost by using a vacant building for an upcoming project
If the IRR is greater than the ___________ ___________, we should accept the project.
Required Return
Internal Rate of Return (IRR) must be compared to the ____________ in order to determine the acceptability of a project.
Required Return
Which of the following is a disadvantage of the payback period rule? Adjusts for uncertainty of later cash flows Requires an arbitrary cutoff point Easy to understand Biased toward liquidity
Requires an arbitrary cutoff point
The following are disadvantages of the SML approach
Requires estimation of beta Requires estimation of the market risk premium
If an asset has a reward-to-risk of 6.0%, that means it has a ___________ of 6.0% per unit of ___________.
Risk premium; Systematic Risk
The excess return is the difference between the rate of return on a risky asset and the _____________ rate
Risk-Free
To estimate a firm's equity cost of capital using the CAPM, we need to know the ________________
Risk-Free Rate, Stock's Beta, Market-Risk Premium
What is the equation for finding the cost of preferred stock?
Rp=D/P0
When we estimate the best-case, worst-case, and base-case cash flows and calculate the corresponding NPVs, we are engaging in:
Scenario Analysis or Asking What-If Questions
What is the difference between scenario analysis and sensitivity analysis?
Scenario analysis considers a combination of factors for each scenario while sensitivity analysis focuses on only one variable at a time
The different types of exchange rate risk include which of the following? Short-term exposure Translation Exposure Long-Term Exposure Arbitrage Exposure
Short-Term Exposure Translation Exposure Long-Term Exposure
Which of the following is true relative to capital rationing? Soft rationing cannot be overcome even if a superior project is found Soft rationing is typically internal in that the firm allocates funds to divisions for capital projects Hard rationing implies the firm is unable to raise funds for projects Hard rationing is typically a decision made by top management
Soft rationing is typically internal in that the firm allocates funds to divisions for capital projects Hard rationing implies the firm is unable to raise funds for projects
Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond? Dividends are unknown but certain Different stock issues have different maturity dates Stock has no set maturity Dividends are unknown and uncertain The required rate of return is unobservable
Stock has no set maturity Dividends are unknown and uncertain The required rate of return is unobservable
Which of the following is commonly used to measure inflation?
The Consumer Price Index (CPI)
What are methods of calculating the MIRR of a project?
The Discounting Approach The Combination Approach The Reinvestment Approach
Specifying variables in the Excel NPV function differs from the manner in which they are entered in a financial calculator in which of the following ways? The Excel NPV function is actually a PV function. The range of cash flows specified in Excel begins with cashflow #1, not cashflow 0. The discount rate is Excel is entered as a decimal, or as a percentage with a percent sign With the Excel NPV function, Cashflow #0 must be handled outside the NPV function There are no significant differences between variable entry in Excel and in a financial calculator.
The Excel NPV function is actually a PV function The range of cash flows specified in Excel begind with cashflow #1, not cashflow 0 The discount rate in Excel is entered as a decimal, or as a percentage with a percent sign. With the Excel NPV function, Cashflow #0 must be handled outside the NPV function
Which of the following ratios might be used to estimate the value of a stock? The Book to Value ratio The Price/Earnings ratio The Price/Sales ratio
The Price/Earnings ratio or The Price/Sales Ratio
Which act sets forth the federal regulation for all new interstate securities issues?
The Securities Act of 1933
What approach does the following formula describe? OCF=(Sales-Costs)x(1-T)+DepreciationxT
The Tax Shield Approach
Which of the following are weaknesses of he payback method?
The cutoff date is arbitrary Time value of money principles are ignored Cash flows received after the payback period are ignored.
Currently, the spot exchange rate for the Swiss franc is SF 1 = $1.10 or SF 1 = $1.12 90 days forward. What is true?
The dollar is selling at a discount to the Swiss franc The Swiss franc is at a forward premium
A security has a beta of 1, a market risk premium of 8%, and a risk-free rate of 3%. What will happen to the expected return if the beta doubles?
The expected return will increase to 19% from 11% Old Expected Return is 3%+1x8%=11% New Expected Return is 3%+2x8%=19%
What will happen over time if a firm uses its overall WACC to evaluate all projects, regardless of each project's risk level
The firm itself becomes riskier It accepts projects it should reject It rejects projects it should accept
Which of the following are examples of information that may impact the risky return of a stock?
The outcome of an application currently pending with the Food and Drug Administration The Fed's decision on interest rates at their meeting next week
What are the advantages of the payback period method for management? The payback period method is ideal for minor projects It allows lower level managers to make small decisions effectively The payback period adjusts for the discount rate The payback period method is easy to use
The payback period method is ideal for minor projects It allows lower level managers to make small decisions effectively The payback period method is easy to use
True or False: Net Working Capital will be recovered at the end of a project.
True
True or False: Some projects, such as mines, have cash outflows followed by cash inflows and cash outflows again, giving the project multiple internal rates of return
True
True or False: a project with non-conventional cash flows will produce two or more IRRs
True
True/False: To prepare proforma financial statements, estimates of quantities such as unit sales, selling price per unit, variable cost per unit, and total fixed costs are required
True
_____ risk is reduced as more securities are added to the portfolio
Unsystematic; Company-Specific; Diversifiable
A US corporation can reduce political risk in a foreign country by which of the following ways?
Use local financing
The cost of capital depends primarily on the ____________ of funds, not the ___________.
Use; Source
The WACC is the overall rate of return the firm must earn on its existing assets to maintain the ________________ of its stock.
Value
The square of the standard deviation is equal to the _________.
Variance
Entrepreneurs seeking start-up capital must usually rely on ________________.
Venture Capital
A firm's capital structure consists of 40% debt and 60% equity. The aftertax yield on debt is 2.5 percent and the cost of equity is 15%. The project is about as risky as the overall firm. What discount rate should be used to estimate the project's net present value?
WACC= .4 x 2.5% + .6 x 15% = 10%
The basic approach to evaluating cash flow and NPV estimates involves asking:
What-If Questions
For a firm with outstanding debt, the cost of debt will be the ____________ on that debt.
Yield-to-Maturity
Which of the following is true about a firm's cost of debt?
Yields can be calculated from observable data It is easier to estimate than the cost of equity
The goals of risk analysis in capital budgeting include: assessing the degree of financing risk identifying critical components zeroing in on the correct NPV determining the correct discount rate
assessing the degree of financing risk identifying critical components
