Finance 325 Homework #6
the dividend growth model
is only reliable as the estimated rate of growth
which one of these will increase a company's aftertax cost of debt
a decrease in the company's tax rate
which one of the following is the best example of a diversifiable risk
a firm's sale decrease
which of the following are examples of diversifiable risk
an earthquake damages an entire town, and all toymakers are required to improve their safety standards
Preston Industries has two separate divisions. Each division is in a separate line of business. Division A is the largest division and represents 65 percent of the company's overall sales. Division A is also the riskier of the two divisions. When management is deciding which of the various divisional projects should be accepted, the managers should:
assign appropriate, but differing, discount rates to each project and then select the project with the highest net present values
systematic risk is measured by
beta
a company's current cost of capital is based on
both the returns currently required by its debt holders and stockholders
unsystematic risk
can be effectively eliminated by portfolio diversification
the cost of capital for a new project
depends upon how the funds raised for that project are going to be spent
a company's overall cost of equity is
directly related to the risk level of the firm
If a company uses its WACC as the discount rate for all of the projects it undertakes then the company will tend to:
increase the average risk level of the company over time
incorporating floatation costs into the analysis of a project will
increase the initial cash outflow for the porject
which one of the following is an example of systematic risk
investors panic causing security prices around the globe to fall precipitously
which one of the following is least apt to reduce the unsystematic risk of a portfolio
reducing the number of stocks held in a portfolio
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
risk premium
the US 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
strong
Black River Tours has a capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. The dividend payout ratio is 30 percent, the company's beta is 1.21, and the tax rate is 21 percent. Given this, which one of the following statements is correct?
the cost of equity is unaffected by change in the company's tax rate
the discount rate assigned to an individual project should be based on
the risk associated with the use do the funds required by the project
which one of the following risk is irrelevant to a well-diversified investor
unsystematic risk
which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst
weak
flotation costs for a levered firm should be
weighted and included in the initial cash flow
the systematic risk of the market is measured by a
beta fo 1
textile mills borrows money at a rate 8.7 percent. this interest rate is referred to as the
cost of debt
a group of individuals got together and purchased all of the outstanding shares of common stock of DL smith inc. what is the return that these individuals require on this investment called
cost of equity
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
efficient capital marketing
assume russo's has a debt-equity ratio of .4 and uses the capital asset pricing model to determine its cost of equity. As a result, the company's cost of equity
is dependent upon a reliable estimate of the market risk premium
a company's weighted average cost of capital
is the return investors required on the total assets of the firm
individual investors who continually monitor the financial markets seeking mispriced securities
make the markets increasingly more efficient
according to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the
market risk premium and the amount of systematic risk inherent in the security
if a stock portfolio is well diversified, then the portfolio variance
may be less than the variance of the least risky stock in the portfolio
which one of the following is an example of unsystematic risk
national decrease in consumer spending on entertainment
which one of the following statements is correct
over time, the average unexpected return will be zero
Jenner's is a multi-division firm that uses its overall WACC as the discount rate for all proposed projects. Each division is in a separate line of business and each presents risks unique to those lines. Given this, a division within the firm will tend to:
prefer higher risks projects over lower risk projects
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
semi strong
the principle of diversification tells us that
spreading an investment across many diverse assets will eliminate some of the total risk
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
the information was expected
the intercept point of the security market line is the rate of return which corresponds to
the risk free rate
the primary advantage of using the dividend growth model to estimate a company's cost of equity is
the simplicity of the model
which one of the following statements related to risk is correct
the systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio
a news flash just appeared that caused about a dozen stocks suddenly increase in value by 12 percent. what type of risk does this news flash best represent
unsystematic