Finance 3320 Unit 2

DuPont Identity says that Return on Equity (ROE) =

(NI/E)*(Sales/Sales)*(Assets/Assets)

DOL at accounting BE point

1+(FC/Dep)

How to solve for financial BE

Find PMT that will equal the target OCF, set PV to the CapEx, N to the length of the project, and I/Y to the required return. Set the target OCF equal to OCF equation, find Q

An analyst wishes to estimate the amount of additional reward she will receive for investing in a risky asset rather than a risk-free asset. The minimum values she will need to know are: I. both assets' standard deviations II. the risky asset's beta III. the risk-free rate of return IV. the market risk premium

II and IV only

Which of the following values will be equal to zero when a project is operating at the accounting break-even level of output?

IRR and net income

Which of the following statements is true of a portfolio's standard deviation?

It can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

Which of the following statements regarding the cost of preferred stock is accurate?

It equals the dividend yield.

The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following?

Opportunity cost

All else constant, if a firm decreases its operating costs, which one of the following will also decrease?

Price-earnings ratio

Based on the capital asset pricing model (CAPM), which of the following should earn the highest risk premium?

Stock with a beta of 1.24

When evaluating any capital project proposal, the cost of capital:

depends upon how the funds raised for that project are going to be spent.

You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value. To determine that sales level you should compute the:

financial break-even point.

In ratios where y/x, it should be interpreted as

for every dollar (borrowed, owed, spent) in x, y/x dollars is increased in y

DOL means

if Q goes up by x%, OCF goes up by (DOL*x)%

Assume a firm utilizes its WACC as the discount rate for every capital project it implements. Accordingly, the firm will tend to:

increase the average risk level of the company over time.

Mortgage lenders probably have the most interest in the ______ ratios.

long-term debt and times interest earned

The slope of the security market line is the:

market risk premium.

Thornton Homes has multiple divisions which operate as separate lines of business and face risks unique to those lines. The firm uses its overall WACC as the discount rate to evaluate all proposed projects. Accordingly, each division within the firm will tend to:

prefer higher risk projects over lower risk projects.

The excess return is computed as the:

return on a risky security minus the risk-free rate.

The security market line intercepts the vertical axis at the:

risk-free rate.

For any given capital project proposal, the discount rate should be based on the:

risks associated with the use of the funds required by the project.

When determining a firm's weighted average cost of capital, the item with the least amount of impact is the:

standard deviation of the company's common stock.