Finance Exam 3 test 3

The net present value is equal to zero

An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true? -The internal rate of return exceeds the required rate of return. -The investment never pays back. -The net present value is equal to zero. -The average accounting return is 1.0. -The net present value is greater than 1.0.

Reject both Projects A and B

Baker's Supply imposes a payback cutoff of 3.5 years for its international investment projects. If the company has the following two projects available, should it accept either of them? -Accept both Projects A and B -Accept Project A but not Project B -Accept Project B but not Project A -Both Project A and B are acceptable but you can only select one project -Reject both Projects A and B

Internal rate of return and net present value

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 -Payback and internal rate of return -Internal rate of return and net present value -Net present value and profitability index -Profitability index and internal rate of return

$4.28

Blackwell Ink is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $0.90 a share but all future dividends will be decreased by 5 percent annually. What is a share of this stock worth today at a required return of 15 percent? -$4.07 -$4.28 -$4.49 -$4.72 -$4.95

future cash flows

Discounted cash flow valuation is the process of discounting an investment's: -assets. -future profits. -liabilities. -costs. -future cash flows.

Risk premium

Investors require a 4 percent return on risk-free investments. On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called? -Inflation premium -Required return -Real return -Average return -Risk premium

$11.26

Klaus Toys just paid its annual dividend of $1.40. The required return is 16 percent and the dividend growth rate is 2 percent. What is the expected value of this stock five years from now? -$11.04 -$11.26 -$11.67 -$12.41 -$12.58

the risk premium on stocks exceeded the risk premium on bonds

Over the period of 1926-2008: -the risk premium on large-company stocks was greater than the risk premium on small- company stocks. -U.S. Treasury bills had a risk premium that was just slightly over 2 percent. -the risk premium on long-term government bonds was zero percent. -the risk premium on stocks exceeded the risk premium on bonds. -U. S. Treasury bills had a negative risk premium.

Unsystematic risk

Portfolio diversification eliminates which one of the following? -Total investment risk -Portfolio risk premium -Market risk -Unsystematic risk -Reward for bearing risk

Portfolio weight

Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent? -Portfolio variance -Portfolio standard deviation -Portfolio weight -Portfolio expected return -Portfolio beta

9.85 percent

The common stock of Tasty Treats is valued at $10.80 a share. The company increases its dividend by 8 percent annually and expects its next dividend to be $0.20 per share. What is the total rate of return on this stock? -8.64 percent -9.12 percent -9.40 percent -9.85 percent -10.64 percent

next year's expected cash dividend divided by the current market price per share.

The dividend yield is defined as: -the current annual cash dividend divided by the current market price per share. -the current annual cash dividend divided by the current book value per share. -next year's expected cash dividend divided by the current market price per share. -next year's expected cash dividend divided by the current book value per share. -next year's expected cash dividend divided by next year's expected market price per share.

The investment is mutually exclusive with another investment under consideration

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following? -One of the time periods within the investment period has a cash flow equal to zero -The initial cash flow is negative -The investment has cash inflows that occur after the required payback period -The investment is mutually exclusive with another investment under consideration -The cash flows are conventional

decreases as the required rate of return increases

The net present value: -decreases as the required rate of return increases. -is equal to the initial investment when the internal rate of return is equal to the required return. -method of analysis cannot be applied to mutually exclusive projects. -is directly related to the discount rate. -is unaffected by the timing of an investment's cash flows.

D5/(R-g)

The price of a stock at year 4 can be expressed as: -D0 / (R + G4). -D0 × (1 + R)5. -D1 × (1 + R)5. -D4/(R-g). -D5/(R-g).

U.S. Treasury bill

The rate of return on which one of the following is used as the risk-free rate? -Long-term government bonds -Long-term corporate bonds -Inflation, as measured by the Consumer Price Index -U.S. Treasury bill -Large-company stocks

own a trading license

To be a member of the NYSE, you must: -be a primary dealer. -buy a seat. -own a trading license. -be registered as a floor trader. -be a specialist.

$2,500; -$8,665.07

What is the NPV of the following set of cash flows at a discount rate of zero percent? What if the discount rate is 15 percent? -$41,700; -$8,665.07 -$41,700; $1,208.19 -$0; $1,208.19 -$2,500; $1,208.19 -$2,500; -$8,665.07

Secondary

What is the market called that allows shareholders to resell their shares to other investors? -Primary -Proxy -Secondary -Inside -Initial

Risk that affects a large number of assets

Which one of the following describes systemic risk? -Risk that affects a large number of assets -An individual security's total risk -Diversifiable risk -Asset specific risk -Risk unique to a firm's management

Project B; because it has the higher net present value

You are considering the following two mutually exclusive projects. The required return on each project is 14 percent. Which project should you accept and what is the best reason for that decision? -Project A; because it pays back faster -Project A; because it has the higher profitability index -Project B; because it has the higher profitability index -Project A; because it has the higher net present value -Project B; because it has the higher net present value

5.80 percent

You purchased 1,300 shares of LKL stock 5 years ago and have earned annual returns of 7.1 percent, 11.2 percent, 3.6 percent, -4.7 percent and 11.8 percent. What is your arithmetic average return? -4.47 percent -5.80 percent -6.23 percent -6.47 percent -6.98 percent

$8,166.19

A project has expected cash inflows, starting with year 1, of $2,200, $2,900, $3,500 and finally in year four, $4,000. The profitability index is 1.14 and the discount rate is 12 percent. What is the initial cost of the project? -$7,899.16 -$8,098.24 -$8,166.19 -$9,211.06 -$9,250.00

21.57 percent

A stock has a beta of 1.68, the expected return on the market is 14.72, and the risk-free rate is 4.65. What must the expected return on this stock be? -15.67 percent -16.75 percent -17.10 percent -18.46 percent -21.57 percent

6.99 percent

A stock has yielded returns of 6 percent, 11 percent, 14 percent, and -2 percent over the past 4 years, respectively. What is the standard deviation of these returns? -5.52 percent -5.86 percent -6.05 percent -6.47 percent -6.99 percent

Stock with a constant growth dividend

Computing the present value of a growing perpetuity is most similar to computing the current value of which one of the following? -Non-dividend-paying stock -Stock with a constant dividend -Stock with irregular dividends -Stock with a constant growth dividend -Stock with growing dividends for a limited period of time

B; A; B; A; A

Consider the following two mutually exclusive projects: Whichever project you choose, if any, you require a 14 percent return on your investment. If you apply the payback criterion, you will choose investment _____, if you apply the NPV criterion, you will choose investment _____; if you apply the IRR criterion, you will choose investment ____; if you choose the profitability index criterion, you will choose investment ____. Based on your first four answers, which project will you finally choose? -A; B; A; A; B -A; A; B; B; A -A; A; B; B; B -B; A; B; A; A -B; A; B; B; A

Proxy

Kate could not attend the last shareholders meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which one of the following terms is used to describe the method by which Kate's shares were voted? -Straight -Cumulative -Consent-form -Proxy -In absentia

Net present value

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? -Internal rate of return -Payback -Average accounting rate of return -Net present value -Profitability index

Expected return

Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate? -Expected return -Real return -Market rate -Systematic return -Risk premium

The price of New Labs stock increases rapidly to a higher price and then remains at that price

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 price of New Labs stock remains unchanged. -The price of New Labs stock increases rapidly and then settles back to its pre-announcement level. -The price of New Labs stock increases rapidly to a higher price and then remains at that price. -All stocks quickly increase in value and then all but New Labs stock fall back to their original values. -The value of all stocks suddenly increase and then level off at their higher values.

Primary

Newly issued securities are sold to investors in which one of the following markets? -Proxy -Stated value -Inside -Secondary -Primary

Small-company stocks

Over the period of 1926-2008, which one of the following investment classes had the highest volatility of returns? -Large-company stocks -U.S. Treasury bills -Small-company stocks -Long-term corporate bonds -Long-term government bonds

measured by beta

Systematic risk is: -totally eliminated when a portfolio is fully diversified. -defined as the total risk associated with surprise events. -risk that affects a limited number of securities. -measured by beta. -measured by standard deviation.

$2.53

The Glass Ceiling paid an annual dividend of $2.20 per share last year. Management just announced that future dividends will increase by 2.8 percent annually. What is the amount of the expected dividend in year 5? -$2.39 -$2.41 -$2.46 -$2.53 -$2.58

$8.33

The Pancake House pays a constant annual dividend of $1.25 per share. How much are you willing to pay for one share if you require a 15 percent rate of return? -$7.86 -$8.33 -$10.87 -$11.04 -$11.38

Yes; because the IRR is 12.74 percent

The Tool Box needs to purchase a new machine costing $1.46 million. Management is estimating the machine will generate cash inflows of $223,000 the first year and $600,000 for the following three years. If management requires a minimum 12 percent rate of return, should the firm purchase this particular machine? Why or why not? -Yes; because the IRR is 10.75 percent -Yes; because the IRR is 12.74 percent -No; because the IRR is 10.75 percent -No; because the IRR is 12.74 percent -The answer cannot be determined as there are multiple IRRs.

greater, greater

The _____________ the standard deviation, the ______________ the risk

Dividend growth rate

The capital gains yield equals which one of the following? -Total yield -Current discount rate -Market rate of return -Dividend yield -Dividend growth rate

recoup its initial cost

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to: -produce a positive annual cash flow. -produce a positive cash flow from assets. -offset its fixed expenses. -offset its total expenses. -recoup its initial cost.

Dividend yield + capital gains yield

The required return on a stock is equal to which one of the following if the dividend on the stock decreases by 1 percent per year? -(P0/D1)-g -(D1/P0)/g -Dividend yield + capital gains yield -Dividend yield - capital gains yield -Dividend yield × capital gains yield

volatility

The standard deviation measures the _____ of a security's returns over time. -average value -frequency -volatility -mean -arithmetic average

Market risk

The systematic risk principle states that the expected return on a risky asset depends only on which one of the following? -Unique risk -Diversifiable risk -Asset-specific risk -Market risk -Unsystematic risk

Group of assets held by an investor

Which one of the following best describes a portfolio? -Risky security -Security equally as risky as the overall market -New issue of stock -Group of assets held by an investor -Investment in a risk-free security

Profitability index

Which one of the following can be defined as a benefit-cost ratio? -Net present value -Internal rate of return -Profitability index -Accounting rate of return -Modified internal rate of return

Small-company stocks

Which one of the following categories has the widest frequency distribution of returns for the period 1926-2008? -Small-company stocks -U.S. Treasury bills -Long-term government bonds -Inflation -Large-company stock

Discount rate which results in a zero net present value for the project

Which one of the following defines the internal rate of return for a project? -Discount rate that creates a zero cash flow from assets -Discount rate which results in a zero net present value for the project -Discount rate which results in a net present value equal to the project's initial cost -Rate of return required by the project's investors -The project's current market rate of return

Increase in consumption created by a reduction in personal tax rates

Which one of the following is an example of systematic risk? -Major layoff by a regional manufacturer of power boats -Increase in consumption created by a reduction in personal tax rates -Surprise firing of a firm's chief financial officer -Closure of a major retail chain of stores -Product recall by one manufacturer

Internal rate of return that exceeds the required return

Which one of the following is an indicator that an investment is acceptable? -Modified internal rate of return equal to zero -Profitability index of zero -Internal rate of return that exceeds the required return -Payback period that exceeds the required period -Negative average accounting return

Normal distribution

Which one of the following is defined as a bell-shaped frequency distribution that is defined by its average and its standard deviation? -Arithmetic average return -Variance -Standard deviation -Probability curve -Normal distribution

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? -Payback -Profitability index -Accounting rate of return -Internal rate of return -Net present value

Standard deviation

Which one of the following is the positive square root of the variance? -Standard deviation -Mean -Risk-free rate -Average return -Real return

The firm should increase in value each time the firm accepts a new project

Which one of the following is true if the managers of a firm only accept projects that have a profitability index greater than 1.5? -The firm should increase in value each time the firm accepts a new project. -The firm is most likely steadily losing value. -The price of the firm's stock should remain constant. -The net present value of each new project is zero. -The internal rate of return on each new project is zero.

Beta coefficient

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset? -Squared deviation -Beta coefficient -Standard deviation -Mean -Variance

A portfolio comprised solely of U. S. Treasury bills

Which one of the following portfolios will 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 with a zero variance of returns. -No portfolio can have a beta of zero.

The payback period ignores the time value of money

Which one of the following statements is correct? -A longer payback period is preferred over a shorter payback period. -The payback rule states that you should accept a project if the payback period is less than one year. -The payback period ignores the time value of money. -The payback rule is biased in favor of long-term projects. -The payback period considers the timing and amount of all of a project's cash flows.

f the internal rate of return equals the required return, the net present value will equal zero

Which one of the following statements is correct? -The net present value is a measure of profits expressed in today's dollars. -The net present value is positive when the required return exceeds the internal rate of return. -If the initial cost of a project is increased, the net present value of that project will also increase. -If the internal rate of return equals the required return, the net present value will equal zero. -Net present value is equal to an investment's cash inflows discounted to today's dollars.

Common stock

Which one of the following types of securities has no priority in a bankruptcy proceeding? -Convertible bond -Senior debt -Common stock -Preferred stock -Straight bond

17.89 percent

Worth While Entertainment has common stock with a beta of 1.46. The market risk premium is 9.1 percent and the risk-free rate is 4.6 percent. What is the expected return on this stock? -16.31 percent -16.67 percent -17.40 percent -17.89 percent -18.23 percent