Finance final quizzes (13,14,16,22,26)

the expected return on a portfolio

-Can never exceed the expected return of the best performing security in the portfolio. -Must be equal or greater than the expected return of the worst performing security in the portfolio. -Is independent of the unsystematic risks of the individual securities held in the portfolio.

the expected return on a portfolio considers which of the following factors?

-percentage of the portfolio invested in each individual security -projected states of the economy -the performance of each security given various economic states -probability of occurrence for each state of the economy

Chelsea Fashions is expected to pay an annual dividend of $1.26 a share next year. The market price of the stock is $24.09 and the growth rate is 2.6 percent. What is the firm's cost of equity?

7.83%

Which one of the following statements is correct?

A firm may benefit from an acquisition if it can lower its capital requirements.

Assume you are an overconfident manager. You are most apt to do which one of the following more so than you would if you were not overconfident?

Accept risky projects that turn out to be less profitable than you expected

financial risk is:

Dependent upon a firm's capital structure

Which one of the following statements is correct?

If the assets of a firm are written up as part of the acquisition process, the increase in value is considered to be a taxable gain.

The concept of homemade leverage is most associated with:

M&M Proposition 1 with no tax

which one of the following states that the cost of equity capital is directly and proportionally related to capital structure

M&M proposition II

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 risk projects over lower risk projects.

Which one of the following statements correctly applies to a legally defined merger?

The acquired firm is completely absorbed and ceases to exist as a separate legal entity.

which one of these statements is correct?

The optimal capital structure maximizes shareholder value.

KN Markets has decided to acquire a controlling interest in BJ's by purchasing shares of BJ stock in the public markets. Which one of these statements correctly applies to this acquisition?

The purchase of publicly traded shares may be more expensive than an outright merger.

M&M Proposition II, without taxes, is the proposition that

a company cost of equity is a linear function with a slope equal to (ra-rd)

the expected return on a stock computed using economic probabilities is

a mathematical expectation based on a weighted average and not an actual anticipated outcome

Assume the shareholders of a target firm benefit from being acquired in a stock transaction. Given this, these shareholders are most apt to realize the largest benefit if the:

acquiring firm has the better management team and replaces the target firm's managers

in a merger the:

acquiring firm retains its pre-merger legal status

You recently overheard your boss telling someone that if he'd actually crunched some numbers and done some analysis instead of just going with his instincts, he never would have opened the new store in Centre City. Which one of the following caused your boss to make a bad decision?

affect heuristic

Bill feels that he possesses a good dose of "street smarts." Thus, he makes his business decisions based on how a project feels to him rather than taking the time to financially analyze a project. This type of behavior is referred to as:

affect heuristics

When evaluating an acquisition you should:

apply the rate of return that is relevant to the incremental cash flows

In a tax-free acquisition, the shareholders of the target firm:

are viewed as having exchanged shares on a dollar-for-dollar basis.

Which one of the following statements is correct concerning the relationship between a levered and an unlettered capital structure?

at the break-even point, there is no advantage to debt

You are a hard-charging manager who doesn't really like to sit at a desk for too long. You prefer to gather information quickly, make a decision, and move on to the next item on your agenda. Which one of the following applies to you?

availability bias

Nadine made a business decision that turned out badly. In reflecting upon her decision, she decided it was a reasoning error that led to the faulty decision. Which one of the following areas of study best applies to this situation?

behavioral finance

a companys current cost of capital is based on

both the returns currently required by its debt-holders and stockholders

unsytematic risk

can be effectively eliminated by portfolio diversification

standard deviation of a portfolio

can be less than the standard deviation of the least risky security in the portfolio.

the standard deviation of a portfolio

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

The tendency for a decision maker to search for reassurance that a recent decision he or she made was a good decision represents which one of the following characteristics?

confirmation bias

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

Based on M&M Proposition 1 with taxes, the weighted average cost of capital

decreases as the debt-equity ratio increases

the cost of capital for a new project

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

the explicit costs, such as legal and administrative expenses, associated with corporate default are classified as __ costs

direct bankruptcy

a company's overall cost of equity is

directly related to the risk level of the firm

The tendency to sell winners and hold losers is known as the:

disposition effect

which one of the following is a marketed claim against the cash flows of a company

dividend payment to shareholders

the static theory of capital structure advocates that the optimal capital structure for a company

equates marginal tax savings form additional debt to the marginal increased bankruptcy costs of that debt

You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent?

expected return

You are the manager of a retail store. You believe the economy is in a recession and that sales for the month will be unusually slow. Since you have complete discretion over the pricing at your location, you decide to have a storewide sale and offer ten percent off all merchandise for a three-day period. You don't expect your superiors to criticize this decision as you believe they, along with the majority of the other store managers, feel the same way about the economy as you do. Which one of the following applies to you?

false consensus

Which one of the following is the equity risk related to capital structure policy

financial risk

Consumer Marketing just conducted a two-phase survey. In the first phase, the survey questions were worded such that the answers tended to sound positive. In the second phase, the survey questions were reworded so the answers tended to convey a negative feeling. Both sets of survey questions should have resulted in similar results as the information solicited was essentially identical. However, the survey results varied significantly. This survey best illustrates which one of the following?

frame dependence

Which one of the following refers to the fact that an individual may reply differently if a question is asked in an equivalent but different manner?

frame dependence

Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of economy when both the securities and the economic states have unequal weights

given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.

A group of individual investors is in the process of acquiring all of the publicly traded shares of OM Outfitters. Once the shares are acquired, they will no longer be publicly traded. Which of the following terms applies to this process?

going-private transaction

assume you are reviewing a graph that plots EPS against EBIT. the steeper the slope of the plotted line the:

greater the sensitivity of EPS to Changes in EBIT

which one of the following makes the capital structure of a company irrelevant

homemade leverage

if a company uses it 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 flotation costs into the analysis of a project will:

increase the initial cash outflow of the project

When a firm has flotation costs equal to 8.3 percent of the funding need, project analysts should:

increase the initial project cost by dividing that cost by (1-0.083)

All of the following are examples of cost reductions that can result from an acquisition except:

increasing the firms market share

A proposed acquisition is most apt to create synergy by:

increasing the utilization of the acquiring firms assets

The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs.

indirect bankruptcy

Westover Mills reduced its taxes last year by $210 by increasing its interest expense by $1,000. Which one of the following terms is used to describe this tax savings?

interest tax shield

which one of the following is an example of systematic risk?

investors panic causing security prices around the globe to fall precipitously.

a company's pretax cost of debt

is based on the current yield to maturity of the company's outstanding bonds

assume Russos has a debt-equity ratio of 0.4 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

the aftertax cost of debt

is highly dependent upon the firm's tax rate

A company's weighted average cost of capital

is the return investors requires on the total assets of the firm

Firms A and B formally agree to each put up $25 million to create firm C. Firm C will perform environmental testing on the products produced by both Firm A and Firm B. Which one of the following terms describes Firm C?

joint venture

the expected rate of return on a stock portfolio is a weighted average where the weights are based on the:

market value of the investment in each stock

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

Assigning discount rates to individual projects based on the risk level of each project:

may cause the company overall weighted average cost of capital to either increase or decrease over time

Last month, Keyser Design acquired all of the assets and liabilities of Tenor Machine Works. The combined firm is known as Keyser Design. Tenor Machine Works no longer exists as a separate entity. This acquisition is best described as a:

merger

the capital structure that maximizes the value of a company also

minimizes the cost of capital

Phyllis is planning for her retirement in 15 years. She currently lives comfortably on $38,000 a year given that she is debt-free. Based on her family history she only expects to live ten years after she retires. Thus, she computes her retirement need as $38,000 a year for ten years. Which one of the following behaviors applies to Phyllis?

money illusion

For financial statement purposes, goodwill created by an acquisition:

must be reviewed each year and amortized to the extent that it has lost value.

Over the past six months, you have watched as your parent's retirement savings have declined in value by 25 percent due to a severe financial market downturn. As a result, you have decided that you will never invest in stocks for your own retirement but will instead keep all of your money in an insured bank account. Which behavioral characteristic have you acquired as a result of the market downturn?

myopic loss aversion

which one of the following is an example of unsystematic risk

national decrease in consumer spending on entertainment

Which of the following statements is true?

over time, the average unexpected return will be zero

Alice believes she can accurately forecast the future and makes business decisions based on this belief. Which characteristics does this belief represent?

overconfidence

Jeremy believes he excels at picking stock winners and thus trades frequently. Which characteristic does he most likely represent?

overconfidence

Suzie owns five different bonds and twelve different stocks. which one of the following terms most applies to her investments?

portfolio

Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following?

portfolio weight

the road stop is a national hotel chain with a cost of capital of 12.4%. this chain is considering opening a high-end resort that is expected to have a cost of capital that is at least 13%. the estimated net present value of the resort project is $500 when discounted at 12.4%. the best representation of this situation is that the resort project should:

probably be put on hold until cost of capital can be lowered

When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of business as the project, the manager is utilizing the _____ approach.

pure play

the weighted average cost of capital for a firm with debt is the

rate of return a company must ear on its existing assets to maintain the current value of its stock

The cost of preferred stock is computed the same as the:

rate of return on a perpetuity

All of the following create limits to arbitrage except:

rational traders

The last six times you purchased a stock you earned high returns within one year. Thus, you believe you will have the same result with your next stock purchase. This is an example of which one of the following?

recency bias

Which term refers to the reliance on stereotypes or limited samples to form opinions about an entire class?

representativeness heuristics

You have a tendency to take credit for the decisions you make that have good outcomes even when those outcomes are out of your control. On the other hand, you blame bad luck for your decisions that turn out badly. Which of these terms applies to you?

self-attribution bias

Which one of the following is an investment risk that investors face in addition to firm-based risk and market-based risk?

sentiment-based risk

the expected risk premium on a stock is equal to the expected return on the stock minus the

standard deviation

Johnson Co. and Peabody Enterprises are both manufacturers of plastic products. These two firms have decided to work together to find a more efficient way to recycle rejected products. Thus, the two companies are each going to assign two engineers to this project and have agreed to share any and all costs. This project is an example of a:

strategic alliance

which one of the following is a risk that applies to most securities

systematic

the present value of the interest tax shield is expressed as

tcd

The Daily News published an ad today wherein it announced its desire to purchase shares of a competing newspaper, the Oil Town Gossip. Which one of the following terms is best described by this announcement?

tender offer

Up until three years ago, A.C. Dime opened an average of ten new retail stores a year. One of every ten new stores had to be closed within two years due to poor sales. This 90 percent success ratio was fairly steady for over 30 years. Starting three years ago, the firm has opened 40 new stores and every one had significant profits within six months. Management believes their recent success is not just a random event and that all future stores will be profitable. Thus, the managers have decided to open a minimum of 15 new stores each year. The managers are suffering from:

the clustering illusion

Which one of the following does not represent a potential tax gain from an acquisition?

the increase in taxable income

the primary advantage of using the dividend growth model to estimate a company's cost of equity is

the simplicity of the model

M&M Proposition I with taxes is based on the concept that:

the value of a taxable company increases as the level of debt increases

which one of the following events would be included in the expected return on Sussex Stock

this morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated

which one of the following statements related to unexpected returns is correct?

unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term

if a company has the optimal amount of debt, then the

value of the levered company will exceed the value of the unlettered company

The value of a target firm to the acquiring firm is equal to the:

value of the target firm as a separate entity plus the incremental value derived from the acquisition.

An automaker recently acquired a windshield manufacturer. Which type of an acquisition was this?

vertical

If Food Markets were to acquire Meat Processors, the acquisition would be classified as a _____ acquisition.

vertical

the average of a companys cost of equity, cost of preferred, and aftertax cost of debt that is weighted based on the companys capital structure is called the

weighted average cost of capital

The value of a firm is maximized when the:

weighted average cost of capital is minimized

the expected return on a stock given various states of the economy is equal to the

weighted average of the returns for each economic state