Finance quizzes
If depreciation is $600,000 and the marginal tax rate is 21 percent, then the tax shield due to depreciation is Question options: $126,000 $474,000 $390,000 The answer cannot be determined from the information given.
$126,000
Suppose you just won the Tennessee State Lottery. The lottery will make a total of 20 annual payments of $300,000 with the initial payment today. The lottery claims that you just won $6,000,000. What do you believe the value of your winnings is today? Assume interest rates are 10% per year. $2,554,069 Cannot determine with the information provided $2,854,069 $2,809,476 $6,000,000
$2,809,476
Next year, a company is expected to pay a dividend of $2.50 per share. Unfortunately, the future doesn't look very rosy, and the dividend is expected to decline by 2% per year forever. If the market interest rate will remain constant at 8% per year, what is the value of the stock today? Question options: $41.67 $40.83 $25.00 $24.50
$25
Suppose the after-tax cash flow associated with a project you are evaluating is $4,000,000 per year. The project lasts 10 years and the equipment is fully depreciated by the end of year 10. If the net income in each of these years is $1,500,000, what is the cost of the original equipment? Question options: $15,000,000 $55,000,000 $25,000,000 $40,000,000 unable to determine without the opportunity cost of capital
$25,000,000
Consider a 7 year project. If the level of working capital at the end of year 2 is $50,000 and the change in working capital between years 1 and 2 is -$20,000, the level of working capital at the end of year 1 is Question options: $70,000 -$30,000 $30,000 $20,000 unable to determine with the information given
$30,000
A perpetuity makes its first payment of C in four years. The cash flows grow at 5% per year, and the perpetuity sells for $112.70 today. In interest rates are 10% forever, what is C? $8.25 $7.50 $11.27 None of the above $5.64
$7.50
A bond matures in 5 years, carries a 7% coupon rate, coupon payments are paid semi-annually, and the face value of the bond is $1,000. If the BEY is 9%, the market price of the bond will be Question options: $920.87 $1,000 $1,083.17 $922.21
$920.87
Stock X has a standard deviation of return of 10 percent. Stock Y has a standard deviation of return of 20 percent. The correlation coefficient between the two stocks is 0.5. If you invest 60 percent of your funds in stock X and 40 percent in stock Y, what is the standard deviation of your portfolio? Question options: 10.2% 21% 12.2% 14.8%
12.2%
A firm has zero debt in its capital structure. Its overall cost of capital is 10 percent. The firm is considering a new capital structure with 60 percent debt. The interest rate on the debt would be 8 percent. Assuming there are no taxes, its cost of equity capital with the new capital structure would be Question options: 8% 16% 13% 10%
13%
A firm has a debt-to-equity ratio of 1.0. If it had no debt, its cost of equity would be 12 percent. Its cost of debt is 9 percent. What is its cost of equity if there are no taxes? Question options: 21% 18% 15% 16%
15%
Stock A has an expected return of 10 percent per year and stock B has an expected return of 20 percent. If 40 percent of a portfolio's funds are invested in stock A and the rest in stock B, what is the expected return on the portfolio of stock A and stock B? Question options: 10% 20% 16% 14%
16%
The market value of Charter Cruise Company's equity is $15 million and the market value of its debt is $5 million. If the required rate of return on the equity is 20 percent and that on its debt is 8 percent, calculate the company's cost of capital. (Assume no taxes.) Question options: 20% 17% 14% 11%8(5/20)
17%
A stock has a CAPM-based expected return of 6.01%. If the beta of the stock is 0.80 and the expected return on the market is 7%, what is the riskfree interest rate? Question options: 7% 6.01% 5.6% 2.05%
2.05%
One would expect a stock with a beta of 1.25 to increase in returns Question options: 25% more than the market in up markets. 25% more than the market in down markets. 125% more than the market in up markets. 125% more than the market in down markets.
25% more than the market in up markets.
The Financial Calculator Company proposes to invest $12 million in a new calculator-making plant that will depreciate on a straight-line basis. Fixed costs are $3 million per year. A financial calculator costs $10 per unit to manufacture and sells for $30 per unit. If the plant lasts for four years and the cost of capital is 20 percent, what is the accounting break-even level of annual sales? Question options: 300,000 units 750,000 units 381,777 units 150,000 units
300,000 units
The cost of a new machine is $250,000. The machine has a five-year life and no salvage value. If the cash flow each year is equal to 25 percent of the cost of the machine, calculate the payback period for the project. Question options: 2 years 2.5 years 3 years 4 years insufficient information to determine
4 years
Because of overbuilding, commercial office towers are offering a year of free rent to tenants who sign a five-year lease. If you are a consultant to the management company, would you recommend that they offer the free year in the 1st or 5th year of the lease? Indifferent 5th year 1st year
5th year
A stock has a beta of 1.35, a CAPM-based expected return of 9.5% and the riskless rate is 4%. What is the expected return on the market? Question options: 9.54% 13.5% 8.07% Cannot determine without additional information
8.07%
Suppose the French Laundry restaurant in Yountville CA becomes so popular you must book your reservation at least one year in advance and pay for your meal when you book. No refunds for canceled reservations. The restaurant uses the IRR method to make their decision. The restaurant should accept this decision if the IRR exceeds their opportunity cost of capital. Question options:TrueFalse
False
The BEY is the same as the stated annual rate, and as such, it incorporates the effect of compounding when coupon payments are semi-annual. True False
False
The Dow Jones Industrial Average is comprised of 30 industrial stocks. Question options:TrueFalse
False
The constant-growth formula for stock valuation is best applied to firms with high current rates of growth. True False
False
The reason that taxes don't appear in the accounting breakeven formula is that non-profits don't pay taxes. Question options:TrueFalse
False
The sensitivity of a stocks price will be lower when the difference between the opportunity cost of capital and the growth rate in dividends is higher. True False
False
The standard deviation of a two-stock portfolio generally equals the value-weighted average of the standard deviations of the two stocks. Question options:TrueFalse
False
The variability of a well-diversified portfolio mostly reflects the contributions to risk from the standard deviations of the stocks within that portfolio. Question options:TrueFalse
False
The yield to maturity of a bond can be interpreted as the rate of return offered by the bond independent of when you sell the bond. Question options:TrueFalse
False
You would still need to use the Marginal Internal Rate of Return in selecting among investments, even if they are not mutually exclusive. Question options:TrueFalse
False
All else equal, an increase in fixed costs I) increases the break-even point based on economic brea-even; II) increases the accounting break-even point; III) decreases the break-even point based on economic break-even; IV) decreases the accounting break-even point Question options: I and IV III and IV II and III I and II
I and II
Which of the following is a statement of weak-form efficiency? I) If markets are efficient in the weak form, then it is impossible to make consistently superior profits by using trading rules based on past returns. II) If markets are efficient in the weak form, then prices will adjust immediately to public information. III) If markets are efficient in the weak form, then prices reflect all information. Question options: Answer I only Answer II only Answer II and III only Answer III only Answer I and II only
I and II only
If a firm uses the same company cost of capital for evaluating all projects, which situation(s) will likely occur? I) The firm will reject good low-risk projects; II) The firm will accept poor high-risk projects; III) The firm will correctly accept projects with average risk Question options: I only I and II I, II and III II only
I, II and III
Which of the following observations would provide evidence against the strong form of efficient market theory? I) Mutual fund managers do not on average make superior returns. II) In any year approximately 50% of all pension funds outperform the market. III) Managers who trade in their own firm's stocks make superior returns after management fees. Question options: I only II only III only I and II only
III only
A reduction in the sales of existing products caused by the introduction of a new product is an example of Question options: incidental costs sunk costs allocated overhead costs opportunity costs
Incidental costs
The internal rate of return method Question options: and the NPV method always lead to the same investment decision makes no distinction between investment and financing projects is superior to the NPV method because the cost of capital is not required to make the investment decision is undefined for projects with perpetual cash flows More than one of the above statements is correct None of the above statements is correct
None of the above
If markets are efficient, which of the following investors should achieve superior returns over time? Question options: Investors who choose stocks by throwing darts at a list of stocks in the financial pages of a newspaper Analysts who spend considerable time evaluating the best stocks to buy Mutual fund managers who manage other people's money for a living None of these options.
None of these options
Assume the following data for a stock: Beta = 1.5; risk-free rate = 4%; market rate of return = 12%; and the anticipated rate of return on the stock = 15%. Then the stock is Question options: over-priced. under-priced. correctly priced. cannot be determined.
Over-priced
Which of the following portfolios will have the highest beta? Question options: Portfolio of US Treasury Bills Portfolio of US Government Bonds Portfolio containing 50 percent U.S. Treasury bills and 50 percent U.S. government bonds Portfolio of U.S. common stocks
Portfolio of U.S. common stocks
The payback period and NPV share one characteristic that would work in favor of them arriving at the same investment recommendation. Question options: They both have well established rules for making the investment decision grounded in valuation maximization They both place greater weight on cash flows close to the date of the investment They both use all the cash flows associated with the investment They both use the opportunity cost of capital
They both place greater weight on cash flows close to the date of the investment
Accelerated depreciation increases near-term project cash flows and therefore increases the project NPV. Question options:TrueFalse
True
Diversification can reduce portfolio risk even in the case when correlations across stock returns equal zero. Question options:TrueFalse
True
Firms that operate at break-even on an accounting profit basis are really losing the opportunity cost of capital on their investment and the NPV will be negative. Question options:TrueFalse
True
If a market is not weak-form efficient, it directly implies that it is also not semi-strong form efficient. Question options:TrueFalse
True
If the BEY is the same as the market rate of interest, the bond will sell for its face value. True False
True
If the first cash flow in an annuity begins today, you can still use the level annuity formula to find its present value today. One approach is to use the annuity formula and then multiply the answer by (1+R) True False
True
If the initial cash flow is positive and all subsequent cash flows are negative, one should accept projects whose IRR is lower than the cost of capital. Question options:TrueFalse
True
Suppose a project lasts 5 years and the level of working capital is 10% of sales. If sales in the very last year of the project are $5,000,000, the level of working capital used to compute the change in working capital in year 5 is $0. Question options:TrueFalse
True
The BEY is defined as the Bond Equivalent Yield. True False
True
The NPV of a project is negative using the expected values. If management is concerned whether their investment decision would change, there is no need to conduct a sensitivity analysis using pessimistic outcomes. Question options:TrueFalse
True
The NPV of an investment will be zero if the IRR of the investment equals the opportunity cost of capital Question options:TrueFalse
True
The accounting and economic breakeven number of units will be identical if the opportunity cost of capital is zero. Question options:TrueFalse
True
The correlation between the return on a risk-free asset and the return on any common stock will equal zero. Question options:TrueFalse
True
The present value of a series of cash inflows will increase as long as the opportunity cost of capital is less than the rate at which the projects cash flows are growing. True False
True
The rate of return required by shareholders increases steadily as the firm's debt-equity ratio increases. Question options:TrueFalse
True
The yield curve shows the relation between bond yields and the number of years until the bond matures True False
True
You are given the following net future values for harvesting trees from a plot of forestland. (This is a one-time harvest.) Year 0 1 2 3 4 5 Net Future Value 100 125 150 175 195 210 If the cost of capital is 15 percent, calculate the optimal year to harvest. Question options: Year 1 Year 2 Year 3 Year 4
Year 3
If capital markets are efficient, then the sale or purchase of any security at the prevailing market price is generally Question options: a positive-NPV transaction. a zero-NPV transaction. a negative-NPV transaction. No general trend exists for such transactions.
a zero-NPV transaction.
Generally, which of the following is true? (b = beta) Question options: bD < bA < bE bE < bA < bD bA < bE < bD bA < bD < bE
bD < bA < bE
The cost of capital is the same as the cost of equity for firms that are financed Question options: entirely by debt entirely by equity by both debt and equity by 50% debt and 50% equity
entirely by equity
If the debt beta is zero, then the relationship between the equity beta and the asset beta is given by Question options: equity beta = 1 + [(beta of assets)/(debt-equity ratio)]. equity beta = (1 − debt-equity ratio)(beta of assets). equity beta = (1 + debt-equity ratio)(beta of assets). equity beta = 1 + (debt-equity ratio/ beta of assets).
equity beta = (1 + debt-equity ratio)(beta of assets).
Firms often calculate a project's break-even sales using accounting profit. However, break-even sales based on NPV are generally Question options: higher than the one calculated using accounting profit. lower than the one calculated using accounting profit. equal to the one calculated using accounting profit. not related to the one calculated using accounting profit
higher than the one calculated using accounting profit.
Investments B and C both have the same standard deviation of 20 percent and the same correlation to the market portfolio. If the expected return on B is 15 percent and that of C is 18 percent, then the investors would Question options: prefer B to C. prefer C to B. reject both B and C. The answer cannot be determined without knowing investors' risk preferences.
prefer C to B
The semi-strong form of efficiency focuses on the economic ineffectiveness of the following type of information: Question options: insider information. publicly available information. privileged information. only information provided by the SEC.
publicly available information.
One important implication of the efficient markets hypothesis is that most investors Question options: should avoid active trading. can benefit by purchasing high-beta stocks. should trade actively to help ensure the highest overall gain in their portfolios. should buy stocks before secondary equity offerings are announced.
should avoid active trading
Money that a firm has already spent, or committed to spend regardless of whether a project is taken, is called a(n) Question options: sunk cost opportunity cost incremental cost fixed cost
sunk cost
A stock return's beta measures Question options: the stock's covariance with the risk-free asset. the change in the stock's return for a given change in the market return. the standard deviation of the stock's return. the return on the stock.
the change in the stock's return for a given change in the market return.
Which of the following statements is true. Question options: the market value of any firm is independent of its capital structure. the market value of a firm's debt is independent of its capital structure. the market value of a firm's common stock is independent of its capital structure. None of these options.
the market value of any firm is independent of its capital structure.
One would expect a stock with a beta of zero to have a rate of return equal to Question options: zero. the difference between the expected return on the market and the riskless rate. the risk free rate. the market rate of return.
the risk free rate
Suppose that a lawyer works for a firm that advises corporate firms planning to sue other corporations for antitrust damages. He finds that he can "beat the market" by short selling the stock of firms that will be sued. This hypothetical finding would violate Question options: the weak-form hypothesis of market efficiency. the semi-strong form hypothesis of market efficiency. the strong-form hypothesis of market efficiency. none of the hypotheses of market efficiency.
the strong-form hypothesis of market efficiency.
The type of the risk that can be eliminated by diversification is called Question options: market risk unique risk interest rate risk default risk
unique risk
As the number of stocks in a portfolio is increased, Question options: unique risk decreases and approaches zero. market risk decreases. unique risk decreases and becomes equal to market risk. total risk approaches zero.
unique risk decreases and approaches zero.
Suppose the beta of Microsoft is 1.13, the risk-free rate is 3% and the expected return on the market is 11%. Calculate the expected return for Microsoft. Question options: 12.04% 15,66% 13.94% 8.65%
12.04%
For a two-stock portfolio, the maximum reduction in risk occurs when the correlation coefficient between the two stocks equals Question options: 1.0 0.5 -1.0 0
-1.0
If the covariance of Stock A with Stock B is −100, what is the covariance of Stock B with Stock A? Question options: -100 100 1/100 More information is needed
-100
The equity beta of a levered firm is 1.2. The beta of debt is 0.2. The firm's market value debt to equity ratio is 0.5. What is the asset beta if the tax rate is zero? Question options: 1.20 0.73 0.20 0.87
0.87
The disadvantages of using the payback rule include Question options: not discounting future cash flows not including cash flows beyond the payback period setting an arbitrary cutoff number of years all of the above
All of the above
Bank A offers you a loan at a stated annual rate 7.65%, compounded monthly. Bank B offers you a loan at a stated annual rate of 7.7%, compounded semi-annually. If you want to minimize your borrowing costs, which would you select Cannot determine from the information provided Indifferent given their EAR's Bank A Bank B
Bank B
Opportunity costs should not be included in project analysis, as they are missed opportunities. Question options:TrueFalse
False
Sensitivity analysis requires that we evaluate the impact on NPV of changing all the inputs to either their pessimistic or optimistic simultaneously rather than individually. Question options:TrueFalse
False
A company may invest in Project A or Project B, but not both (i.e. they are mutually exclusive). Project A's initial cost is less than Project B's, and you are asked to make your investment decision using the IRR rule. You calculate that the IRR of Project A is less than the opportunity cost of capital. Project B should be accepted if the IRR of the incremental cash flows of moving from Project A to Project B exceeds the cost of capital. Question options:TrueFalse
False
A farmer has one acre of timber on the edge of his farm. If the farmer cuts down the trees and sells them now, he will receive $50 for each of the 500 cords of wood. If the farmer waits a year, the trees will grow, and there will be 520 cords of wood next year. However, the price of the wood is expected to remain constant at $50 per cord. If the discount rate is 10%, the farmer should cut down and sell the trees next period rather than cut down and sell the trees today. True False
False
A stock market analyst is able to identify incorrectly priced stocks by comparing the average price for the last five days to the average price for the last 20 days. If this is true, the market is weak-form efficient. Question options:TrueFalse
False
According to the model of pricing stocks using a level or growing perpetuity, a stock that is not currently paying a dividend should sell for a price of $0 Question options:TrueFalse
False
For a corporation, financing decisions are typically harder to reverse than investment decisions. Question options:TrueFalse
False