FN 312 Final

The ________ explains the relationship between the expected return on a security and the level of that security's systematic risk.

CAPM; capital asset pricing model

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

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

An investor wants to reduce the unsystematic risk in her portfolio. Which of the following actions is least likely to do so?

Reducing the number of stocks held in her stock portfolio

Which one of the following statements related to the internal rate of return (IRR) is correct?

The IRR is equal to the required return when the net present value is equal to zero.

Buchi owns several financial instruments: stocks issued by seven different companies, plus bonds issued by four different companies. Her investments are best described as a(n):

portfolio

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $2.40 per share and has a beta of 1.42, all else constant, which of the following actions will decrease the firm's cost of equity?

A decrease in the firm's beta

Of the options listed below, which is the best example of unsystematic risk?

A national decrease in consumer spending on entertainment

A project's average net income divided by its average book value is referred to as the project's average:

Accounting Return

Okonjo Economics has a debt-equity ratio of .38. All of the firm's outstanding shares were purchased by a small number of investors. The return these investors require is called the:

Cost of equity

The internal rate of return is defined as the:

Discount rate which causes the net present value of a project to equal zero.

Which of the following statements regarding unsystematic risk is accurate?

It can be effectively eliminated by portfolio diversification.

Which of the following statements regarding a firm's pretax cost of debt is accurate?

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

Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest rate is called the:

cost of debt

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

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

The cost of preferred stock is equivalent to the:

rate of return on a perpetuity

The ________ is a positively sloped linear function that plots securities' expected returns against their betas.

security market line

A project has a net present value of zero. Given this information:

the project's cash inflows equal its cash outflows in current dollar terms.

The expected return of a stock, based on the likelihood of various economic outcomes, equals the:

weighted average of the returns for each economic state.

Rafia owns stocks of 15 different companies. Together, the stocks have a value of $78,640. Twelve percent of that total value is from one company, Gambrell & Valdez. The twelve percent figure is called a(n):

Portfolio weight

________ measures total risk, and ________ measures systematic risk.

Standard deviation; beta

With respect to capital project analysis, which of the following statements is accurate?

Overall, a company makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects.

Of the options listed below, which is the best measure of systematic risk?

Beta

The length of time a firm must wait to recoup the money it has invested in a project is called the:

Payback period

Of the options listed below, which is the best example of systematic risk?

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

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

It equals the dividend yield.

Which of the following items are included when calculating the expected return on a portfolio? I. Percentage of the portfolio invested in each individual security II. Projected states of the economy III. The performance of each security given various economic states IV. Probability of occurrence for each state of the economy

all of the above

A ________ is the market's measure of systematic risk.

beta of 1

A firm's aftertax cost of debt will increase if there is a(n):

decrease in the company's tax rate.

While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 percent figure is called the:

expected return

NPV

is the best method of analyzing mutually exclusive projects.

If a firm accepts Project X it will not be feasible to also accept Project Z because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

mutually exclusive.

To determine a firm's cost of capital, one must include:

the returns currently required by both debtholders and stockholders.

Which of the following are assumptions of the capital asset pricing model (CAPM)? I. A risk-free asset has no systematic risk. II. Beta is a reliable estimate of total risk. III. The reward-to-risk ratio is constant. IV. The market rate of return can be approximated.

I, III, and IV only

Which of the following statements regarding the weighted average cost of capital is accurate?

It is the return investors require on the total assets of the firm.

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted?

NPV

Which of the following statements best describes the principle of diversification?

Spreading an investment across many diverse assets will eliminate some of the total risk.

Most financial securities have some level of ________ risk.

Systematic

When calculating a firm's weighted average cost of capital, the capital structure weights:

are based on the market values of the outstanding securities.

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:

discounted payback period.

Assume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2 percent. Lexant stock has 2 percent less systematic risk than the market and has an actual return of 10.2 percent. This stock:

is underpriced