blah Flashcards
1
Q
- The principle of diversification tells us that:
a. concentrating an investment in two or three large stocks will eliminate all of your risk
b. spreading an investment across many diverse assets will eliminate some of the risk
c. spreading an investment across five diverse companies will not lower your overall risk at all
d. spreading an investment across many diverse assets will eliminate all of the risk.
A
b. spreading an investment across many diverse assets will eliminate some of the risk
2
Q
- The net present value of a growth opportunity, NPVGO, can be defined as:
a. the initial investment necessary for a new project
b. the net present value per share of an investment in a new project
c. a single period investment when r > g.
d. None of the above
A
b. the net present value per share of an investment in a new project
3
Q
- The constant dividend growth model is:
a. generally used in practice because most stocks have a constant growth rate
b. generally not used in practice because most stocks grow at a non constant rate
c. generally not used in practice because the constant growth rate is usually higher than the required rate of return
d. generally used in practice because the historical growth rate of most stocks is constan
A
b. generally not used in practice because most stocks grow at a non constant rate
4
Q
- All else constant, a bond will
sell at _____ when the yield to
maturity is _____ the coupon
rate
a. a discount; higher than
b. a premium; higher than
c. at par; higher than
d. a premium; equal to
A
a. a discount; higher than
5
Q
- The Liberty Co. is considering two projects. Project A consists of building a wholesale book outlet on lot #169 of the Englewood Retail Center. Project B consists of building a sit-down restaurant on lot #169 of the Englewood Retail Center. When trying to decide whether to build the book outlet or the restaurant, management should rely most
heavily on the analysis results from the _______ method of analysis.
a. IRR
b. Payback
c. NPV
d. PI
A
c. NPV
6
Q
- A bond that makes no coupon
payments and is initially priced at
a deep discount is called a _____ bond
a. Zero coupon
b Treasury
c. Municipal
d. Government
A
a. Zero coupons
7
Q
7. Assume that you are using the dividend growth model to value stocks. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect the:
a. market values of all stocks to
decrease, all else constant
b. market values of all stocks to
increase, all else constant
c. dividend growth rates to
increase to offset this change
d. stocks that do not pay dividends
to decrease in price while the
dividend-paying stocks maintain
a constant price
A
a. market values of all stocks to decrease, all else constant
9
Q
- If its yield to maturity is less than its coupon rate, a bond will sell at a _____,
and increases in market interest rates will _____.
a. discount; decrease this discount
b. discount; increase this discount
c. premium; decrease this premium
d. None of these
A
c. premium; decrease this premium
10
Q
- The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the _____ model.
a. Dividend growth
b. Zerop growth
c. Capital pricing
d. Differential growth
A
a. Dividend growth
11
Q
15. Based on the period of 1926 through 2011, \_\_\_\_\_ have tended to outperform other securities over the long-term.
a. Large company stocks
b. T-bills
c. Corporate bonds
d. Small company stocks
A
d. Small company stocks
12
Q
- Which one of the following is a correct statement concerning risk premium?
a. The greater the volatility of returns, the greater the risk premium
b. The lower the volatility of returns, the greater the risk premium
c. The lower the average rate of return, the greater the risk premium
d. The risk premium is not affected by the volatility of returns
A
a. The greater the volatility of returns, the greater the risk premium
13
Q
- The market price of a bond is equal to the present value of the:
a. face value minus the present value of the annuity payments
b. annuity payments plus the future value of the face amount
c. face value plus the present value of the annuity payments
d. annuity payments minus the face value of the bond
A
c. face value plus the present value of the annuity payments
15
Q
- Estimates using the arithmetic average will probably tend to _____ values over the
long-term while estimates using the geometric average will probably tend to _____ values
over the short-term.
a. overestimate; overestimate
b. overestimate; underestimate
c. underestimate; overestimate
d. accurately; accurately
A
b. overestimate; underestimate
16
Q
- You are considering purchasing stock S. This stock has an expected return of 8% if the economy booms
and 3% if the economy goes into a recessionary period. The overall expected rate of return on this stock will:
a. vary inversely with the growth of the economy
b. increase as the probability of a recession increases
c. increase as the probability of a boom economy increases.
d. Nothing happens
A
c. increase as the probability of a boom economy increases.
17
Q
- Which one of the following is an example of a nondiversifiable risk?
a. a well-respected president of a firm suddenly resigns
b. a key employee suddenly resigns and accepts employment with a key competitor
c. a well-respected chairman of the Federal Reserve suddenly resigns
d. a poorly managed firm suddenly goes out of business due to lack of sales
A
c. a well-respected chairman of the Federal Reserve suddenly resigns
18
Q
- The expected return on a portfolio:
a. can be greater than the expected return on the best performing security in the portfolio
b. is limited by the returns on the individual securities within the portfolio
c. is independent of the performance of the overall economy
d. is an arithmetic average of the returns of the individual securities when the weights of those securities are unequal.
A
b. is limited by the returns on the individual securities within the portfolio
19
Q
- The beta of a security provides an:
a. estimate of the market risk premium
b. estimate of the slope of the Capital Market Line
c. estimate of the systematic risk of the security
d. estimate of the slope of the Security Market Line
A
c. estimate of the systematic risk of the security
20
Q
- When valuing an entire firm with both debt and equity, the basic starting point in choosing a discount rate is:
a. WACC
b. CAPM
c. pre-tax cost of debt
d. after-tax cost of debt.
A
b. CAPM
21
Q
- The changes in a firm’s future cash flows that are a direct consequence of accepting a project are called _____ cash flows.
a. stand-alone
b. Incremental
c. After tax
d. Erosion
A
b. Incremental
22
Q
- Comparing two otherwise equal firms, the beta of the common stock of a levered firm is ____________ than the beta of the common stock of an unlevered firm:
a. equal to equal to
b. greater
c. slightly less
d. significantly less
A
b. greater
23
Q
- The total rate of return earned on a stock is comprised of which two of the following?
I. current yield
II. yield to maturity
III. dividend yield
IV. capital gains yield
a. III and IV only
b. I and IV only
c. I and II only
d. II and III only
A
a. III and IV only
24
Q
- Which of the following should be included in the analysis of a project?
I. sunk costs
II. opportunity costs
III. erosion costs
IV. incremental costs
a. I and II
b. II and III
c. I, II and IV
d. II, III and IV
A
d. II, III and IV
25
Q
- The weighted average of the firm’s costs of equity, preferred stock, and after tax debt is the:
a. reward to risk ratio for the firm.
b. weighted average cost of capital
c. expected capital gains yield for the firm
d. portfolio beta for the firm
A
b. weighted average cost of capital
26
Q
- The optimal capital structure has been achieved when the:
a. debt-equity ratio is equal to 1.
b. cost of equity is maximized given a pre-tax cost of debt
c. debt-equity ratio selected results in the lowest possible weighed average cost of capital
d. debt-equity ratio is such that the cost of debt exceeds the cost of equity
A
c. debt-equity ratio selected results in the lowest possible weighed average cost of capital
27
29. Which one of the following statements concerning net present value (NPV) is correct?
a. An investment should be accepted if the NPV is positive and rejected if it is negative.
b. An investment should be accepted if, and only if, the NPV is exactly equal to zero.
c. An investment should be accepted only if the NPV is equal to the initial cash flow
d. Any project that has positive cash flows for every time period after the initial investment should be accepted
a. An investment should be accepted if the NPV is positive and rejected if it is negative.
28
35. A manager should attempt to maximize the value of the firm by:
a. changing the capital structure if and only if the value of the firm increases to the benefit of inside management
b. changing the capital structure if and only if the value of the firm increases only to the benefits of the debtholders
c. changing the capital structure if and only if the value of the firm increases
d. changing the capital structure if and only if the value of the firm increases and stockholder wealth is constant.
c. changing the capital structure if and only if the value of the firm increases
29
36. MM Proposition I without
taxes is used to illustrate:
a. the value of an unlevered firm equals that of a levered firm
b. that one capital structure is as good as another
c. leverage does not affect the value of the firm
d. All of these
d. All of these
30
13. The excess return required
from a risky asset over that
required from a risk-free asset
is called the:
a. Risk premium
b. Geometric premium
c. Excess return
d. Average return
a. Risk premium
31
14. The average compound return earned per year over a multi-year period is called the _____ average return
a. Arithmetic
b. Standard
c. Geometric
d. Real
c. Geometric
32
30. All else equal, the payback period for a project will decrease whenever the:
a. initial cost increases
b. required return for a project increases
c. cash inflows are moved earlier in time
d. duration of a project is lengthened
b. required return for a project increases
33
The External Funds Needed (EFN) equation does not measure the:
a. additional asset requirements given a change in sales
b. additional total liabilities raised given the change in sales
c. rate of return to shareholders given the change in sales.
d. net income expected to be earned given the change in sales
c. rate of return to shareholders given the change in sales.
34
2. The amount of systematic risk present in a particular risky asset, relative to the systematic risk present in an average risky asset, is called the particular asset's:
a. beta coefficient
b. reward-to-risk ratio
c. diversifiable risk
d. total risk
a. beta coefficient
34
25. The weighted average cost of capital for a firm is the:
a. overall rate which the firm must earn on its existing assets to maintain the value of its stock
b. rate of return that the firm's preferred stockholders should expect to earn over the long term.
c. rate the firm should expect to pay on its next bond issue
d. maximum rate which the firm should require on any projects it undertakes
a. overall rate which the firm must earn on its existing assets to maintain the value of its stock
34
34. The firm's capital structure refers to:
a. the way a firm invests its assets.
b. the mix of debt and equity used to finance the firm's assets.
c. the amount of capital in the firm
d. how much cash the firm holds.
b. the mix of debt and equity used to finance the firm's assets.
35
37. The explicit costs, such as the legal expenses, associated with corporate default are classified as _____ costs:
a. direct bankruptcy
b. indirect bankruptcy
c. flotation cost
d. leverage cost
a. direct bankruptcy
36
39. The date on which the board of directors passes a resolution authorizing payment of a dividend to the
shareholders is the _____ date
a. Declaration
b. Payment
c. ex-dividend
d. record
a. Declaration
37
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48. You are comparing two annuities
which offer monthly payments for
ten years. Both annuities are
identical with the exception
of the payment dates. Annuity A
pays on the first of each month
while annuity B pays on the last day
of each month. Which one of the
following statements is correct concerning these two annuities?
```
a. Both annuities are of equal value today
b. Both annuities have the same
future value as of ten years from today.
c. Annuity B has a higher present
value than annuity A.
d. Annuity A is an annuity due
d. Annuity A is an annuity due
38
40. The market's reaction to the announcement of a change in the firm's dividend payout is likely the:
a. clientele effect.
b. information content effect
c. efficient markets hypothesis
d. MM proposition I
b. information content effect
38
42. A rights offering is:
a. the issuing of options on shares to the general public to acquire stock
b. the issuing of an option directly to the existing shareholders to acquire stock
c. the issuing of proxies which are used by shareholders to exercise their voting rights
d. the awarding of special perquisites to management
b. the issuing of an option directly to the existing shareholders to acquire stock
39
43. Investment banks perform which of the following services for corporate issuers:
a. formulating the method used to issue the securities
b. pricing the new securities
c. selling the new securities
d. All of these
d. All of these
41
9. The relationship between nominal rates, real rates, and inflation is known as the:
a. Gordon growth model
b. Term structure of interest rate
c. interest rate risk premium
d. Fisher effect
d. Fisher effect
42
45. Discounting cash flows involves:
a. discounting only those cash flows that occur at least 10 years in the future
b. estimating only the cash flows that occur in the first 4 years of a project.
c. multiplying expected future cash flows by the cost of capital.
d. discounting all expected future cash flows to reflect the time value of money.
d. discounting all expected future cash flows to reflect the time value of money.
42
46. Compound interest:
a. allows for the reinvestment of interest payments.
b. does not allow for the reinvestment of interest payments
c. provides a value that is less than simple interest.
d. Both allows for the reinvestment of interest payments and provides a value that is less than simple interest.
a. allows for the reinvestment of interest payments.
45
The main objective of long-term financial planning models is to:
a. determine the asset requirements given the investment activities
of the firm.
b. plan for contingencies or uncertain events.
c. determine the external financing needs
d. All of these
d. All of these
46
44. The time value of money
concept can be defined as:
a. the relationship between the
supply and demand of money.
b. the relationship between
money spent versus money
received.
c. the relationship between a
dollar to be received in the
future and a dollar today.
d. the relationship between
interest rate stated and
amount paid
c. the relationship between a dollar to be received in the future and a dollar today.
47
47. The stated rate of interest
is 10%. Which form of compounding
will give the highest effective rate of
interest?
a. annual compounding
b. monthly compounding
c. continuous compounding
d. daily compounding
c. continuous compounding
48
Which of the following will increase sustainable growth?
a. Buy back existing stock
b. Decrease debt
c. Increase profit margin
d. Increase asset requirement or asset turnover ratio
c. Increase profit margin
49
41. A _____ is an alternative method to cash dividends which is used to pay out a firm's earnings to shareholders.
a. Mergers
b. Stock splits
c. Reverse stock splits
d. share repurchase
d. share repurchase
50
Net working capital is defined as:
a. total liabilities minus
shareholders' equity
b. current liabilities minus
shareholders' equity.
c. current assets minus current
liabilities
d. total assets minus total
liabilities.
c. current assets minus current
| liabilities
50
_____ refers to the cash flow that results from the firm's ongoing,
normal business activities?
a. Cash flow from operating activities
b. Capital spending
c. Net working capital
d. Cash flow from assets
a. Cash flow from operating activities
