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30 Cards in this Set
- Front
- Back
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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?
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Cost of equity.
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Flotation costs for a levered firm should:
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be weighted and included in the initial cash flow.
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The subjective approach to project analysis:
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Assigns discount rates to projects based on the discretion of the senior managers of a firm.
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A firm's overall cost of equity is:
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highly dependent upon the risk level of the firm.
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Which one of the following statements related to the capital asset pricing model approach to equity valuation is correct? Assume the firm uses debt in its capital structure.
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The model is dependent upon a reliable estimate of the market risk premium.
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The expected return on a portfolio considers which of the following factors?
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. |
I, II, III, and IV
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Which one of the following is an example of unsystematic risk?
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Consumer spending on entertainment decreased nationally.
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Which one of the following risks is irrelevant to a well-diversified investor?
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unsystematic risk.
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Which one of the following is an example of diversifiable risk?
I. Earthquake damages an entire town. II. Federal government imposes a $100 fee on all business entities III. Employment taxes increase nationally. IV. Toymakers are required to improve their safety standards. |
I and IV only.
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How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio?
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10. |
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Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly?
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Reward-to-risk ratio.
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Assume a project has a discounted payback that equals the project’s life. The project’s sales quantity must be at which one of these break-even points?
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Financial. |
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Operating leverage is the degree of dependence a firm places on its:
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Fixed Cost. |
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The procedure of allocating a fixed amount of funds for capital spending to each business unit is called:
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Soft Rationing. |
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PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing:
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hard rationing. |
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Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the:
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Accuracy of the projected cash flows.
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Which one of the following will be used in the computation of the best-case analysis of a proposed project?
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the lowest variable cost per unit that can reasonably be expected.
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The base case values used in scenario analysis are the values considered to be the most:
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likely to occur. |
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Which of the following variables will be forecast at their highest expected level under a worst case scenario?
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Fixed and variable costs.
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New Town Instruments is analyzing a proposed project. The company expects to sell 2,100 units, ±4 percent. The expected variable cost per unit is $270 and the expected fixed costs are $548,000. Cost estimates are considered accurate within a plus or minus 3 percent range. The depreciation expense is $118,000. The sales price is estimated at $789 per unit, plus or minus 5 percent. What is the sales revenue under the worst case scenario?
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(2,100 × .96) × ($789 × .95) = $1,511,092.80
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You are considering a new product launch. The project will cost $574,000, have a five-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 160 units per year, price per unit will be $16,000, variable cost per unit will be $12,500, and fixed costs will be $179,000 per year. The required return is 13.5 percent and the relevant tax rate is 35 percent. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±3 percent. What is the worst-case NPV?
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Unit salesWorst = 160(1- .03) = 155.2 units
Variable cost per unitWorst = $12,500 (1 + .03) = $12,875 Fixed costsWorst = $179,000 (1 + .03) = $184,370 OCFWorst = [($16,000 –12,875)(155.2) - $184,370][1 - .35] + ($574,000/5)(.35) = $235,589.50 NPVWorst = -$574,000 + $235,589.50({1 – [1 / 1.1355]} / .135) = $244,612.89 |
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Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return?
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Risk premium
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Standard deviation is a measure of which one of the following?
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Volatility
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Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions?
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Efficient capital market
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Which one of the following statements best defines the efficient market hypothesis?
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All securities in an efficient market are zero net present value investments.
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Which one of the following statements is a correct reflection of the U.S. markets for the period 1926-2013?
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U.S. Treasury bills provided a positive rate of return each and every year during the period.
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Which one of the following categories of securities had the highest average return for the period 1926-2013?
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Small company stocks
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Which one of the following categories of securities had the lowest average risk premium for the period 1926-2013?
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U.S. Treasury bills
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Which one of the following categories of securities had the most volatile annual returns over the period 1926-2013?
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small-company stocks. |
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To convince investors to accept greater volatility, you must:
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Increase the risk premium.
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