1 / 1 pts
"Oakdale Furniture Inc. has a
beta coefficient of 0.7 and a required rate of return of 15 percent. The market
risk premium is currently 5 percent. If the inflation premium increases by 2
percentage points, and Oakdale acquires new assets which increase its beta by
50 percent, what will be Oakdale's new required rate of return?"
22.80%
17.00%
13.50%
15.25%
Correct!
18.75%
1 / 1 pts
A major disadvantage of the payback
period method is it
All of these are correct
Is useless as a risk indicator
Correct!
Ignores
cash flows beyond the payback period
It is biased towards accepting large
projects
1 / 1 pts
"The Seattle Corporation has
been presented with an investment opportunity which will yield end of year cash
flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5
through 9, and $40,000 in Year10. This investment will cost the firm $150,000
today, and the firm's required rate of return is 10 percent. What is the NPV
for this investment?"
Correct!
$51,138.24
$(546.43)
$201,138.24
None of these are correct.
1 / 1 pts
"Other things held constant,
(1) if the expected inflation rate decreases, and (2) investors become more
risk averse, the Security Market Line would shift"
Up and have less steep slope
Correct!
Down
and have steeper slope.
Down and keep same slope
Down and have less steep slope.
Up and keep same slope.
1 / 1 pts
"Assume a project has normal
cash flows (i.e., initial cash flow is negative, and all other cash flows are
positive). Which of the following statements is most correct?"
"All else equal, a project's
IRR increases as the required rate of return declines"
All of these are correct
"All else equal, a project's
IRR is directly related to changes in the required rate of return"
Correct!
"All
else equal, a project's NPV increases as the required rate of return
declines"
1 / 1 pts
The advantage of the payback period
over other capital budgeting techniques is that
it directly accounts for the time
value of money
it ignores cash flows beyond the
payback period
Correct!
it
is the simplest and oldest formal model to evaluate capital budgeting model
it always leads to decisions that
maximize the value of the firm
it incorporates risk into the
discount rate used to solve the payback period
1 / 1 pts
The importance of capital budgeting
decisions is due to all of the following factors except for:
all of these are factors that make
capital budgeting important
Correct!
"capital
budgeting techniques overcome the problems with error in forecasts for asset
requirements and projected sales, we will still be able to determine if we
should fund the project."
effective capital budgeting can
improve the timing of asset acquisition and the quality of assets purchased
the impact of a capital budgeting
decision is long term; the firm looses some decision-making flexibility when
capital projects are purchased
"the acquisition of fixed
assets typically involves substantial expenditures, and before a firm spends a
large amount of money, it must have the funds available."
1 / 1 pts
"The capital budgeting director
of Sparrow Corporation is evaluating a project which costs $94,641.50, is
expected to last for 4 years and produce after-tax cash flows, including
depreciation, of $34,500 per year. If the firm's required rate of return is 14
percent and its tax rate is 40 percent, what is the project's IRR?"
Correct!
17%
-3%
2%
13%
16%
1 / 1 pts
"The Seattle Corporation has
been presented with an investment opportunity which will yield cash flows of
$30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9,
and $40,000 in Year10. This investment will cost the firm $140,000 today, and
the firm's required rate of return is 10 percent. Assume cash flows occur
evenly during the year, 1/365th each day. What is the payback period for this
investment?"
4.88 years
Correct!
4.57
years
3.56 years
6.23 years
1 / 1 pts
"In a portfolio of three
different stocks, which of the following could not be true?"
"None of the above (i.e., they
all could be true, but not necessarily at the same time)."
The riskiness of the portfolio is
greater than the riskiness of one or two of the stocks.
The beta of the portfolio is greater
than the beta of one or two of the individual stock's betas.
The riskiness of the portfolio is
less than the riskiness of each of the stocks if they were held in isolation.
Correct!
The
beta of the portfolio is less than the beta of each of the individual stocks.
1 / 1 pts
"When Richard evaluated a
capital budgeting project a new machine needed to manufacture inventory using
his firm's required rate of return, he discovered that the project's net
present value (NPV) is negative. Based on this information, which of the
following must be correct?"
The project's traditional payback
period must be greater than the maximum payback period that the firm has
established
The project's internal rate of
return is also negative
"As long as the new machine's
initial investment outlay is fairly low, the firm should purchase if it is used
to replace an older machine that is required to produce inventory"
Correct!
The
project's discounted payback period is greater than its economic life
1 / 1 pts
"If the risk-free rate is 7
percent, the expected return on the market is 10 percent, and the expected
return on Security J is 13 percent, what is the beta of Security J?"
3
1.5
Correct!
2
1
2.5
1 / 1 pts
The __________ involves comparing
the actual results with those predicted by the project's sponsors and
explaining why any differences occur
internal rate of return
discounted payback
economic value added
Correct!
post-audit
net present value
1 / 1 pts
"All else equal, risk averse
investors generally require __________ returns to purchase investments with
__________ risks"
None of the above is correct.
lower; higher
Correct!
higher;
higher
higher; lower
1 / 1 pts
Stock A has a beta of 1.5 and Stock
B has a beta of 0.5. Which of the following statements must be true about these
securities? (Assume the market is in equilibrium.)
Stock A would be a more desirable
addition to a portfolio than Stock B.
The expected return on Stock B will
be greater than that on Stock A.
Stock B would be a more desirable
addition to a portfolio than Stock A.
Correct!
The
expected return on Stock A will be greater than that on Stock B.
"When held in isolation, Stock
A has greater risk than Stock B."
1 / 1 pts
Net present value is preferred to
internal rate of return for capital budgeting decisions because
the internal rate of return for a
project is different for each firm
the net present value is the only
method that allows you to determine which independent project is acceptable
Correct!
the
net present value allows you to compare mutually exclusive projects
the internal rate of return does not
allow you to determine if the project is acceptable.
"NPV contains information about
a projects ""safety margin"" which is not inherent in
IRR."
0 / 1 pts
"You have recently accepted a
one-year employment term by a firm. The firm has given you the option of
receiving your salary as a lump sum value of $30,000 at the end of the year or
as 12 monthly payments of $2,400 starting one month after you start work. If
your relevant discount rate is 2 percent per month, then which salary options
would you prefer? (Ignore taxes, risk, and consumption needs.) Choose the best
answer"
"Monthly payments, since you do
not have to wait so long to receive your money."
"The lump sum payment, since it
has the larger future value."
Correct Answer
"Monthly
payments, since it has the larger present value"
"The lump sum payment, since it
has the larger present value"
You Answered
"Either one, since they have
the same present value"
1 / 1 pts
Choose the correct answer for the
following: (1) Which is the best measure of risk for choosing an asset which is
to be held in isolation? (2) Which is the best measure for choosing an asset to
be held as part of a diversified portfolio?
Beta; beta.
Standard deviation; correlation
coefficient.
Variance; correlation coefficient.
Correct!
Coefficient
of variation; beta.
Beta; variance.
1 / 1 pts
All of the following factors can
complicate the post-audit process except
it is often difficult to separate
the operating results of one investment from those of a larger system
executives who where responsible for
a given decision might have moved on by the time the time the results of the
long term project are known
each element of the cash flow
forecast is subject to uncertainty
Correct!
"the
most successful firms, on average, are the ones that put the least emphasis on
the post-audit"
projects sometimes fail to meet
expectations for reasons beyond the control of operating executives
1 / 1 pts
Discounted payback's primary
advantage over traditional payback is that
all of these are true
Correct!
discounted
payback does consider the time value of money
discounted payback is always shorter
than traditional payback making more projects acceptable
discounted payback will let you
accept projects whose discounted payback period is longer than the useful of
the project
discounted payback considers cash
flows that occur after the discounted payback period
1 / 1 pts
"You are considering the
purchase of an investment that would pay you $5,000 per year for Years 1-5,
$3,000 per year for Years 6-8, and $2,000 per year for Years 9 and10. If you
require a 12 percent rate of return, and the cash flows occur at the end of
each year, then how much should you be willing to pay for this
investment?"
$38,000
Correct!
$23,477.64
$20,455.36
None of these are correct
1 / 1 pts
"You are an investor in common
stock, and you currently hold a well-diversified portfolio which has an
expected return of 12 percent, a beta of 1.2, and a total value of $9,000. You
plan to increase your portfolio by buying 100 shares of AT&E at $10 a
share. AT&E has an expected return of 20 percent with a beta of 2.0. What
will be the expected return and the beta of your portfolio after you purchase
the new stock?"
EV(p)=14.0%; Beta(p)=1.32
EV(p)=12.0%; Beta(p)=1.20
Correct!
EV(p)=12.8%;
Beta(p)=1.28
EV(p)=20.0%; Beta(p)=2.00
EV(p)=13.2%; Beta(p)=1.40
1 / 1 pts
Benefits of the post-audit include
all of the following except
"when decision makers are
forced to compare their projections to actual outcomes, there is a tendency to
improve"
all of the above are benefits of the
post-audit
conscious or unconscious biases are
removed
Correct!
negative
NPV projects are identified before they begin
forecasts are improved
1 / 1 pts
"__________ is a measure of
total risk, whereas __________ is a measure of systematic risk"
None of the above is correct.
Beta; standard deviation
Correct!
Standard
deviation; beta
Standard deviation; variance
Coefficient of variation; standard
deviation
1 / 1 pts
"Steve Brickson currently has
an investment portfolio that contains four stocks with a total value equal to
$70,000. The portfolio has a beta (b) equal to 1.4. Steve wants to invest an
additional $30,000 in a stock that has b = 2.4. After Steve adds the new stock
to his portfolio, what will be the portfolio's beta?"
None of the above is correct.
1.5
2.1
Correct!
1.7
Quiz Score:
24 out of 25
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