Finance Questions Exam 11

QUESTION 11. Theoretically the NPV is the most appropriate method to determine he acceptability of a project. A false sense of security can overwhelm the decision-maker when the procedure is applied properly and the positive NPV results are accepted blindly. Sensitivity and scenario analysis aid in the process by: changing the underlying assumptions on which the decision is based. highlighting the areas were more and better data are needed. providing a picture of how an event can effect the calculations. all of the above. none of the above.4 points QUESTION 21. Given the following market conditions, calculate the expected/required rate of return using the CAPM: kRF=6%, kM=14%What is ki for a security with ?i=1.4? 13.5% 14.2% 15.6% 17.2%4 points QUESTION 31. Given the following market conditions, calculate the expected/required rate of return using the CAPM: kRF=7%, kM=15%What is ki for a security with ?i=1.4 17.8% 18.2% 18.6% 19.0% 19.6%4 points QUESTION 41. The value of a previously purchased building that will be used by a proposed project rather than generating cash in some other manner is an example of a(n): sunk cost. opportunity cost. erosion cost. fixed cost. variable cost.4 points QUESTION 51. A stock with a beta of zero would be expected to: have a rate of return equal to the risk-free rate. have a rate of return equal to the market rate. have a rate of return equal to zero. have a rate of return equal to the one. have a negative return when the market is up.4 points QUESTION 61. A portfolio is entirely invested into Bruno’s Gold Mining Equity, which is expected to return 18%, and Alfred’s Inc. bonds, which are expected to return 6%. Three quarters of the funds are invested in Bruno’s and the rest in Alfred’s. What is the expected return on the portfolio? 2% 9% 12% 15% 18%4 points QUESTION 71. Given the following market conditions, calculate the expected/required rate of return using the CAPM: kRF=6%, kM=14%What is ?A of a security with kA=16.4%? 0.95 1.0 1.25 1.30 1.354 points QUESTION 81. Money that the firm has already spent or is committed to spend regardless of whether a project is taken is called a(n) sunk cost. opportunity cost. erosion cost. fixed cost. irrational cost.4 points QUESTION 91. The value of an existing asset (such as a previously purchased building) that will be used by a proposed project but could otherwise generate cash in some other manner is an example of: sunk cost. opportunity cost. erosion cost. fixed cost. nominal cost.4 points QUESTION 101. You bought 100 shares of stock at $20 each. At the end of the year, you received a total of $400 in dividends, and your stock was worth $2,500 total. What was your total return? 45%. 50% 90%. 20%. 25%4 points QUESTION 111. Diversification can effectively reduce risk. Once a portfolio is diversified the type of risk remaining is: individual security risk. riskless security risk. market risk. total standard deviations. non-systematic risk.4 points QUESTION 121. Beta measures: the ability to diversify risk an asset’s covariance with the market the actual return on an asset the standard deviation of the assets’ returns all of the above4 points QUESTION 131. The total annual returns on common stocks averaged 12.2% from 1926 to 1994, small company stocks averaged 17.4%, long-term government bonds averaged 5.2%, while Treasury Bills averaged 3.7%. What was the average risk premium earned by long-term Government Bonds, and small company stocks respectively? 8.5%; 1.5% 0; 12.2% 1.5%; 13.7% 1.5%; 7.0% 7.0%; 5.2%4 points QUESTION 141. Suppose you are the money manager of a $10 million investment fund. The fund consists of 2 stocks with the following investment and betas. Assume that the CAPM holds, and kRF=6%, kM=14%. What is beta of the investment fund?Stock Investment BetaA $ 4 million 1.2B $ 6 million 1.42. 1.22 1.28 1.32 1.44 1.484 points QUESTION 151. A capital loss occurs when: the selling price is less than the purchase price. the purchase price is less than the selling price. there is no dividend paid. there is no income component of return. never, as they can not exist.4 points QUESTION 161. Inflation is treated properly in NPV analysis by: discounting nominal cash flows by a nominal discount rate or discounting real cash flows by a real discount rate. discounting nominal cash flows by a real discount rate. discounting real cash flows by a nominal discount rate. discounting nominal or real cash flows by the risk-free discount rate4 points QUESTION 171. Variable costs change as the quantity of output changes. are zero when production is zero. are exemplified by direct labor and raw materials. All of the above.4 points QUESTION 181. The correlation between two stocks: can take in positive values. can take on negative values. cannot be greater than 1. cannot be less than -1. all of the above.4 points QUESTION 191. Fixed production costs are: directly related to labor costs. measured as cost per period of time. measured as cost per unit of output. dependent on the amount of goods or services produced. required by federal law.4 points QUESTION 201. The prices for IMB over the last 3 years are given below. Assuming no dividends were paid, what was the 3-year holding period return? Year Price 0 $ 70 1 64 2 68 3 80 17.65%. 5.11%. 14.29%. -8.57%. 10.50%.4 points QUESTION 211. A typical investor is assumed to be: uninformed. a gambler a single security holder. risk averse. risk neutral.4 points QUESTION 221. Net working capital should be considered in cashflows because: firms must make sure the investment NPV calculation is positive. firms must commit cash to short term assets to begin producing the finished goods. taxes will erode the value otherwise. these are sunk costs. GAAP rules require an adjustment to net working capital.4 points QUESTION 231. Sensitivity analysis evaluates the NPV with respect to: changes in the underlying assumptions. one variable changing while holding the others constant. different economic conditions. all of the above4 points QUESTION 241. You have plotted the data for two securities over time on the same graph, i.e., the month return of each security for the last 5 years. If the pattern of the movements of the two securities rose and fell as the other did, these two securities would have: no correlation at all. a weak negative correlation. a strong negative correlation. a strong positive correlation. one can not get any idea of the correlation from a graph.4 points QUESTION 251. From the information below, calculate the accounting break-even point.Fixed costs are $ 2500/year. Variable costs: $ 8/unit.Depreciation: $ 500/year.Price: $ 25/unit.Discount rate: 10%.Project life: 4 years.Tax rate: 34%. 88 units/year. 100 units/year. 120 units/year. 177 units/year. 147 units/year.

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