Week 4 REQUIRED Quiz 1

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Best, Dr. Gandevani
375594 Week 4 REQUIRE

Part 1 of 1 - Week 4 REQUIRED Quiz 100.0/ 100.0 Points

Question 1 of 25
4.0/ 4.0 Points
Market risk is also called: I) systematic risk, II) undiversifiable risk, III) firm specific risk.

A.I only


B.II only


C.III only


D.I and II only


Answer Key: D

Question 2 of 25
4.0/ 4.0 Points
Using the company cost of capital to evaluate a project is:
I) Always correct
II) Always incorrect
III) Correct for projects that are about as risky as the average of the firm's other assets

A.I only


B.II only


C.III only


D.I and III only


Answer Key: C

Question 3 of 25
4.0/ 4.0 Points
The following are important functions of financial markets: I) Source of financing; II) Provide liquidity; III)
Reduce risk; IV) Source of information

A.I only


B.I and II only


C.I, II, III, and IV


D.IV only


Answer Key: C

Question 4 of 25
4.0/ 4.0 Points
The following are measures used by firms when making capital budgeting decisions except:

A.Payback period


B.Internal rate of return


C.P/E ratio


D.Net present value


Answer Key: C

Question 5 of 25
4.0/ 4.0 Points
For example, in the case of an electric car project, which of the following cash flows should be treated as
incremental flows when deciding whether to go ahead with the project?

A.The cost of research and development undertaken for developing the electric car in the past
three years


B.The annual depreciation charge


C.Tax savings resulting from the depreciation charges


D.Dividend payments


Answer Key: C

Question 6 of 25
4.0/ 4.0 Points
The type of bonds where the identities of bonds' owners are recorded and the coupon interest payments
are sent automatically are called:

A.Bearer bonds


B.Government bonds


C.Registered bonds


D.None of the above


Answer Key: C

Question 7 of 25
4.0/ 4.0 Points
Discuss the general principle in the valuation of a common stock.
1. One method used is called the Gordon Model or Discounted Model - this valuation method values a
stock based on its cash payments, or dividends, to stock holders.

2. Relative valuation - these methods employ comparisons between similar corporations.

3. Cash Flow Valuations - This method is similar to the discount model, however it focuses on all cash
flows produced by the company. This method is widely used, is one of the most difficult and it requires
forecasting all revenues and expenses for many years.

4. Intrinsic/Liquidation valuations - these methods value a company based on the scrap of sell off value
of the company.
Feedback: The value of a common stock is the present value of all the dividends received by owning the
stock discounted at the market capitalization rate or the cost of equity. This is called the discounted
cash flow (DCF) method.

Question 8 of 25
4.0/ 4.0 Points
An annuity is defined as

A.Equal cash flows at equal intervals of time for a specified period of time


B.Equal cash flows at equal intervals of time forever


C.Unequal cash flows at equal intervals of time forever


D.None of the above


Answer Key: A

Question 9 of 25
4.0/ 4.0 Points
Discuss some of the disadvantages of the payback rule.
The payback method ignores the time value of money. The cash inflows from a project may be irregular,
with the most of the return not occurring until well into the future. The payback model does not consider
cash inflows from a project that may occur after the initial investment has been recovered. Most major
capital expenditures have a long life span and continue to provide income long after the payback period.
Since the payback method focuses on short-term profitability, an attractive project could be overlook if
the payback period is the only consideration.
Feedback: The disadvantages are that it does not take the time value of money into account and also
does not use all the cash flow. It has limited applications such as small projects.

Question 10 of 25
4.0/ 4.0 Points
According to the net present value rule, an investment in a project should be made if the:

A.Net present value is greater than the cost of investment


B.Net present value is greater than the present value of cash flows


C.Net present value is positive


D.Net present value is negative


Answer Key: C

Question 11 of 25
4.0/ 4.0 Points
The market value of Cable Company's equity is $60 million, and the market value of its risk-free debt is
$40 million. If the required rate of return on the equity is 15% and that on the debt is 5%, calculate the
company's cost of capital. (Assume no taxes.)

A.15%


B.10%


C.11%


D.None of the above


Answer Key: C
Feedback: Company cost of capital = (40/100)(5) + (60/100)(15) = 11%

Question 12 of 25
4.0/ 4.0 Points
Which of the following investment rules has value adding-up property?

A.The payback period method


B.Net present value method


C.The book rate of return method


D.The internal rate of return method


Answer Key: B

Question 13 of 25
4.0/ 4.0 Points
You are given the following data for year-1.
Revenue = $43;
Total costs = $30;
Depreciation = $3;
Tax rate = 30%.

Calculate the operating cash flow for the project for year-1.

A.$7


B.$10


C.$13


D.None of the above


Answer Key: B
Feedback: Revenue = (43 - 30 - 3) = 10; Tax = 10(0.3) = 3; Net Profit = 10 - 3 = 7; Operating cash flow
7 + 3 = 10

Question 14 of 25
4.0/ 4.0 Points
Which of the following portfolios have the least risk?

A.A portfolio of Treasury bills


B.A portfolio of long-term United States Government bonds


C.Portfolio of U.S. common stocks of small firms


D.None of the above


Answer Key: A

Question 15 of 25
4.0/ 4.0 Points
The growth rate in dividends is a function of two ratios. They are:

A.ROA and ROE.


B.Dividend yield and growth rate in dividends.


C.ROE and the Retention Ratio.


D.Book value per share and EPS.


Answer Key: C

Question 16 of 25
4.0/ 4.0 Points
The hurdle rate for capital budgeting decisions is:

A.The cost of capital


B.The cost of debt


C.The cost of equity


D.All of the above


Answer Key: A

Question 17 of 25
4.0/ 4.0 Points
Briefly explain the functions of financial markets.
The primary function of the financial markets is to channel the financial resources from the economic
agents such as households, companies, governments, etc., with a financial surplus to the agents with a
financial deficit, or in other words, from the lender to the borrowers. It is also known as the market to
which people and entities can trade financial securities, commodities, and other fungible items of value at
low transaction costs and at prices that reflect supply and demand.
Feedback: There are five important functions of financial markets. They are:
a source of financing for corporations.
provide liquidity for the investors.
reduce risk for the investors.
source of information.
monitor of firms' financial performance.


Question 18 of 25
4.0/ 4.0 Points
The managers of a firm can maximize stockholder wealth by:

A.Taking all projects with positive NPVs


B.Taking all projects with NPVs greater than the cost of investment


C.Taking all projects with NPVs greater than present value of cash flow


D.All of the above


Answer Key: A

Question 19 of 25
4.0/ 4.0 Points
If the Wall Street Journal Quotation for a company has the following values close: 55.14; Net chg: = +
1.04; then the closing price for the stock for the previous trading day was?

A.$56.18


B.$54.10


C.$55.66


D.None of the above.


Answer Key: B
Feedback: Previous closing = today's closing net chg. = 55.14 - 1.04 = $54.10

Question 20 of 25
4.0/ 4.0 Points
When a firm has the opportunity to add a project that will utilize excess factory capacity (that is currently
not being used), which costs should be used to determine if the added project should be undertaken?

A.Opportunity cost


B.Sunk cost


C.Incremental costs


D.None of the above


Answer Key: C

Question 21 of 25
4.0/ 4.0 Points
The distribution of returns, measured over a short interval of time, like daily returns, can be approximated
by:

A.Normal distribution


B.Lognormal distribution


C.Binomial distribution


D.none of the above


Answer Key: A

Question 22 of 25
4.0/ 4.0 Points
Spill Oil Company's stocks had -8%, 11% and 24% rates of return during the last three years
respectively; calculate the average rate of return for the stock.

A.8% per year


B.9% per year


C.11% per year


D.None of the above


Answer Key: B
Feedback: Average rate of return = (-8 + 11 + 24)/3 = 9%

Question 23 of 25
4.0/ 4.0 Points
Profitability index is the ratio of:

A.Future value of cash flows to investment


B.Net present value of cash flows to investment


C.Net present value of cash flows to IRR


D.Present value of cash flows to IRR


Answer Key: B

Question 24 of 25
4.0/ 4.0 Points
The following entities issue bonds to raise long-term loans except:

A.The federal government


B.State and local governments


C.Companies


D.Individuals


Answer Key: D

Question 25 of 25
4.0/ 4.0 Points
The market value of XYZ Corporation's common stock is 40 million and the market value of the risk-free
debt is 60 million. The beta of the company's common stock is 0.8, and the expected market risk
premium is 10%. If the Treasury bill rate is 6%, what is the firm's cost of capital? (Assume no taxes.)

A.9.2%


B.14%


C.8.1%


D.None of the above


Answer Key: A
Feedback: rE = 6 + 0.8(10) = 14%; rD = 5%; Cost of capital = (0.6)(6) + (0.4) (14) = 9.2%