Take Home Exam 3 MULTIPLE CHOICE – Choose the one alternative that

Take Home Exam 3

MULTIPLE CHOICE – Choose the one alternative that best completes the statement or answers the question.

2) The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:

A) produce a positive annual cash flow.

B) produce a positive cash flow from assets.

C) offset its fixed expenses.

D) offset its total expenses.

E) recoup its initial cost.

3) The average net income of a project divided by the project’s average book value is referred to as the project’s:

A) required return.

B) market rate of return.

C) internal rate of return.

D) average accounting return.

E) discounted rate of return.

4) Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?

A) Mutually exclusive

B) Conventional

C) Multiple choice

D) Dual return

E) Crosswise

6) Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities?

A) Payback

B) Profitability index

C) Accounting rate of return

D) Internal rate of return

E) Net present value

7) Which one of the following indicators offers the best assurance that a project will produce value for its owners?

A) PI equal to zero

B) Negative rate of return

C) Positive AAR

D) Positive IRR

E) Positive NPV

9) Which one of the following methods of analysis ignores the time value of money?

A) Net present value

B) Internal rate of return

C) Discounted cash flow analysis

D) Payback

E) Profitability index

10) Which one of the following methods of analysis has the greatest bias toward short-term projects?

A) Net present value

B) Internal rate of return

C) Average accounting return

D) Profitability index

E) Payback

11) Which one of the following analytical methods is based on net income?

A) Profitability index

B) Internal rate of return

C) Average accounting return

D) Modified internal rate of return

E) Payback

13) Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows?

A) Forecast assumption principle

B) Base assumption principle

C) Fallacy principle

D) Erosion principle

E) Stand-alone principle

14) A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a(n):

A) fixed cost.

B) forgotten cost.

C) variable cost.

D) opportunity cost.

E) sunk cost.

16) Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project?

A) Opportunity cost

B) Sunk cost

C) Erosion

D) Replicated flows

E) Pirated flows

17) A pro forma financial statement is a financial statement that:

A) expresses all values as a percentage of either total assets or total sales.

B) compares actual results to the budgeted amounts.

C) compares the performance of a firm to its industry.

D) projects future years’ operating results.

E) values all assets based on their current market values.

18) The amount by which a firm’s tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:

A) tax shield.

B) credit.

C) erosion.

D) opportunity cost.

E) adjustment.

19) Which one of the following refers to a method of increasing the rate at which an asset is depreciated?

A) Noncash expense

B) Straight-line depreciation

C) Depreciation tax shield

D) Accelerated cost recovery system

E) Market-based depreciation

20) Forecasting risk is best defined as:

A) reality risk.

B) value risk.

C) potential risk.

D) management risk.

E) estimation risk.

22) Contingency planning focuses on the:

A) opportunity costs involved with a project.

B) sunk costs related to a project.

C) economic effects on a project’s profitability.

D) managerial options implicit in a project.

E) optional capital requirements of a project.

23) Which one of the following refers to the option to expand into related businesses in the future?

A) Strategic option

B) Contingency option

C) Soft rationing

D) Hard rationing

E) Capital rationing option

24) Kyle Electric has three positive net present value opportunities. Unfortunately, the firm has not been able to find financing for any of these projects. Which one of the following terms best fits the situation facing the firm?

A) Sensitivity analysis

B) Capital rationing

C) Soft rationing

D) Contingency planning

E) Sunk cost

25) Northern Companies has three separate divisions. Each year, the company determines the amount it can afford to spend in total for capital expenditures and then allocates one-third of that amount to each division. This allocation process is called:

A) soft rationing.

B) hard rationing.

C) opportunity cost allocation.

D) divisional separation.

E) strategic planning.

26) On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called?

A) Inflation premium

B) Required return

C) Real return

D) Average return

E) Risk premium

28) Which one of the following is defined as a bell-shaped frequency distribution that is defined by its average and its standard deviation?

A) Arithmetic average return

B) Variance

C) Standard deviation

D) Probability curve

E) Normal distribution

29) Which one of the following is defined as the average compound return earned per year over a multiyear period?

A) Geometric average return

B) Variance of returns

C) Standard deviation of returns

D) Arithmetic average return

E) Normal distribution of returns

30) Which one of the following best describes an arithmetic average return?

A) Total return divided by N − 1, where N equals the number of individual returns

B) Average compound return earned per year over a multiyear period

C) Total compound return divided by the number of individual returns

D) Return earned in an average year over a multiyear period

E) Positive square root of the average compound return

31) An efficient capital market is best defined as a market in which security prices reflect which one of the following?

A) Current inflation

B) A risk premium

C) All available information

D) The historical arithmetic rate of return

E) The historical geometric rate of return

32) Which one of the following is the hypothesis that securities markets are efficient?

A) Geometric market hypothesis

B) Standard deviation hypothesis

C) Efficient markets hypothesis

D) Capital market hypothesis

E) Financial markets hypothesis

34) The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield and reported in your textbook, are based on the:

A) largest 20 percent of the stocks traded on the NYSE.

B) stock returns for the largest 10 percent of the publicly traded firms in the U.S. C) returns of the 100 largest firms in the U.S.

D) returns of all the stocks listed on the NYSE.

E) stocks of the 500 companies included in the S&P 500 index.

35) Over the period of 1926-2020, which one of the following investment classes had the highest volatility of returns?

A) Large-company stocks

B) U.S. Treasury bills

C) Small-company stocks

D) Long-term corporate bonds

E) Long-term government bonds

36) Over the period of 1926-2020:

A) long-term government bonds underperformed long-term corporate bonds.

B) small-company stocks underperformed large-company stocks.

C) inflation exceeded the rate of return on U.S. Treasury bills.

D) U.S. Treasury bills outperformed long-term government bonds.

E) large-company stocks outperformed all other investment categories.

37) Over the period of 1926-2020:

A) the risk premium on large-company stocks was greater than the risk premium on small- company stocks.

B) U.S. Treasury bills had a risk premium that was just slightly over 2 percent. C) the risk premium on long-term government bonds was zero percent. D) the risk premium on stocks exceeded the risk premium on bonds.

E) U. S. Treasury bills had a negative risk premium.

38) The rate of return on which one of the following has a risk premium of 0%?

A) Long-term government bonds

B) Long-term corporate bonds

C) Intermediate-term government bonds

D) U.S. Treasury bills

E) Large-company stocks

40) Which one of the following categories has the widest frequency distribution of returns for the period 1926-2020?

A) Small-company stocks

B) U.S. Treasury bills

C) Long-term government bonds

D) Inflation

E) Large-company stock

41) A portfolio is:

A) a single risky security.

B) any security that is equally as risky as the overall market.

C) any new issue of stock.

D) a group of assets held by an investor.

E) an investment in a risk-free security.

42) Stock A comprises 28 percent of Susan’s portfolio. Which one of the following terms applies to the 28 percent?

A) Portfolio variance

B) Portfolio standard deviation

C) Portfolio weight

D) Portfolio expected return

E) Portfolio beta

43) Systematic risk is defined as:

A) any risk that affects a large number of assets.

B) the total risk of an individual security.

C) diversifiable risk.

D) asset-specific risk.

E) the risk unique to a firm’s management.

44) Unsystematic risk can be defined by all of the following except:

A) unrewarded risk.

B) diversifiable risk.

C) market risk.

D) unique risk.

E) asset-specific risk.

46) The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is measured by the:

A) squared deviation.

B) beta coefficient.

C) standard deviation.

D) mean.

E) variance.

47) The security market line is a linear function that is graphed by plotting data points based on the relationship between the:

A) risk-free rate and beta.

B) market rate of return and beta.

C) market rate of return and the risk-free rate.

D) risk-free rate and the market rate of return.

E) expected return and beta.

48) The slope of the security market line represents the:

A) risk-free rate.

B) market risk premium.

C) beta coefficient.

D) risk premium on an individual asset.

E) market rate of return.

49) Which one of the following statements is correct?

A) The risk premium on a risk-free security is generally considered to be one percent.

B) The expected rate of return on any security, given multiple states of the economy, must be positive.

C) There is an inverse relationship between the level of risk and the risk premium given a risky security.

D) If a risky security is correctly priced, its expected risk premium will be positive.

E) If a risky security is priced correctly, it will have an expected return equal to the risk free rate.