Business Finance Exam 2, Fall 2023
39 Questions
0 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to Lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the expected return on the portfolio invested in Stock A and Stock B?

  • 10.0%
  • 9.6%
  • 11.0%
  • 10.4% (correct)

Based on CAPM's model, an investor would want to own more of Stock A given its market beta.

False (B)

What is the historical arithmetic average return for the given stock returns of 35%, -52%, and 20%?

1%

The relevant amount to use as the annual sales figure for the Builder grade windows project is ________.

<p>164000000</p> Signup and view all the answers

Match the type of windows with their corresponding annual sales figures:

<p>Contractor grade = 220000 Architect grade = 60000 Builder grade = 100000</p> Signup and view all the answers

Which statement accurately describes market-wide risks in a portfolio?

<p>Controlling market-wide risks is possible but not very easy. (C)</p> Signup and view all the answers

It is possible for a well-diversified portfolio to have a standard deviation less than that of every asset within it.

<p>True (A)</p> Signup and view all the answers

What does WACC stand for?

<p>Weighted Average Cost of Capital</p> Signup and view all the answers

The formula to calculate WACC considers the cost of equity, the cost of debt, and the ___ of capital.

<p>proportion</p> Signup and view all the answers

Match the following terms with their definitions:

<p>Standard Deviation = A measure of the amount of variation or dispersion of a set of values Expected Return = The anticipated return on an investment based on probabilities Market Risk = The risk of losses in investments due to market fluctuations Asset-Specific Risks = Risks that are unique to a particular asset or group of assets</p> Signup and view all the answers

Which statement about the firm's cost of capital is TRUE?

<p>The cost of capital equals the expected return to the providers of funds. (C)</p> Signup and view all the answers

All forms of risk can be easily eliminated through diversification.

<p>False (B)</p> Signup and view all the answers

What is a characteristic that determines the expected return of a well-diversified portfolio?

<p>Total variance risks of the individual assets</p> Signup and view all the answers

Which statement is FALSE regarding long-term investments?

<p>The average return is always less than the geometric return. (A)</p> Signup and view all the answers

Investors who prefer bonds over stocks for long horizons are usually risk-takers.

<p>False (B)</p> Signup and view all the answers

What does the internal rate of return signify?

<p>The discount rate that results in a zero net present value for a project.</p> Signup and view all the answers

The Gordon Growth Model assumes constant _____ growth.

<p>dividend</p> Signup and view all the answers

Which option does NOT help to increase the net present value (NPV) of an investment?

<p>All of the above can increase the NPV (D)</p> Signup and view all the answers

Which statement is TRUE regarding stock prices?

<p>A stock's price is determined by the present value of expected cash flows. (C)</p> Signup and view all the answers

Match the investment analysis components with their relevance:

<p>Current market value of an existing building = Relevant Amount paid 4 years ago for an existing building = Irrelevant</p> Signup and view all the answers

The profitability index indicates the value gained per dollar invested.

<p>True (A)</p> Signup and view all the answers

What type of risk does standard deviation measure?

<p>Total risk (D)</p> Signup and view all the answers

Which statement about the risk-free rate of return is TRUE?

<p>It has no risk premium. (C)</p> Signup and view all the answers

The higher the expected rate of return, the narrower the distribution of returns.

<p>False (B)</p> Signup and view all the answers

What is the market called where newly issued securities are sold to investors?

<p>Primary market</p> Signup and view all the answers

The firm automatically maximizes the total value created for its shareholders by maintaining the current ____ and ____ of the firm.

<p>risk level; capital structure</p> Signup and view all the answers

For the proposed projects, which investment had a higher NPV?

<p>MacBooks (C)</p> Signup and view all the answers

Match the securities with their details:

<p>Bonds = A1 rated, 5% coupon, trading at 90% of face value Preferred Shares = $7.00 annual dividend, current market price $102 Common Shares = $80 market price, dividend growth of 4%</p> Signup and view all the answers

What effect does the weighted average cost of capital (WACC) have on a firm's project evaluations?

<p>It allows for consistent comparison across divisions. (D)</p> Signup and view all the answers

What formula is used to calculate Operating Cash Flow?

<p>EBIT - Taxes + Depreciation (B)</p> Signup and view all the answers

The Price to Earnings (PE) ratio is calculated as Price divided by Earnings Per Share (EPS).

<p>True (A)</p> Signup and view all the answers

What does 'Net Debt' represent in financial analysis?

<p>Debt minus Cash</p> Signup and view all the answers

The formula for the Current Ratio is __________.

<p>Current Assets divided by Current Liabilities</p> Signup and view all the answers

Match the following financial metrics with their definitions:

<p>EPS = Net Income divided by shares outstanding ROE = Net Income divided by Book Equity Profit Margin = Net Income divided by Sales Current Ratio = Current Assets divided by Current Liabilities</p> Signup and view all the answers

What represents the Retention Ratio?

<p>Earnings retained divided by Net Income (C)</p> Signup and view all the answers

The formula for Total Debt Ratio is (Assets - Book Equity) / Assets.

<p>True (A)</p> Signup and view all the answers

What calculation gives the Inventory Turnover ratio?

<p>Cost of Goods Sold divided by Average Inventory</p> Signup and view all the answers

In the earnings forecasting model, the Capital Gains Yield is calculated as __________.

<p>(Price at time t+1 - Price at time t) / Price at time t</p> Signup and view all the answers

Which formula is used to calculate the Sustainable Growth Rate (SGR)?

<p>ROE * Retention Ratio (C)</p> Signup and view all the answers

Flashcards

TRUE statement about portfolio diversification

Diversification can reduce asset-specific risks in a portfolio, but cannot eliminate market-wide risks entirely.

FALSE statement about cost of capital

A firm's cost of capital depends primarily on the use of funds, not just the source.

Relationship between expected return and cost of capital

The cost to a firm for capital funding is equal to the expected return for those who supply the funds.

Factors affecting WACC

Market conditions including interest rates, tax rates, and market risk premium affect a company's weighted average cost of capital (WACC).

Signup and view all the flashcards

Portfolio Risk

A well-diversified portfolio's expected return is determined largely by the systematic risk of the assets, not its total variance.

Signup and view all the flashcards

Controlling market risk

An investor can't readily control market risk. Increased market risk decreases expected returns.

Signup and view all the flashcards

Exam time

Exams are usually 1 hour, 15 minutes long. Read the directions thoroughly.

Signup and view all the flashcards

Academic Honesty Policy

Students must pledge not to give or receive unauthorized assistance on exams.

Signup and view all the flashcards

After-tax salvage value

The estimated value of an asset after deducting taxes at the end of a project.

Signup and view all the flashcards

Net working capital

The difference between a company's current assets and current liabilities.

Signup and view all the flashcards

Standard deviation risk

Measures asset-specific risk (unique risk of investment).

Signup and view all the flashcards

Beta risk

Measures market-wide risk (risk related to market movements).

Signup and view all the flashcards

Primary market

Where new securities (stocks or bonds) are first offered to investors.

Signup and view all the flashcards

Weighted Average Cost of Capital (WACC)

The average rate a firm pays to finance its assets.

Signup and view all the flashcards

Mutually exclusive investments

Choices where accepting one automatically eliminates the others.

Signup and view all the flashcards

NPV (Net Present Value)

The difference between the present value of cash inflows and cash outflows.

Signup and view all the flashcards

WACC

A firm's weighted average cost of capital reflects the average risk of projects.

Signup and view all the flashcards

Small-company stock returns

Historically have higher returns than large-company stocks, but are also riskier.

Signup and view all the flashcards

Bond investors and risk aversion

Investors holding bonds can be rational and relatively averse to risk over long periods.

Signup and view all the flashcards

Dividend yield

The dividend yield of a stock, unlike capital gains yield, can't be negative.

Signup and view all the flashcards

NPV increasing options

Project flexibility (shutting, waiting, expansion) can potentially increase a project's net present value (NPV).

Signup and view all the flashcards

IRR definition

The internal rate of return (IRR) is the discount rate at which a project's net present value (NPV) is zero.

Signup and view all the flashcards

Payback analysis bias

Payback analysis can bias companies toward short-term projects, neglecting potential long-term value.

Signup and view all the flashcards

Profitability Index

The profitability index measures the value created per dollar invested, showing a project's value in relation to investment.

Signup and view all the flashcards

Portfolio Expected Return

The predicted average return of a portfolio of investments, weighted by the proportion of each investment in the portfolio.

Signup and view all the flashcards

Geometric Average Return

The average rate of return per period over a specified time horizon. Accounts for the compounding effect.

Signup and view all the flashcards

Historical Volatility

A measure of the dispersion of returns around the average return.

Signup and view all the flashcards

Annual Sales Figure

The relevant revenue figures for evaluating a new product's profitability, considering the net changes in sales from the new item.

Signup and view all the flashcards

Market Risk Premium

The extra return investors expect to receive for holding a risky investment (market portfolio) versus a risk-free asset.

Signup and view all the flashcards

Operating Cash Flow

EBIT minus taxes, plus depreciation

Signup and view all the flashcards

CapEx

Change in Net Fixed Assets plus Depreciation

Signup and view all the flashcards

Average Effective Tax Rate

Tax expense divided by taxable income

Signup and view all the flashcards

Net Debt

Total debt minus cash

Signup and view all the flashcards

Book Equity

Assets minus liabilities

Signup and view all the flashcards

Inventory Turnover

Cost of Goods Sold divided by Average Inventory

Signup and view all the flashcards

Operating Cycle

Inventory period plus Receivables period

Signup and view all the flashcards

Cash Cycle

Operating cycle minus Accounts Payable period

Signup and view all the flashcards

Present Value (PV)

The current value of a future payment or stream of payments, discounted at an appropriate rate

Signup and view all the flashcards

Fisher Equation

Nominal rate ≈ Real rate + Expected Inflation rate

Signup and view all the flashcards

Study Notes

Exam 2, Version 8, Fall 2023 - Business Finance

  • Exam Time: 1 hour and 15 minutes.
  • Exam Format: Multiple choice (4 points each) and problems.
  • Honor Code: Pledge required to receive a grade. Cheating is unacceptable.
  • Multiple Choice Answers: Neatly write answers in the designated boxes.

Multiple Choice Questions

  • Question 1: True/False statements about portfolio risk

    • False: Diversification eliminates all asset-specific risk easily and cheaply.
    • True: Market-wide risks are controllable, but controlling increases in these risks is costly.
    • False: Total variance risk is the most important factor in expected returns of a diversified portfolio.
    • False: A portfolio's standard deviation can be lower than individual assets.

  • Question 2: False statement about WACC (Weighted Average Cost of Capital)

    • False: WACC doesn't depend primarily on the use of funds, but rather on the source.

  • Question 3: False statement about investments

    • False: Small-company stocks do not have the highest returns in the long run.

  • Question 4: Which concerning NPV doesn't increase it?

    • The ability to wait for better economic conditions to invest.

Additional Questions

  • Question 5: False statement on project valuation methods

    • False: Payback method is biased toward long-term projects over short-term projects.

  • Question 6: True statement on securities

    • True: A stock's price is the sum of the present values of future cash flows (i.e., dividends and capital gains)
    • True: brokers and dealers have different roles when buying and selling securities.

  • Question 7: What should not be included regarding investments?

    • Amounts paid in prior years for assets being planned to be used in the investment

  • Question 8: Standard deviation measures

    • Asset-specific risk and market-wide risk.

  • Question 9: What is true about risk and return?

    • Risks and returns are inversely related (higher risk, higher potential return; lower risk, lower potential return).

  • Question 10: New securities are sold in which market?

    • Primary

  • Question 11: What does applying a weighted average cost of capital do?

    • Automatically does not maximize value.

Additional Exam Problems (Q1-Q5)

  • Capital Budgeting: Calculate Net Present Value (NPV), Payback, and Profitability Index for mutually exclusive investment options.
  • Cost of Capital: Calculate weighted average cost of capital (WACC) for a utility company using provided information.
  • Portfolio Theory: Calculate portfolio expected return.
  • Historical Returns: Calculate arithmetic average return, geometric average return, total return index, and historical volatility of a stock.
  • Sales Forecasting: Calculate relevant annual sales figure for a new window product under competitor pressure.

Formula Sheet Information

  • Specific formulas are available (see provided pages).
  • Formulas provided for the mentioned concepts.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Quiz Team

Related Documents

Business Finance Exam 2, Fall 2023 PDF

Description

Test your knowledge of key concepts in business finance with this exam. It covers topics such as portfolio risk and the Weighted Average Cost of Capital (WACC). Prepare for multiple-choice questions and problem-solving scenarios essential for finance proficiency.

More Like This

Portfolio Risk and Return Quiz
10 questions

Portfolio Risk and Return Quiz

HighSpiritedBalance avatar
HighSpiritedBalance
Portfolio Risk and Return: Part I Quiz
6 questions

Portfolio Risk and Return: Part I Quiz

EfficaciousAwareness avatar
EfficaciousAwareness
Portfolio Risk Management
18 questions

Portfolio Risk Management

WellReceivedHexagon avatar
WellReceivedHexagon
Portfolio Risk and Diversification Concepts
44 questions

Portfolio Risk and Diversification Concepts

EthicalToad1316 avatar
EthicalToad1316
Use Quizgecko on...
Browser
Open
Browser
Browser