Business Finance Exam 2, Fall 2023
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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

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

    All forms of risk can be easily eliminated through diversification.

    <p>False</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.</p> Signup and view all the answers

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

    <p>False</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</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.</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</p> Signup and view all the answers

    What type of risk does standard deviation measure?

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

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

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

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

    <p>False</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</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.</p> Signup and view all the answers

    What formula is used to calculate Operating Cash Flow?

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

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

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

    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.

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    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.

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