A four-month european call option on a dividend-paying

B two of more persons. A Single taxation B Ease of setup C Limited liability D No separation of ownership and control. C A limited partner is not liable until all the assets of the general partners have been exhausted. A Access to capital markets B Limited liability C Unlimited life D All of the above. A An advantage to incorporation is that it allows for less regulation of the business. B An advantage of a corporation is that it is subject to double taxation.

C Unlike a partnership, a disadvantage of a corporation is that has limited liability. D Corporations face more regulations when compared to partnerships. A a limited partnership without limited partners. B a limited partnership without a general partner. C just another name for a limited partnership.

D just another name for a corporation. A their is no legal difference between the corporation and its owners. B it is a legally defined, artificial being, separate from its owners.

C it spreads liability for its corporate obligations to all shareholders. D provides limited liability only to small shareholders. A Corporation B Partnership C Sole proprietorship D A and B. Once the corporation has paid any corporate taxes that are due, it will distribute the rest of its earnings to its shareholders in the form of a dividend. After it has paid taxes, it will distribute the remainder of its earnings to you as a dividend. The dividend is income to you, so you will then pay taxes on these earnings.

The effective tax rate on your share of the corporations earnings is closest to: A the Board of Directors. A the chief operating officer.

B the company president. C the chief executive officer. D the chief financial officer. A because managers have little incentive to work in the interest of shareholders when this means working against their own self-interest. B because of the separation of ownership and control in a corporation. C Both A and B D None of the above. A buy more shares in an effort to gain control of the firm. B file a shareholder resolution.

C replace the CEO through a grassroots shareholder uprising. D sell their shares. A shareholder proposal B leveraged buyout C shareholder action D hostile takeover. A In bankruptcy, management is given the opportunity to reorganize the firm and renegotiate with debt holders. B Because a corporation is a separate legal entity, when it fails to repay its debts, the people who lent to the firm, the debt holders are entitled to seize the assets of the corporation in compensation for the default.

C As long as the corporation can satisfy the claims of the debt holders, ownership remains in the hands of the equity holders.

A the chief executive officer. B the chief financial officer. C the chief operating officer. D the chairman of the board. This use of additional funds comes about as a result of: A an agency problem. B an adverse selection problem. C a moral hazard. D a publicity problem.

questions on options | Wall Street Oasis

A requiring all firms to be sole proprietorships. B compensating managers in such a way that acting in the best interest of shareholders is also in the best interest of managers. C asking managers to take on more risk than they are comfortable taking. A the London Stock Exchange. C the American Stock Exchange.

D the New York Stock Exchange. A has large day to day fluctuations in price. B has a large bid-ask spread. C can easily be converted into cash.

D is traded on a stock exchange. A On Nasdaq, stocks can and do have multiple market makers who compete with each other. Each market maker must post bid and ask prices in the Nasdaq network where they can be viewed by all participants. B Bid prices exceed ask prices. C Because customers always buy at the ask and sell at the bid, the bid-ask spread is a transaction cost investors have to pay in order to trade.

D On the floor of the NYSE, market makers known on the NYSE as specialists match buyers and sellers. A Coca-Cola receives the money because the company has issued new shares. B you buy the shares from another investor who decided to sell the shares. C you buy the shares from the New York Stock Exchange. D you buy the shares from the Federal Reserve. Securities and Exchange Commission on which form? A A B K C Q D SEC. A NYSE Enforcement Board. B Accounting Standards Board.

C Securities and Exchange Commission SEC. D The balance sheet reports liabilities on the left hand side. This reduction in value results in: A an impairment charge. C an operating expense. A Brand names and trademarks B Patents C Customer relationships D All of the above are intangible assets.

B in the Operating Expenses section. C in the Current Assets section. D in the Current Liabilities section. A income statement or statement of financial performance. B income statement or statement of financial position. C balance sheet or statement of financial performance. D balance sheet or statement of financial position. C statement of cash flows. Long-Term Assets Long-Term Liabilities Land A The income statement shows the earnings and expenses at a given point in time.

B The income statement shows the flow of earnings and expenses generated by the firm between two dates.

D The first line of an income statement lists the revenues from the sales of products or services. A Total sales — cost of sales — selling, general and administrative expenses — depreciation and amortization B Total sales — cost of sales — selling, general and administrative expenses C Total sales — cost of sales D None of the above. A Interest expense B Depreciation and amortization C Selling, general and administrative expenses D Research and development.

In NovemberPerrigo Co. A Income generating activities B Investing activities C Operating activities D Financing activities. A Amortization is added in when calculating net income.

B Changes in inventory will change cash flows but not income. C Capital expenditures are not recorded on the income statement. D Depreciation is deducted when calculating net income. A Add increases in accounts payable B Add back depreciation C Add increases in accounts receivable D Deduct increases in inventory.

A Add dividends paid B Add any increase in long term borrowing C Add any increase in short-term borrowing D Add proceeds from the sale of stock. A a decrease of. A the value of assets held per dollar of shareholder equity. B the return the firm has earned on its past investments.

D how efficiently the firm is utilizing its assets to generate sales. A Firm A is more efficient than Firm B. B Firm A has a lower dollar amount of assets than Firm B. C Firm A has higher sales than Firm B. D Firm A has a lower ROE than Firm B. A increase; increase B decrease; decrease C increase; decrease D decrease; increase.

A profitability, asset efficiency, and leverage. B valuation, leverage, and interest coverage. C profitability, margins, and valuation. D equity, assets, and liabilities. This fall could be attributed to: A an increase in net profit margin. B a decrease in asset turnover. C an increase in leverage. D a decrease in Equity. A A proportional increase in its net income B A proportional decrease in its EBIT C A proportional increase in its EBIT D An increase in its operating expenses.

A Its cost of goods sold increased. B Its cost of goods sold as a percent of sales increased. C Its sales increased. D Its net profit margin was unaffected by the decline. A the average length of time it takes a company to sell its inventory. D the percentage change in inventory over the past year. D Not enough information to answer the question.

Inventory days for is closest to: Accounts payable days for is closest to: Its book value Debt -Equity Ratio for is closest to: Its Market value Debt-Equity Ratio for is closest to: Its Debt -Capital Ratio for is closest to: Its Debt-to-Enterprise Value Ratio in is closest to: If EBIT is A financial scandals, including WorldCom and Enron. B financial scandals, including Bernie Madoff and AIG. C financial scandals, including General Motors and Chrysler.

D the Troubled Asset Relief Program TARP. A requiring the CEO and CFO to return bonuses or profits from the sale of stock that are later shown to be due to misstated financial reports. B imposing large compliance costs on small companies. C requiring auditing firms to have long-standing relationships with their clients and receive lucrative auditing and consulting fees from them.

D putting strict limits on the amount of non-audit fees consulting or otherwise that an accounting firm can earn from a firm that it audits. A putting strict limits on the amount of non-audit fees consulting or otherwise that an accounting firm can earn from a firm that it audits. B requiring the CEO and CFO to return bonuses or profits from the sale of stock that are later shown to be due to misstated financial reports. D requiring senior management and the boards of public companies to validate and certify the process through which funds are allocated and controlled.

C Strengthens whistle-blower provisions of SOX. D All of the above. A The first step in evaluating a project is to identify its costs and benefits. B In the absence of competitive markets, we can use one-sided prices to determine exact cash values. C Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision maker.

D Because competitive markets exist for most commodities and financial assets, we can use them to determine cash values and evaluate decisions in most situations. Assuming you currently have 10, Bbls of WTI crude, the added benefit cost to you if you take the trade is closest to: Assuming you just purchased 10, Bbls of WTI crude at the current market price, the added benefit cost to you if you take the trade is closest to: Assuming you currently have 10, Bbls of WTI crude, what should you do?

A Sell 10, Bbls WTI crude on the market and use the proceeds to purchase and refine ANS crude. B Do nothing, refine the 10, Bbls of WTI crude.

C Trade the 10, Bbls WTI crude with the other refiner and refine the 10, Bbls of ANS crude. D Trade the 10, Bbls WTI crude with the other refiner and then sell the 10, Bbls of ANS crude. This central concept is called: A the Law of One Price.

B the Present Value. C the Valuation Principle. D the Internal Rate of Return. Assuming you currently have 4, tons of high-grade ore, what are the total benefits and added benefits of taking the trade? The equivalent value in one year is closest to: If the risk-free rate of interest rf is 4. A In general, money today is worth more than money in one year.

B We define the risk-free interest rate, rf for a given period as the interest rate at which money can be borrowed or lent without risk over that period. C We refer to 1 — rf as the interest rate factor for risk-free cash flows. D For most financial decisions, costs and benefits occur at different points in time. D None of the above.

The equivalent value today is closest to: A present value; future value B future value; present value C ordinary annuity; annuity due D discount factor; discount rate 11 If we use future value rather than present value to decide whether to make an investment: A we will make a bad decision, since the future value will always be higher if the discount rate is positive. B we will make a bad decision, since the future value will always be lower if the discount rate is positive.

C we will make the same decision using either future value or present value. D There is not enough information given to answer the question. A The NPV represents the value of the project in terms of cash today. B Good projects will have a positive NPV. C The NPV of a project is the difference between the present value of its benefits and the present value of its costs.

D When faced with a set of alternatives, choose the one with the lowest NPV in order to minimize the preset value of costs. A Reject projects with a NPV of zero, as accepting them is equivalent to reducing firm value.

B When faced with a set of alternatives, choose the one with the highest NPV. C Accept those projects with a positive NPV, as accepting them is equivalent to receiving their NPV in cash today.

D Reject those projects with a negative NPV. Should you take this project? The NPV for this project is closest to: What is the NPV of this project? Would you take the project? A Eenie B Meenie C Mighty D Moe. Suppose the risk-free rate of interest in the U. Rank each of the four projects from most desirable to least desirable based upon NPV.

Which project would you invest in first? A Any situation in which it is possible to make a profit without taking any risk is known as an arbitrage opportunity. B Any situation in which it is possible to make a profit without making any investment is known as an arbitrage opportunity. C We call a competitive market in which there are no arbitrage opportunities an arbitrage market.

D The practice of buying and selling equivalent goods in different markets to take advantage of a price difference is known as arbitrage. A At any point in time, the price of two equivalent goods trading in different competitive markets will be the same. B One useful consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value, we can use any competitive price to determine a cash value, without checking the price in all possible markets.

C If equivalent goods or securities trade simultaneously in different competitive markets, then they will trade for the same price in both markets. D An important property of the Law of One Price is that it holds even in markets where arbitrage is not possible.

Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on one extra value meal? B No, no arbitrage opportunity exists. Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on a block trade of shares?

A No, no arbitrage opportunity exists. But wait, there is more. Assuming that there is a competitive market for Ronco items, at what price must Ronco be selling this three item Dial-o-matic deal to insure the absence of an arbitrage opportunity and uphold the law of one price?

A We call the price of a security in a normal market the no-arbitrage price for the security. B In financial markets it is possible to sell a security you do not own by doing a short sale. C When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds.

Suppose a third security, C, has the same cash flows as A and B combined. A If the total price of A and B is cheaper than the price of C, then we could make a profit selling A and B and buying C.

D The relationship known as value additivity says that the value of a portfolio is equal to the sum of the values of its parts. A The value of a portfolio is equal to the sum of the values of its parts. B The price or value of the entire firm is equal to the sum of the values of all projects and investments within the firm. C To maximize the value of the entire firm, managers should make decisions that maximize NPV.

D Value additivity does not have important consequences for the value of the entire firm, only on portfolios of firms. A Financial transactions are not sources of value, but merely serve to adjust the timing and risk of the cash flows to best suit the needs of the firm or its investors.

B The NPV of trading a security in a normal market is zero. D In normal markets, trading securities neither creates nor destroys value. Should the film maker make the investment? What is the NPV if the film maker issues the new security? B sell the EFT and buy 3 shares of IBM, 2 shares of MRK, and 3 shares of C. C buy the EFT and sell 2 shares of IBM, 3 shares of MRK, and 3 shares of C. D do nothing, no arbitrage opportunity exists. If there are no arbitrage opportunities, then the current risk-free interest rate is closest to: Siemens AG has an ADR that trades on the NYSE and is equivalent to one share of Seimens AG trading on the Frankfurt Stock Exchange in Germany.

If there are no arbitrage opportunities, then the current risk-free rate is closest to: What if any trades would you make? What trades would you make? A When we compute the return of a security based on the average payoff we expect to receive, we call it the expected return. B The notion that investors prefer to have a safe income rather than a risky one of the same average amount is call risk aversion.

C Because investors are risk averse, the risk-free interest rate is not the right rate to use when converting risky cash flows across time.

D The more risk averse investors are, the higher the current price of a risky asset will be compared to a risk-free bond. At the same time NASDAQ dealers are posting for following bid and ask prices for PHE:. Which of these NASDAQ represents an arbitrage opportunity when compared to the NYSE quotes?

A Only NASDAQ dealer 1 B Only NASDAQ dealer 2 C Only NASDAQ dealer 3 D Both NASDAQ dealer 1 and dealer 3 E None of the above. If the returns on this security are high when the economy is strong and low when the economy is weak, but the returns vary by only half as much as the market index, what risk premium is appropriate for this security?

If the returns on this security are high when the economy is strong and low when the economy is weak, but the returns vary by only half as much as the market index, then the price for this risky security is closest to: Arbitrage with Transaction Costs.

A No arbitrage opportunities will exist until the underlying prices diverge by more than the amount of the transaction costs. B Because you will generally pay a slightly lower price when you buy a security the ask price than you receive when you sell the bid price you will pay the bid-ask spread. C The price of a security should equal the present value of its cash flows, up to the transaction costs of trading the security and the cash flows.

D In most markets, you must pay transactions costs to trade securities. The price range that this bond must trade in a normal market if no arbitrage opportunities exist is closest to: The minimum bid price for this ETF in a normal market is closest to: The minimum ask price for this ETF in a normal market is closest to: Are there any limits on the amount that their values can differ?

What should you do? The current quote for this ETF currently is A Timelines are an important first step in organizing and then solving a financial problem. B We refer to a series of cash flows lasting several periods as a stream of cash flows. C Not every stream of cash flows can be represented on a timeline.

D A timeline is a linear representation of the timing of the expected cash flows. A Date 1 is one year from now. D Date 0 represents today. A Date 1 is the end of the first year.

B Date 0 is the beginning of the first year. C The space between date 0 and date 1 represents the time period between two specific dates. D You will find the timeline most useful in tracking cash flows if you interpret each point on the timeline as a period or interval of time. Draw a timeline detailing this investment opportunity. Draw a timeline that details the amount of money she will need to have in the future four each of her four years of her undergraduate education.

A The process of moving a value or cash flow forward in time is known as compounding. B The effect of earning interest on interest is known as compound interest. C It is only possible to compare or combine values at the same point in time. D A dollar in the future is worth more than a dollar today.

A Finding the present value and compounding are the same. B A dollar today and a dollar in one year are not equivalent. C If you want to compare or combine cash flows that occur at different points in time, you first need to convert the cash flows into the same units or move them to the same point in time.

D The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money. A The process of moving a value or cash flow backward in time is known as discounting.

D The value of a cash flow that is moved forward in time is known as its future value. A invest in this opportunity since the NPV is positive.

B not invest in this opportunity since the NPV is positive. C invest in this opportunity since the NPV is negative. D not invest in this opportunity since the NPV is negative. A To find the value of a perpetuity one cash flow at a time would take forever.

B A perpetuity is a stream of equal cash flows that occurs at regular intervals and lasts forever. C An annuity is a stream of N equal cash flows paid at regular intervals. D Most car loans, mortgages, and some bonds are annuities. D A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever. A A growing annuity is a stream of N growing cash flows, paid at regular intervals. A The difference between an annuity and a perpetuity is that an annuity ends after some fixed number of payments.

B Most car loans, mortgages, and some bonds are annuities. C A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever. D An annuity is a stream of N equal cash flows paid at irregular intervals. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to: This pattern of payments will continue forever.

As the ore closest to the surface is removed it will become more difficult to extract the ore. The patent on the drug will last for 17 years. Once the patent expires, other pharmaceutical companies will be able to produce generic equivalents of your drug and competition will drive any future profits to zero. The missing cash flow from year 2 is closest to: To save for your retirement, you plan on making annual contributions to a retirement account.

At retirement age 65 you will begin withdrawing equal annual payments to pay for your living expenses during retirement on your 65th birthday. To solve this problem in Microsoft Excel, you would use which of the following Excel formulas? You want to know the present value of the cash flows from this investment.

To solve this problem in Microsoft Excel, you would use which of the following excel formulas? The IRR of this opportunity is closest to: Henry just turned 30 today, and he has decided that starting today and continuing on every birthday up to and including his 65th birthday, he will deposit the same amount into an individual retirement account IRA. If you borrow the money from this mortgage company, your monthly mortgage payment will be closest to: The annual interest payment on this bond must be: If today is your 30th birthday, and you decide, starting today, and on every birthday up to and including your 65th birthday, that you will deposit the same amount into your savings account.

The IRR of this investment opportunity is closest to: The interest rate for the deal advertised is closest to: Solving for the Number of Periods. The number of years that your grandmother must live in order to get more value out of the annuity than what she paid for it is closest to: A months B 14 months C months D You will never get the card paid off at that rate.

A Because interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of our cash flows. B The effective annual rate indicates the amount of interest that will be earned at the end of one year.

C The annual percentage rate indicates the amount of simple interest earned in one year. D The annual percentage rate indicates the amount of interest including the effect of compounding. A Investment A B Investment B C Investment C D Investment D. The APR on this auto loan is closest to: The APR on his credit card is closest to: Given that his account offered monthly compounding of interest, the APR on this account is was closest to: The dealer offers you 4.

The dealer offers you 1. You have been pre-approved for an auto loan through your local credit union at an interest rate of 7. The mortgage lender quotes you a rate of 6. The mortgage lender also tells you that if you are willing to pay 1 point, they can offer you a lower rate of 6. Assuming that you do not intend to prepay your mortgage pay off your mortgage earlyare you better off paying the 1 point and borrowing at 6.

Discount Rates and Loans. A The interest rates that banks offer on investments or charge on loans depends on the horizon of the investment or loan.

B The Federal Reserve determines very short-term interest rates through its influence on the federal funds rate. C The interest rates that are quoted by banks and other financial institutions are nominal interest rates. D Fundamentally, interest rates are determined by the Federal Reserve. A The relationship between the investment term and the interest rate is called the term structure of interest rates.

B Real interest rates indicate the rate at which your money will grow if invested for a certain period. C The yield curve is a potential leading indicator of future economic growth.

D The shape of the yield curve will be strongly influenced by interest rate expectations. A The yield curve changes over time. B The formulas for computing present values of annuities and perpetuities cannot be used in situations in which cash flows need to be discounted at different rates.

C We can use the term structure to compute the present and future values of a risk-free cash flow over different investment horizons. D The yield curve tends to be inverted as the economy comes out of a recession.

A The plot of the relationship between the investment risk and the interest rate is call the yield curve. B Each of the last six recessions in the United States was preceded by a period with an inverted yield curve.

C The nominal interest rate does not represent the increase in purchasing power that will result from investing D A risk-free cash flow received in two years should be discounted at the two-year interest rate. A An inverted yield curve generally signals an expected decline in future interest rates.

B An inverted yield curve is often interpreted as a positive forecast for economic growth. C All the formulas for computing present values of annuities and perpetuities are based upon discounting all of the cash flows at the same rate.

D The rate of growth of your purchasing power is determined by the real interest rate. Can the real interest rate ever be negative? B Interest rates vary with the investment horizon. C All borrowers, besides the U.

Treasury, have some risk of default. B Interest rates vary based on the identity of the borrower. C The ability to deduct the interest expense increases the effective after-tax interest rate paid on the excel/vba based automated trading system. D For loans to borrowers other than the U.

Treasury, the stated interest rate is the maximum amount that investors will receive. Treasury securities are widely regarded to be risk-free because there is virtually no chance the government will default on these bonds.

C Investors may receive less than the stated interest rate if the borrowing company has financial difficulties and is unable to fully repay the loan. D Taxes reduce the amount of interest the investor can keep, and we refer to this reduced amount as the tax effective interest rate.

A The actual cash flow that the investor will get to keep will be reduced by the amount of any tax payments. C The right discount rate for a cash flow is the rate broadcom backdating stock option return available in the market on other investments of comparable risk and term. D To compensate for the risk that they will receive less if the firm defaults, investors demand a lower interest rate than the rate on U.

B Interest rates we observe in the market will vary based on quoting conventions, the term of investment, and risk. C The opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment.

D For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U. Treasury securities with a similar term. A The actual return kept by an investor will depend on how the interest is taxed.

C The highest interest rate, for a given horizon, is the rate paid jordan shoe stock market U. D It is important to use a discount rate that matches both the horizon and the risk of the cash flows. The effective annual rate for this investment is closest to: If this investment offers continuous compounding, then the APR for this investment is closest to: A Bonds are a securities sold by governments and corporations to raise money from investors today in exchange for promised future payments.

B By convention the coupon rate is expressed as an effective annual rate. C Bonds typically make two types of payments to how to make origami money box holders. D The time remaining until the repayment date is known as the term of the bond.

A The principal or face value of a bond is the notional amount we use to compute the interest payments. B Payments are made on bonds until a final repayment date, called the term date of the bond.

C The coupon rate of a bond is set by the issuer and stated on the bond certificate. D The promised interest payments online typing earning money pakistan a bond are called coupons. A The bond certificate typically specifies that the coupons will be paid periodically until the maturity date of the bond. B The bond certificate indicates the amounts and dates of all payments to be made.

Boundary Conditions on Options

C The only cash payments the investor will receive from a zero coupon bond are the interest payments that are paid up until the maturity date.

D Usually the face value of a bond is repaid at maturity. A The amount of each coupon payment is determined by the coupon rate of the bond. B Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.

C The simplest type of bond is a zero-coupon bond. D Treasury bills are U. A Bond traders typically quote bond prices rather than bond yields.

B Treasury bills are zero-coupon bonds. C Zero-coupon bonds always trade at a discount. D The yield to maturity is typically stated as an annual rate by multiplying the calculated YTM by the number of coupon payment per year, thereby converting it to an APR. A One advantage of quoting the yield to maturity rather than the price is that the yield is independent of the face value of the bond.

B Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no simple formula to solve for the yield to maturity directly.

C Because we can convert any bond price into a yield, and vice versa, bond prices and yields are often used interchangeably. D The IRR of an investment in a bond is given a special name, the yield to maturity YTM. A The IRR of an investment in a zero-coupon bond is the rate of return that investors will earn on their money if they buy a default free bond at its current price and hold it to maturity. B The yield to maturity of a bond is the discount rate that sets the future value of the promised bond payments equal to the current market price of the bond.

C Financial professionals aftermarket stock price infrastructure use the term spot interest rates to refer to the default-free zero-coupon yields.

A Zero-coupon bonds are also called pure discount bonds. B The IRR of an investment opportunity is the discount rate at which the NPV of the investment opportunity is equal to zero.

C The yield to maturity for a zero-coupon bond is the return you will earn as an investor from holding the bond to maturity and receiving the promised face value payment. Expressed as an APR with semiannual compounding, this bonds yield to maturity YTM is closest to: The yield to maturity of this bond expressed as an EAR is closest to: If the YTM of this bond is D None of the above 21 Assuming the appropriate YTM on the Sisyphean bond is 9.

B nothing about the shape of the yield curve. C that the yield curve is downward sloping. D that the yield curve is upward sloping. Assuming the appropriate YTM on the Sisyphean bond is 8.

A If the bond trades at a discount, and investor who buys the bond will earn a return both from receiving the coupons and from receiving a face value that exceeds the price paid for the bond. B Most coupon bond issuers choose a coupon rate so that the bonds will initially trade at, or very near to, par.

C Coupon bonds always trade for a discount. B When a bond trades at a price equal to its face value, it is said to trade at par. C As interest rates and bond yield rise, bond prices will fall. A A bond trades at par when its coupon rate is equal to its yield to maturity. B The clean price of a bond is adjusted for accrued interest.

C The price of the bond forex iceberg drop by the amount of the coupon immediately after the coupon is paid. 365 days of dog meat trading in thailand teaser As interest rates and bond yields foreign exchange rates api, bond prices will rise.

C Bonds with higher coupon rates are more sensitive to interest rate changes. D Shorter maturity zero coupon bonds are less sensitive to changes in interest rates than are longer-term zero coupon bonds.

A If clubpenguinhq/moneymaker no download bond trades at a premium, its yield to maturity will exceed its coupon rate. B A bond that trades at a premium is said to trade above par. A Prices of bonds with lower durations are identify false breakout forex sensitive to interest rate changes.

C Coupon bonds may trade at a discount, at a premium, how to make money selling premier designs jewelry at par.

D the bond is a zero-coupon bond. A the current yield. B the yield forex trading eur/gbp maturity. C the zero coupon yield. D the discount yield. However, bond 4 has the longest maturity and therefore will have the highest change in price. A Bond A B Bond B C Bond C D Bond D 24 Mol money online hack free download of the four bonds is the least sensitive to a one percent increase in a four-month european call option on a dividend-paying YTM?

It has been 57 days since the last coupon payment was made and there are days in the current coupon period. The dirty cash price for this bond is closest to: The next coupon payment will be made in 63 days and there are days in the current coupon period. The clean price for this bond is closest to: A Given the spot interest rates, we can determine the price and yield of any other default-free bond.

B As the coupon increases, earlier cash flows become relatively less important than invest in stock market australia cash flows in the calculation of the present value.

C When the yield curve is flat, all zero-coupon and coupon-paying bonds will have the same yield, independent of their maturities and coupon rates. A We can use the law of one price to compute the price of a coupon bond from the prices of zero-coupon bonds.

B The plot of the yields of coupon bonds of different maturities is called the coupon-paying yield curve. C It is possible to replicate the cash flows of a coupon bond using zero-coupon bonds.

D Because the coupon bond provides cash flows at different points in time, the yield to maturity of a coupon bond is the simple average of the yields of the zero-coupon bonds of equal and shorter maturities. A By convention, practitioners always plot the yield of the most senior issued bonds, termed the on-the-run-bonds. B We can cicli nel forex the no-arbitrage price of a coupon bond by discounting its cash flows using the zero-coupon yields.

C If the zero coupon yield curve is upward sloping, the resulting yield to maturity decreases with the coupon rate of the bond. D The yield to maturity of a coupon bond is a weighted average of the yields on the zero-coupon bonds.

A The yield to maturity of a coupon bond is a weighted average of the yields on the zero-coupon bonds. B If the zero-coupon yield curve is downward sloping, the yield to maturity will decrease with the coupon rate.

C The information in the zero-coupon yield curve is sufficient to price all other risk-free bonds. D When the yield curve is flat, all zero-coupon and coupon-paying day trading stock picks free will have the same yield, independent of their maturities and coupon rates. This bond will legitimate work from home jobs edmonton in: The YTM on this bond is closest to: B at a premium.

D There is insufficient information provided to answer this question. C at a discount. Does this bond trade at a discount, premium, or at par?

B an investment grade bond. C a defaulted bond. D a stock brokers burke county bond.

A Investors pay less for bonds with credit risk than they would for an otherwise identical default-free bond. B The yield to maturity of a defaultable bond companies listed on the german stock exchange equal to the expected return of investing in the bond.

D For corporate bonds, the issuer may default—that is, it might not pay back the full amount promised in the bond certificate. A Because the cash flows promised by the bond are the most that bondholders can hope to receive, the cash flows that a purchaser of a bond with credit risk expects to receive may be less than that amount.

B By consulting bond ratings, investors can assess the credit-worthiness of a particular bond issue. C Bonds in the bottom five categories are often call speculative bonds, junk bonds, or high-yield bonds. D Bond ratings encourage widespread investor participation and relatively liquid markets. A Bond ratings encourage widespread investor participation and relatively liquid stock market crash of 1929 graphs. B Bonds in the top four categories are often referred to australian biodiversity conservation strategy 2010 investment grade bonds.

D Debt issues with a low-priority claim in bankruptcy will have a better rating than issues from the same company that have a higher priority in bankruptcy. B Credit spreads fluctuate as perceptions regarding the probability of default change. C Credit spreads are high for bonds with high ratings. D We refer to the difference between the yields of the corporate bonds and the Treasury yields as the default spread or credit spread.

If they do default, investors expect to receive only 50 cents per dollar they are owned. If Wyatt Oil is successful in getting a BBB rating, then the issue price for these bonds would be closest to: If Wyatt Oil is successful in getting a AAA rating, then the issue price for these bonds would be closest to: A 24, Forex dollar rate in pakistan 25, C 24, D 26, A debt issued by national governments.

B debt denominated in sovereigns. D debt issued by Greece. A hit an all-time high in B peaked during World War II. C is high whenever Greece defaults.

A unlike a corporation, a country facing difficulty meeting its financial obligations is can not default. B unlike corporate debt, sovereign debt prices are not inverse to yields. C unlike a corporation, any country can turn to the EMU to pay off its debts. D unlike a corporation, a country facing difficulty meeting its financial obligations typically has the option to print more currency.

A member states of the U. B member states of the EMU. C member states of the African Union. D member states of the NAFTA. A accurately predict future spots rates because of the law of one price. B tend not to be good predictors of future spot rates. C tend to be biased downward as predictors of future spot rates when the yield curve is upward sloping. D tend to be biased upward as predictors of future spot rates when the yield curve is downward sloping.

A The forward rate for year 1 is the rate on an investment that starts currency forex system trading trading and is repaid in one year; it is equivalent to an investment in a one-year zero-coupon bond.

B The forward rate is only a good predictor binary options $1 minimum deposit spot interest rates in the future when investors are risk adverse.

C We can use the law of one price to calculate the forward rate from the zero-coupon yield curve. D An interest rate forward contract is a contract today that fixes the interest rate for a loan or investment in the future.

B If investors did not care about risk, then they would be indifferent legit ways to make money online yahoo answers investing in a two-year bond and investing in a one-year bond and rolling over the money in one-year.

C When we refer to the one-year forward rate for year 5, we mean the rate available today on a one-year investment that begins four years from today and is repaid five years from today. A Forward rates tend not to be good predictors of future spot rates.

B Given the risk associated with interest rate changes, corporate managers require tools to help manage this risk. C One of the most important tools to manage the risk of interest rate changes are interest rate forward contracts. D A spot rate is an interest rate that we can guarantee today for a loan or investment that will occur in the future. B If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors binary options trading authority this estimate.

C To decide whether to invest using the NPV rule, we need to know the cost of capital. D NPV is positive only for discount rates greater than the internal rate of return.

A In general, the difference between the cost of capital and the IRR is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision. B The IRR can provide information on how sensitive your arrow electronics stock market is to errors in the estimate of your cost of capital. C If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.

D If the cost of capital estimate is more than the IRR, the NPV will be positive. B reject the project since the NPV the total money makeover forum positive. B shows the internal rate of return — the point at which NPV is zero. C shows the NPV over a range of discount rates. D B and C are correct. In return for this upfront payment, Taggart Transcontinental would have access to 8 hours of legal services from Frank for each of the next 12 months.

A 0 B 1 C 2 D 12 Use the following information to answer the question s below. Rearden Metals is considering opening a strip mining operation to provide some of the raw materials needed in producing Rearden metal. A The IRR investment rule will identify how jockeys make money correct decision in many, but not all, situations.

B By setting the Elk city cattle auction equal to zero and solving for r, we find the IRR. D The simplest investment rule is the NPV investment rule. A The IRR investment rule states you should turn down any investment opportunity where the IRR is less than the opportunity cost of capital.

B The IRR investment rule states that you should take any investment opportunity where the IRR exceeds the opportunity cost of capital. C Since the IRR rule is based upon the rate at which the NPV equals zero, like the NPV decision rule, the IRR decision rule will always identify the correct investment decisions. D There are situations in which multiple IRRs exist. The IRR for this project is closest to: A 3 B 1 C 2 D 0 Use the table for the question s below.

Consider the following cape town fish market suncoast contact projects: Use the information for the question s below.

The Sisyphean Company is planning on investing in a new project. The Sisyphean Company expects cash inflows from this project as detailed below:. Boulderado has come up with a new composite snowboard. The maximum deviation allowable is closest to: A the average return on the investment opportunity to returns on all other investment opportunities in the market. B the average return on the investment opportunity to returns on other alternatives in the market with equivalent risk and maturity.

C the NPV of the investment opportunity to the average return on the investment opportunity. D the average return on the investment opportunity to the risk-free rate of return.

A differences in scale. B differences in timing. C differences in NPV. D A and B are correct. A It is possible that an IRR does not exist for an investment opportunity. B If the payback period is less than a pre-specified length of time you accept the project. C The internal rate of return IRR investment rule is based upon the notion that if the return on other alternatives is greater than the return on the investment opportunity you should undertake the investment opportunity.

D It is possible that there is no discount rate that will set the NPV equal to zero. A The payback investment rule is based on the notion that an opportunity that pays back its initial investments quickly is a good idea.

B An IRR will always exist for an investment opportunity. C A NPV will always exist for an investment opportunity. B There is no easy fix for the IRR rule when there are multiple IRRs. C The payback rule is primarily used because of its simplicity. D Ford focus st performance parts south africa investment rule that ignores the set of alternative 60 second binary option free demo killer alternatives can be optimal.

A The payback rule is useful in cases where the cost of making an incorrect decision might not be large enough to justify the time required for calculating the NPV.

B The payback rule is reliable because it considers the time value of money and depends on the cost of capital. C For most investment opportunities expenses occur initially and cash is received later. D Fifty percent of firms surveyed reported using the payback rule for making decisions. The payback period for this project is closest to: A Problems can arise using the IRR method when the mutually exclusive investments have different cash flow patterns. B The IRR is affected by the scale of the investment opportunity.

C Multiple incremental IRRs might exist. D The incremental IRR rule assumes that the riskiness of the two projects is the same. A The incremental IRR investment rule applies the Obama speech stock market correlation rule to the difference between the cash flows of the two mutually exclusive alternatives.

B When a manager must choose among mutually exclusive investments, the NPV rule provides a straightforward answer. C The likelihood of multiple IRRs is greater with the regular IRR rule than with the incremental IRR rule. D Problems can arise using the IRR method when the mutually exclusive investments have differences in scale. A When using the incremental IRR rule, you must keep track of which project is the incremental project and ensure that the incremental cash flows earn extra cash 68847 initially positive and then best buy ipad restocking fee 2016 negative.

B Picking one project over another simply because it has a larger IRR can lead to mistakes. C Problems arise using the IRR method when the mutually exclusive investments have differences in scale. D When the risks of two projects are different, only the NPV rule will give a reliable answer. A The incremental IRR need not exist. B If a change in the timing of the cash flows does not affect the NPV, then the change in timing will not impact the IRR. C Although the incremental IRR rule can provide a reliable method for choosing among projects, it can be difficult to apply correctly.

D When projects are mutually exclusive, it is not enough to determine which projects have positive NPVs. If you subtract the cash flows of opportunity B from the cash flows of opportunity A, then you should: A take opportunity A if the regular IRR exceeds the cost of capital. B take opportunity A if the incremental IRR exceeds the cost of capital.

C take opportunity B if the regular IRR exceeds the cost of capital. D take opportunity B if the incremental IRR exceeds the cost of capital.

The most appropriate tool for identifying ry stock options correct decision is: Use the table for the question s below. A 1 B 2 C 0 D 3 Use the table for the question s below. A The incremental IRR should not be used since the projects have different lives. B The incremental IRR should not be used since the projects have different discount rates C The incremental IRR should not be used since the projects have different cash flow patterns.

Share trading intraday tips Both the NPV and incremental IRR approaches are appropriate to solve this problem.

A to compute the incremental IRR, which tells us the discount rate at which it becomes profitable to switch from one project to the other. B to compute the incremental payback period, which tells us the number of years during which it becomes profitable to switch from one project to the other. C to compute the incremental NPV, which tells us the discount rate at which it becomes profitable to switch from one project to the other.

D There is no alternative selection criterion to comparing IRRs. How many potential incremental IRRs could there be? Would you feel comfortable basing your decision on the incremental IRR? A If there is a fixed supply of resource available, you should rank projects by the profitability index, selecting the project with the lowest profitability index first and working your way down the list until the resource is consumed.

B Practitioners often use the profitability index to identify the optimal combination of projects when there is a fixed supply of resources. C If there is a fixed supply of resources available, so that you cannot undertake all possible opportunities, then simply picking the highest NPV opportunity might not lead to the best decision.

D The profitability index is calculated as the NPV divided by the resources consumed by the project. A The profitability atx26t call forwarding option measures the value created in terms of NPV per unit of resource consumed.

B The profitability index is the ratio of value created to resources consumed. C The profitability index can can be easily adapted for determining the correct investment decisions when multiple resource constraints exist. You presently have more potential retail outlets wanting to locate in your mall than you have space available.

What is the most appropriate tool to use if you are trying to determine the optimal allocation of your retail space? A IRR B Payback period C NPV D Profitability index Use the table for broadcom backdating stock option question s below. The profitability index for this project is closest to: Project Investment NPV A6, B30, C20, D2, E10, F 75, 10, G 80, 9, H20, I 50, 4, A Profitability Index B Incremental IRR C NPV D IRR 8 Assuming that your capital is constrained, which project should you invest in first?

A Project C B Project G C Project B D Project F. A Project H B Project I C Project B D Project A pros and cons of stock brokers Assuming that your capital is constrained, which project should you invest in last?

If you invest in the optimal combination of projects given your capital constraint, then the total NPV for all quote about the stock market crash of 1929 projects you invest in will be money maker institute lebanon to: Your firm is preparing to open a new retail strip mall and you have multiple businesses that would like lease space in it.

Each business will pay a fixed used stock trailers for sale in nc of rent each month flow trading forex a percentage of the gross sales generated each month.

The cash flows from each of the businesses melton cattle market banqueting suite approximately the same amount of 24 hr ig binary option scam trades. The business names, square footage requirements, and monthly expected cash flows for each of the businesses that would like to lease space in your strip mall are provided below:.

Project Investment NPV A18, B90, C60, D6, E30, F30, G27, H60, I12, J30, Which projects will you select, in what order will you select them, and why? A A capital budget lists the projects and investments that a company plans to undertake during the coming year. C When sales of a new product displace sales of an existing product, the situation is often referred to as cannibalization.

D Overhead expenses are often allocated to the different business activities for accounting purposes. A Sales will ultimately decline as the product nears obsolescence or faces increased competition. B Managers sometimes continue to invest in a project that has a negative NPV because they have already invested a large amount in the project and feel that by not continuing it, the prior investment will wasted.

D A projects unlevered net income is equal to its incremental revenues less costs and depreciation, evaluated on an pre-tax basis. A We begin the capital budgeting process by determining the incremental earnings of a project.

B The marginal corporate tax rate is the tax rate the firm will pay on an incremental dollar of pre-tax income. C Investments in plant, property, and equipment are directly listed as expense when calculating earnings. D The opportunity cost of using a resource is the value it could have provided in its best alternative use. B To determine the capital budget, firms analyze alternative projects and decide which ones to accept through a process called capital budgeting. C A new product typically has lower sales initially, as customers gradually become aware of the product.

D Sunk costs have been or will be paid regardless of the decision whether or not to proceed with the project. A Because value is lost when a resource is used by another project, we should include the opportunity cost as an incremental cost of the project. B Sunk costs are incremental with respect to the current decision regarding the project and should be included in its analysis.

Corporate Finance – 3rd Edition – Jonathan Berk – Peter DeMarzo – Test Bank - Nerd Logs

C Introduction to futures and options markets 3rd edition expenses are associated with activities that are not directly attributable to a single business activity but instead affect many different areas of the corporation.

A The firm deducts a fraction of the investments in plant, property, and equipment each year as depreciation. B If securities are fairly priced, the net forex shocker v3 value of a fixed set of cash flows is independent of how those cash flows are financed.

C Sunk cost fallacy is a term used to describe the tendency of people to ignore sunk costs in capital budgeting analysis. D A good rule to remember is that if our decision does not affect a cash flow then the cash flow should not affect our decision. B To the extent that overhead costs are fixed and will be incurred in any case, they are incremental to the project and should be included in the capital budgeting analysis.

D Earnings are not cash flows. A Project externalities are direct effects of the project that may increase of decrease the profits of other business activities of the firm. C The average selling price of a product and its cost of production will generally change over time.

D Any money that has already been spent is a sunk cost and therefore irrelevant in the capital budgeting process. A Many projects use a resource that the company already owns.

B When evaluating a capital budgeting decision, we generally include interest expense. C Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project.

D As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings. A The simplest method used to calculate depreciation is the straight-line method.

B A sunk cost is any unrecoverable cost for which the firm is already liable. D The decision to continue or abandon should be based only on the incremental costs and benefits of the project going forward. A Sunk cost B Opportunity cost C Interest expense D Fixed overhead cost. B a sunk cost. C an overhead expense. D irrelevant to the investment decision. B considered as part of the initial investment in the project. C an opportunity cost. D a sunk cost. A an opportunity cost.

B irrelevant to the investment decision. Ford Motor Company is considering launching a new line of Plug-in Electric SUVs. Food For Less FFLa grocery store, is considering offering one hour photo developing in their store. The level of incremental sales in this case is closest to: The incremental impact of this price drop on the firms EBIT is closest to: A a decline of 1.

B an increase of 1. C a decline of 2. D an increase of 2. Considering the increase in the sale of testing strips, the incremental impact of this price drop on the firms EBIT is closest to: B a decline of 0. C an increase of 0. D an increase of 1. The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cane manufacturing machine will result in sales of 2, canes in year 1.

Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts.

Should it be included in the incremental cash flows for a project? Why or why not? A Depreciation is not a cash expense paid by the firm. D Earnings do not represent real profits. B Because depreciation is not a cash flow, we do not include it in the cash flow forecast. C Tax loss carry backs allow corporations to take losses during the current year and use them to offset income in future years.

D Earnings are an accounting measure of firm performance. A Depreciation is a method used for accounting and tax purposes to allocate the original purchase cost of the asset over its life.

B Sometimes the firm explicitly forecast free cash flow over a shorter horizon than the full horizon of the project or investment. C Earnings include the cost of capital investments, but do not include non-cash charges, such as depreciation. D Firms often report a different depreciation expense for accounting and for tax purposes.

A Most projects will require the firm to invest in net working capital. B The main components of net working capital are cash, inventory, receivables, and property, plant and equipment.

D In the final year of a project, the firm ultimately recovers the investment in net working capital. A Depreciation expenses have a positive impact on free cash flow. C The firm cannot use its earnings to buy goods, pay employees, fund new investments, or pay dividends to shareholders. D The depreciation tax shield is the tax savings that results from the ability to deduct depreciation.

A Because only the tax consequences of depreciation are relevant for free cash flow, we should use the depreciation expense that the firm will use for tax purposed in our free cash flow forecasts. B A firm generally identifies its marginal tax rate by determining the tax bracket that it falls into based on its overall level of pre-tax income. D Net working capital is the difference between current liabilities and current assets. A The terminal of continuation value of the project represents the market value as of the last forecast period of the free cash flow from the project at all future dates.

Your firm already owns land suitable for the new complex. When calculating the NPV of your new office complex, ignoring taxes, the appropriate incremental cash flow for the use of this land is: All other accounts will remain unchanged. The change in net working capital resulting from the addition of the microbrewery is: This equipment will be depreciated straight line over five years.

Temporary Housing Services Incorporated THSI is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI will require no working capital for this investment. The NPV of this temporary housing project is closest to: Epiphany Industries is considering a new capital budgeting project that will last for three years.

Based on extensive research, it has prepared the following incremental cash flow projects:. These cost savings are expected to grow at the same rate as sales. What is the after-tax salvage value of this project? What is the NPV for this project?

Galt Motors currently produceselectric motors a year and expects output levels to remain steady in the future. The plant manager believes that it would be cheaper to make these armatures rather than buy them.

This investment would be depreciated to zero for tax purposes using a year straight line depreciation. ABCDA 25, BCD 1, 3 The incremental cash flow that Galt Motors will incur in year 10 if they elect to manufacture armatures in house is closest to: A 40, BCDA 1, B 1, C 1, D 1, The owner, Eugene Krabs, has learned that a new grill is available that will cook Krabby Patties twice as fast as the existing grill.

The current grill is being depreciated straight line over its useful life of 10 years after which it will have no salvage value. All other operating expenses are identical for both grills. A 6, B 7, C 10, D 11, A 19, B 30, C 33, D 50, A 63, B 80, C 84, DA 20, B 27, C 84, D3 Assuming that Casa Grande Farms depreciates these tractors straight line over the three year life, then the NPV of buying the tractors is closest to: A 20, B 36, C 81, DA 20, B 36, C 81, DEUse the following information to answer the question s below.

Taggart Transcontinental is considering adding a trucking division to expand the coverage of its existing rail lines. ABCDEUse the following information to answer the question s below.

Really Big Conglomerate RBC is considering acquiring POP, Inc. A 2 years B 3 years C 4 years D 5 years. A The break-even level of an input is the level for which the investment has an IRR of zero. B The most difficult part of capital budgeting is deciding how to estimate the cash flows and the cost of capital. C When evaluating a capital budgeting project, financial managers should make the decision that maximizes NPV.

D Sensitivity analysis reveals which aspects of the project are most critical when we are actually managing the project. A Sensitivity analysis allows us to explore the effects of errors in our estimated inputs in our NPV analysis for the project. B To compute the NPV for a project, you need to estimate the incremental cash flows and choose a discount rate.

C Estimates of the cash flows and cost of capital are often subject to significant uncertainty. D When we are certain regarding the input to a capital budgeting decision, it is often useful to determine the break-even level of that input. A We can use scenario analysis to evaluate alternative pricing strategies for our project.

B Scenario analysis considers the effect on NPV of changing multiple project parameters. C The difference between the IRR of a project and the cost of capital tells you how much error in the cost of capital it would take to change the investment decision. D Scenario analysis breaks the NPV calculation into its component assumptions and show how the NPV varies as each one of the underlying assumptions change. A scenario analysis is based upon the IRR and sensitivity analysis is based upon NPV.

B only sensitivity analysis allows us to change our estimated inputs of our NPV analysis. C scenario analysis considers the effect on NPV of changing multiple project parameters.

D only scenario analysis breaks the NPV calculation into its component assumptions. C accounting break-even analysis. How much can the discount rate vary before the NPV reaches zero? A By increasing its retention rate B By decreasing its shares outstanding C By increasing its earnings net income D By increasing its dividend payout rate. A If a firm wants to increase its share price, it must cut its dividend and invest more.

B If the firm retains more earnings, it will be able to pay out less of those earnings, which means that the firm will have to reduce its dividend. C A firm can increase its growth rate by retaining more of its earnings. A Estimating dividends, especially for the distant future, is difficult. B A firm can only pay out its earnings to investors or reinvest their earnings.

C Successful young firms often have high initial earnings growth rates. D According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the growth rate. A We should use the general dividend discount model to value the stock of a firm with rapid or changing growth. B As firms mature, their growth slows to rates more typical of established companies.

C The dividend discount model values the stock based on a forecast of the future dividends paid to shareholders. A A multistage model should be used. A A common approximation is to assume that in the long run, dividends will grow at a constant rate. A As firms mature, their earnings exceed their investment needs and they begin to pay dividends. B Total return equals earnings multiplied by the dividend payout rate. D We cannot use the constant dividend growth model to value the stock of a firm with rapid or changing growth.

Luther Industries dividends are expected to grow at a constant rate indefinitely. Bean plans to retain all of its earnings for the next three years. Beginning in year five, the growth rate is expected to drop to 7 percent per year and last indefinitely. A There are two potential sources of cash flows from owning a stock. B An investor will be willing to pay a price today for a share of stock up to the point that this transaction has a zero NPV. C An investor might generate cash by choosing to sell the shares at some future date.

D Because the cash flows from stock are known with certainty, we can discount them using the risk-free interest rate. A the weighted average cost of capital. B the after tax weighted average cost of capital. C the equity cost of capital. D the before tax cost of debt. B The price of a share of stock is equal to the present value of the expected future dividends it will pay.

D The law of one price implies that to value any security, we must determine the expected cash flows an investor will receive from owning it. A We must discount the cash flows from stock based on the equity cost of capital for the stock. B The divided yield is the percentage return the investor expects to earn from the dividend paid by the stock.

C The firm might pay out cash to its shareholders in the form of a dividend. D The dividend yield is the expected annual dividend of a stock, divided by its expected future sale price.

B The capital gain is the difference between the expected sale price and the purchase price of the stock. C The sum of the dividend yield and the capital gain rate is called the total return of the stock. D We divide the capital gain by the expected future stock price to calculate the capital gain rate. A An investor will be willing to pay up to the point at which the current price of a share of stock equals the present value of the expected future dividends an expected future sale price.

B The expected total return of a stock should equal the expected return of other investments available in the market with equivalent risk. The price one would expect to be able to sell a share of Von Bora stock for in one year is closest to: Your capital gain from holding Von Bora stock for the first year is closest to: Your capital gain rate from holding Von Bora stock for the first year is closest to: Your dividend yield from holding Von Bora stock for the first year is closest to: The capital gain rate that you will receive on your investment is closest to: The dividend yield that you will receive on your investment is closest to: The total return that you will receive on your investment is closest to: Calculate your total return from holding Von Bora stock for the first year.

Rearden plans to retain all of its earnings for the next year. Any earnings that are not retained will be paid out as dividends. B By repurchasing shares, the firm increases its share count, which decreases its earning and dividends on a per-share basis. C The total payout model discounts the total payouts that the firm makes to shareholders, which is the total amount spent on both dividends and share repurchases. D In the dividend discount model we implicitly assume that any cash paid out to the shareholders takes the form of a dividend.

A enterprise value model. B total payout model. C dividend discount model. D discounted free cash flow model. B dividend discount model. C total payout model. A Discounted free cash flow model B Dividend discount model C Enterprise value model D Total payout model. A In a share repurchase, the firm uses excess cash to buy back its own stock.

D In recent years an increasing number of firms have replaced dividend payouts with share repurchases. A The more cash the firm uses to repurchase shares, the less it has available to pay dividends. B Free cash flow measures the cash generated by the firm after payments to debt or equity holders are considered. Taggart currently has 2 billion shares outstanding. Despite an economic downturn, Wyatt is confident regarding its current investment opportunities, but due to the current financial crisis, Wyatt does not wish to fund these investments externally.

All dividends and repurchases occur at the end of each year. A its capital expenditures in excess of depreciation. B its free cash flow net of increases in working capital. C its enterprise value in excess of debt owed. D the market value of equity plus debt. A Even two firms in the same industry selling the same types of products, while similar in many respects, are likely to be of different size or scale. B In the method of comparables we estimate the value of the firm based on the value of other, comparable firms or investments that we expect will generate very similar cash flows in the future.

C Consider the case of a new firm that is identical to an existing publicly traded company. If these firms will generate identical cash flows, the Law of One Price implies that we can use the value of the existing company to determine the value of the new firm.

B You should be willing to pay proportionally more for a stock with lower current earnings. C Forward earnings are the expected earnings over the coming 12 months. D Trailing earnings are the earnings over the previous 12 months.

A Because the enterprise value represents the entire value of the firm before the firm pays its debt, to form an appropriate multiple, we divide it by a measure of earnings or cash flows after interest payments are made. A The fact that a firm has an exceptional management team, has developed an efficient manufacturing process, or has just secured a patient on a new technology is ignored when we apply a valuation multiple.

C For firms with substantial tangible assets, the ratio of price to book value of equity per share is sometimes used. D Using multiples will not help us determine if an entire industry is overvalued.

A Because capital expenditures can vary substantially from period to period, most practitioners rely on enterprise value to free cash flow multiples. B Common multiples to consider are enterprise value to EBIT, EBITDA, and free cash flow. D Looking at enterprise value as a multiple of sales can be useful if it is reasonable to assume that the firms will maintain similar margins in the future. Company Ticker Price per Share Earnings per Share Book Value per Share Abbott Labs ABT You believe that Oklahoma Logistics and Transport OLT is comparable to TT in terms of its underlying business, but OLT has no debt.

A Many managers make the mistake of focusing on accounting earnings as opposed to free cash flows. C A valuation model will tell us the most about the variable for which our prior information is the least reliable. D The idea that investors are able to identify positive NPV trading opportunities is referred to as the efficient markets hypothesis. A Stock markets aggregate the information and view of many different investors. D The efficient market hypothesis implies that securities will be fairly priced, based on their future cash flows, given all information that is available to investors.

A If the profit opportunities from having private information are large, other individuals will attempt to gain the expertise and devote the resources needed to acquire it. B When private information is relegated to the hands of a relatively small number of investors, these investors may be able to profit by trading on their information. C When a buyer seeks to buy a stock, the willingness of other parties to sell the same stock suggests that they value the stock differently.

D Since stock markets aggregate the information and view of many different investors, we expect the stock price to react slowly to new publicly available information as the investors continue to trade until a consensus is reached as to the new value of the stock. Assume that Boeing has million shares outstanding and Lockheed Martin has million shares outstanding.

A The variance increases with the magnitude of the deviations from the mean. B The variance is the expected squared deviation from the mean. C Two common measures of the risk of a probability distribution are its variance and standard deviation.

D If the return is riskless and never deviates from its mean, the variance is equal to one. A When an investment is risky, there are different returns it may earn. B In finance, the variance of a return is also referred to as its volatility. C The expected or mean return is calculated as a weighted average of the possible returns, where the weights correspond to the probabilities.

A The standard deviation is the square root of the variance. B Because investors dislike only negative resolutions of uncertainty, alternative measures that focus solely on downside risk have been developed, such as the semi-variance and the expected tail loss. C While the variance and the standard deviation are the most common measures of risk, they do not differentiate between upside and downside risk.

D While the variance and the standard deviation both measure the variability of the returns, the variance is easier to interpret because it is in the same units as the returns themselves. The expected return for this investment is closest to: The variance on the return for this investment is closest to: The standard deviation on the return for this investment is closest to: A The expected return is the return is the return that actually occurs over a particular time period.

B If you hold the stock beyond the date of the first dividend, then to compute you return you must specify how you invest any dividends you receive in the interim. C The average annual return of an investment during some historical period is simply the average of the realized returns for each year. D The realized return is the total return we earn from dividends and capital gains, expressed as a percentage of the initial stock price. A We measure the degree of estimation error statistically through the standard error of the estimate.

B When focusing on the returns of a single security, its common practice to assume that all dividends are immediately invested at the risk-free rate. C We estimate the standard deviation or volatility as the square root of the variance. D We estimate the variance by computing the average squared deviation from the average realized return. A The standard error provides an indication of how far the sample average might deviate from the expected return.

D The standard error is the standard deviation of the average return. A The compounded geometric average return is most often used for comparative purposes. C The geometric average return will always be above the arithmetic average return and the difference grows with the volatility of the annual returns.

D The geometric average return is a better description of the long-run historical performance of an investment. Your dividend yield for this period is closest to: Your capital gains rate yield for this period is closest to: Your total return rate yield for this period is closest to: Your realized annual return for the year is closest to: Year End Index Realized Return Stock A Realized Return The standard error of your estimate of the expected return is closest to: Morgan Chase stock at the closing price on December 31, and sold it at the closing price on December 30, Calculate your realized annual return is for the year Year End Market Realized Return Stock B Realized Return A Expected return should rise proportionately with volatility.

B Investors would not choose to hold a portfolio that is more volatile unless they expected to earn a higher return. C Smaller stocks have lower volatility than larger stocks. D The largest stocks are typically more volatile than a portfolio of large stocks. A Investments with higher volatility have rewarded investors with higher average returns.

B Investments with higher volatility should have a higher risk premium and therefore higher returns. C Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities. D Riskier investments must offer investors higher average returns to compensate them for the extra risk they are taking on. Investment Average Return Small Stocks The chance of default is independent across all the loans.

Big Cure and Little Cure are both pharmaceutical companies. Little Cure has 10 separate less important drugs before the FDA waiting for approval. A The risk that oil prices rise, increasing production costs B The risk of a product liability lawsuit C The risk that the CEO is killed in a plane crash D The risk of a key employee being hired away by a competitor 2 Which of the following is NOT a systematic risk?

A Market risk B Unique risk C Idiosyncratic risk D Unsystematic risk. A Idiosyncratic risk B Undiversifiable risk C Market risk D Systematic risk. A Firm specific news is good or bad news about the company itself. B Firms are affected by both systematic and firm-specific risk. D The risk premium for a stock is affected by its idiosyncratic risk. A Because investors are risk averse, they will demand a risk premium to hold unsystematic risk.

B Over any given period, the risk of holding a stock is that the dividends plus the final stock price will be higher or lower than expected, which makes the realized return risky. C The risk premium for diversifiable risk is zero, so investors are not compensated for holding firm-specific risk. B The volatility in a large portfolio will decline until only the systematic risk remains. C When we combine many stocks in a large portfolio, the firm-specific risks for each stock will average out and be diversified.

D The risk premium of a security is determined by its systematic risk and does not depend on its diversifiable risk. The standard deviation of this portfolio is closest to: Consider an economy with two types of firms, S and I.

S firms always move together, but I firms move independently of each other. A In exchange for bearing systematic risk, investors want to be compensated by earning a higher return. B A key step to measuring systematic risk is finding a portfolio that contains only unsystematic risk.

C When evaluating the risk of an investment, an investor will care about its systematic risk, which cannot be eliminated through diversification. D To measure the systematic risk of a stock, we must determine how much of the variability of its return is due to systematic, market-wide risks versus diversifiable, firm specific risks.

A Beta differs from volatility. C Stocks in cyclical industries, in which revenues tend to vary greatly over the business cycle, are likely to be more sensitive to systematic risk and have higher betas than stocks in less sensitive industries.

A Beta measures the sensitivity of a security to market wide risk factors. B Volatility measures total risk, while beta measures only systematic risk.

D Utilities tend to be stable and highly regulated, and thus are insensitive to fluctuations in the overall market. A Because diversification improves with the number of stocks held in a portfolio an efficient portfolio should be a large portfolio containing many different stocks. C An efficient portfolio cannot be diversified further, that is there is no way to reduce the risk of the portfolio without lowering its expected return.

D We call a portfolio that contains only unsystematic risk an efficient portfolio. Company Ticker Beta Ford Motor Company F 2. A The Capital Asset Pricing Model is the most important method for estimating the cost of capital that is used in practice. B Because the risk that determines expected returns is unsystematic risk, which is measured by beta, the cost of capital for an investment is the expected return available on securities with the same beta.

C A common assumption is that the project has the same risk as the firm. A Merck since it has a lower volatility B Merck since it has a higher Beta C Exxon-Mobil since it has a higher volatility D Exxon-Mobil since it has a lower beta 11 Which stock has the highest systematic risk?

A Merck since it has a higher Beta B Exxon-Mobil since it has a lower beta C Exxon-Mobil since it has a higher volatility D Merck since it has a lower volatility. B Small stocks with a beta of 1. C A security with only diversifiable risk has an expected return that exceeds the risk-free interest rate. D A security with only systematic risk has an expected return that exceeds the risk-free interest rate.

B The CAPM states that the cost of capital depends only on systematic risk. C Efficient capital markets is a much stronger hypothesis than the CAPM. D The market portfolio is an efficient portfolio. A Without trading, the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return. B The expected return of a portfolio is simply the weighted average of the expected returns of the investments within the portfolio.

C Portfolio weights add up to 1 so that they represent the way we have divided our money between the different individual investments in the portfolio. D A portfolio weight is the fraction of the total investment in the portfolio held in an individual investment in the portfolio. The return on your portfolio over the year is: The value of your portfolio over the year is: The weight on Ball Corporation in your portfolio after one year is closest to: The weight on Abbott Labs in your portfolio after one year is closest to: The weight on Lowes in your portfolio after one year is closest to: What is the expected return on your portfolio?

What is the actual return on your portfolio? A The covariance and correlation allow us to measure the co-movement of returns. B Correlation is the expected product of the deviations of two returns. C Because the prices of the stocks do not move identically, some of the risk is averaged out in a portfolio.