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32 terms

exam 3 business finance pt

STUDY
PLAY
The depreciation tax shield is best defined as the;
amount of tax that is saved because of the depreciation expense
Scenario analysis is defined as the
determination of changes in NPV estimates when what-if questions are posed
An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis.
sensitivity
Variable costs can be defined as the costs that:
vary directly with sales
Fixed costs
are constant over the short-run regardless of the quantity of output produced
Which one of the following is defined as the sales level that corresponds to a zero NPV?
financial break-even
An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis.
simulation
Bell Weather Goods has several proposed independent projects that have positive NPV's. However, the firm cannot initiate any of the projects due to a lack of financing. This situation is referred to as:
capital rationing
PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing:
hard rationing
Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the:
accuracy of the projected cash flows
The base case values used in scenario analysis are the ones considered the most:
likely to occur
Last year, T-bills returned 2 percent while your investment is large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return?
risk premium
Standard deviation is a measure of which one of the following?
volatility
Which one of the following is defined by its mean and its standard deviation?
normal distribution
Assume that the market prices of the securities that trade in a particular market fairly reflect the available information related to those securities. Which one of the following terms best defines the market?
efficient capital market
Which one of the following correctly describes the dividend yield?
next year's annual dividend divided by today's stock price
Which one of the following categories of securities had the highest average return for the period 1926-2007?
small-company stocks
Which one of the following categories of securities has had the most volatile returns over the period 1926-2007?
small-company stocks
You own a stock that you think will produce a return of 11 percent in a good economy and a 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that you stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent?
expected return
Which one of the following is a risk that applies to most securities?
systematic
The principle of diversification tells us that:
spreading an investment across many diverse assets will eliminate some of the total risk
Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?
beta
Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?
security market line
Which one of the following is represented by the slope of the security market line?
market risk premium
Which of the following is the formula that explains the relationship between the expected return on a security and the level of that security's risk?
capital asset pricing model
The average of a firm's cost of equity and aftertax cost of debt that is weighted based of the firm's capital structure is called the:
weighted average cost of capital
Scholastic Toys is considering developing and distributing a new board game for children. The project is similar in risk to the firm's current operations. The firm maintains a debt equity ratio of 0.40 and retains all profits to fund the firm's rapid growth. How should the firm determine its cost of equity?
by using the capital asset pricing model
The cost of preferred stock:
is equal to the dividend yield
The capital structure weights used in computing the weighted average cost of capital:
are based on the market value of the firm's debt and equity securities
Southern Home Cookin' just paid its annual dividend of $0.65a share. The stock has a market price of $13 and a beta of 1.12. The return on the U.S. Treasury bill is 2.5 percent and the market risk premium is 6.8 percent. What is the cost of equity?
10.12 percent
The cost of preferred stock is computed the same as the:
return on a perpetuity
The capital structure weights used in computing the weighted average cost of capital:
are based on the market value of the firm's debt and equity securities