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FIN 534 FINAL EXAM WEEK 11 PART 2

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Question;Question 1;Which is the best measure of risk for an asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?;Variance, correlation coefficient.;Standard deviation, correlation coefficient.;Beta, variance.;Coefficient of variation, beta.;Beta, beta;Question 2;Which of the following statements about pension plans if any, is incorrect?;A defined contribution plan is, in effect, a savings plan that is funded by employers, although many plans also permit additional contributions by employees.;Under a defined benefit plan, the employer agrees to give retirees a specifically defined benefit, such as $500 per month or 50 percent of the employee?s final salary.;A portable pension plan is one that an employee can carry from one employer to another.;An employer?s obligation is satisfied under a defined contribution plan when it makes the required contributions to the plan. The risk of inadequate investment returns is borne by the employee.;If assets exceed the present value of benefits, the pension plan is fully funded.;Question 3;You have the following data on three stocks;Stock Standard Deviation Beta;A 0.15 0.79;B 0.25 0.61;C 0.20 1.29;As a risk minimizer, you would choose Stock if it is to be held in isolation and Stock if it is to be held as part of a well-diversified portfolio.;A, A.;A, B.;B, C.;C, A.;C, B.;Question 4;Which of the following statements concerning capital structure theory is NOT;CORRECT?;The major contribution of Miller's theory is that it demonstrates that personal taxes decrease the value of using corporate debt.;Under MM with zero taxes, financial leverage has no effect on a firm?s value.;Under MM with corporate taxes, the value of a levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt.;Under MM with corporate taxes, rs increases with leverage, and this increase exactly offsets the tax benefits of debt financing.;Under MM with corporate taxes, the effect of business risk is automatically incorporated because rsL is a function of rsU.;Question 5;Which of the following would cause average inventory holdings to decrease, other things held constant?;Fixed order costs double.;The purchase price of inventory items decreases by 50 percent.;The carrying price of an item decreases (as a percent of purchase price).;The sales forecast is revised downward by 10 percent.;Interest rates fall.;8 points;Question 6;Which of the following is NOT a real option?;The option to expand production if the product is successful.;The option to buy shares of stock if its price goes up.;The option to expand into a new geographic region.;The option to abandon a project.;The option to switch the type of fuel used in an industrial furnace.;Question 7;Which of the following statements is CORRECT?;The typical R2 for a stock is about 0.3 and the typical R2 for a portfolio is also about 0.3.;The typical R2 for a stock is about 0.94 and the typical R2 for a portfolio is about 0.6.;The typical R2 for a stock is about 0.3 and the typical R2 for a large portfolio is about 0.94.;The typical R2 for a stock is about 0.94 and the typical R2 for a portfolio is also about 0.94.;The typical R2 for a stock is about 0.6 and the typical R2 for a portfolio is also about 0.6.;Question 8;Which of the following will NOT increase the value of a real option?;Lengthening the time in which a real option must be exercised.;An increase in the volatility of the underlying source of risk.;An increase in the risk-free rate.;An increase in the cost of obtaining the real option.;A decrease in the probability that a competitor will enter the market of the project in question.;Question 9;Which of the following statements is most CORRECT?;One advantage of forward contracts is that they are default free.;Futures contracts generally trade on an organized exchange and are marked to market daily.;Goods are never delivered under forward contracts, but are almost always delivered under futures contracts.;There are futures contracts for currencies but no forward contracts for currencies.;Futures contracts don?t have any margin requirements but forward contracts do.;Question 10;Which of the following statements concerning the MM extension with growth is NOT;CORRECT?;The tax shields should be discounted at the cost of debt.;The value of a growing tax shield is greater than the value of a constant tax shield.;For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM?s original (with tax) assumptions.;For a given D/S, the WACC is greater than the WACC under MM?s original (with tax) assumptions.;The total value of the firm increases with the amount of debt.;Question 11;In a portfolio of three different stocks, which of the following could NOT be true?;The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation.;The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.;The beta of the portfolio is less than the betas of each of the individual stocks.;The beta of the portfolio is greater than the beta of one or two of the individual stocks? betas.;The beta of the portfolio can not be equal to 1.;Question 12;Stock A?s beta is 1.5 and Stock B?s beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.);When held in isolation, Stock A has greater risk than Stock B.;Stock B must be a more desirable addition to a portfolio than Stock A.;Stock A must be a more desirable addition to a portfolio than Stock B.;The expected return on Stock A should be greater than that on Stock B.;The expected return on Stock B should be greater than that on Stock A.;Question 13;Which of the following are the factors for the Fama-French model?;The excess market return, a size factor, and a book-to-market factor.;The excess market return, a debt factor, and a book-to-market factor.;The excess market return, a size factor, and a debt.;A debt factor, a size factor, and a book-to-market factor.;The excess market return, an industrial production factor, and a book-to-market factor.;Question 14;Which of the following statements is CORRECT?;The Capital Market Line (CML) is a curved line that connects the risk-free rate and the market portfolio.;The slope of the CML is (M ? rRF)/bM.;All portfolios that lie on the CML to the right of sM are inefficient.;All portfolios that lie on the CML to the left of sM are inefficient.;The slope of the CML is (M ? rRF)/?M..;Question 15;For markets to be in equilibrium (that is, for there to be no strong pressure for prices to depart from their current levels);The expected rate of return must be equal to the required rate of return, that is,.;The past realized rate of return must be equal to the expected rate of return, that is;The required rate of return must equal the realized rate of return, that is,..;all companies must pay dividends.;no companies can be in danger of declaring bankruptcy.;Question 16;Which of the following statements about defined contribution plans is incorrect?;A defined contribution plan places the risk of poor pension portfolio performance on the employee.;In general, employees can choose the investment vehicle under a defined contribution plan. Thus, highly risk-averse employees can choose low-risk investments, while more risk-tolerant employees can choose high-risk investments.;In a defined contribution plan, the employer must make larger-than-average contributions to the pension plan when investment returns have been below expectations.;Defined benefit plans are used more often by large corporations than by small companies.;The PBGC insures a portion of pension benefits.;Question 17;The major contribution of the Miller model is that it demonstrates that;personal taxes increase the value of using corporate debt.;personal taxes decrease the value of using corporate debt.;financial distress and agency costs reduce the value of using corporate debt.;equity costs increase with financial leverage.;debt costs increase with financial leverage;Question 18;Which of the following statements about pension plan portfolio performance is incorrect?;Pension fund sponsors must evaluate the performance of their portfolio managers periodically as a basis for future asset allocations.;Alpha analysis, which relies on the Capital Asset Pricing Model, considers the risk of the portfolio when measuring performance.;Peer comparison examines the relative performance of portfolio managers with similar investment objectives.;A portfolio annual return of 12 percent from one investment advisor is not necessarily better than a return of 10 percent from another advisor.;In managing the retiree portfolio, fund managers often use immunization techniques such as alpha analysis to eliminate, or at least significantly reduce, the risk associated with changing interest rates.;Question 19;A swap is a method used to reduce financial risk. Which of the following statements about swaps, if any, is NOT CORRECT?;A swap involves the exchange of cash payment obligations.;The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, say dollars and pounds.;Swaps are very often arranged by a financial intermediary, who may or may not take the position of one of the counterparties.;A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market.;A company can swap fixed interest payments for floating interest payments.;Question 20;Which one of the following aspects of banks is considered most relevant to businesses when choosing a bank?;Convenience of location.;Competitive cost of services provided.;Size of the bank's deposits.;Experience of personnel.;Loyalty and willingness to assume lending risks.;Question 21;Which one of the following is an example of a ?flexibility? option?;A company has an option to invest in a project today or to wait a year.;A company has an option to close down an operation if it turns out to be unprofitable.;A company agrees to pay more to build a plant in order to be able to change the plant?s inputs and/or outputs at a later date if conditions change.;A company invests in a project today to gain knowledge that may enable it to expand into different markets at a later date.;A company invests in a jet aircraft so that its CEO, who must travel frequently, can arrive for distant meetings feeling less tired than if he had to fly commercial.;Question 22;Which of the following statements about project risk analysis in not-for-profit firms is incorrect?;The market risk of a project is not relevant to not-for-profit firms.;A project?s corporate beta measures the contribution of the project to the overall corporate risk of the firm.;A project?s corporate beta is found (at least conceptually) by regressing returns on the project against returns on the market portfolio.;A project?s corporate beta is defined as (?P/?F)rPF, where?P;is the standard deviation of the project?s returns,?F;is the standard deviation of the firm?s returns, and rPF is the correlation among the two sets of returns.;In practice, it is usually difficult, if not impossible, to directly measure a project?s corporate risk, so project risk analysis typically focuses on stand-alone risk.;Question 23;Which of the following statements concerning the MM extension with growth is NOT;CORRECT?;The tax shields should be discounted at the unlevered cost of equity.;The value of a growing tax shield is greater than the value of a constant tax shield.;For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM?s original (with tax) assumptions.;For a given D/S, the WACC is less than the WACC under MM?s original (with tax) assumptions.;The total value of the firm increases with the amount of debt.;Question 24;A firm?s credit policy consists of which of the following items?;Credit period, cash discounts, credit standards, receivables monitoring.;Credit period, cash discounts, credit standards, collection policy.;Credit period, cash discounts, receivables monitoring, collection policy.;Cash discounts, credit standards, receivables monitoring, collection policy.;Credit period, receivables monitoring, credit standards, collection policy.;Question 25;Which of the following is true of the EOQ model? Note that the optimal order quantity, Q, will be called EOQ.;If the fixed per order cost increases by 20%, then EOQ will increase by 20%.;If the annual sales, in units, increases by 20%, then EOQ will increase by 20%.;If the average inventory increases by 20%, then the total carrying costs will increase by 20%.;If the average inventory increases by 20% the total order costs will increase by 20%.;The EOC is the same for all comppanies.;Question 26;Which of the following statements concerning the MM extension with growth is NOT;CORRECT?;The tax shields should be discounted at the unlevered cost of equity.;The value of a growing tax shield is greater than the value of a constant tax shield.;For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM?s original (with tax) assumptions.;For a given D/S, the WACC is greater than the WACC under MM?s original (with tax) assumptions.;The total value of the firm is independent of the amount of debt it uses.;Question 27;Which of the following statements is CORRECT?;Tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time.;Richard Roll has argued that it is possible to test the CAPM to see if it is correct.;Tests have shown that the betas of individual stocks are stable over time, but that the betas of large portfolios are much less stable.;Tests have shown that the betas of individual stocks are stable over time, but that the betas of large portfolios are much less stable.;The most widely cited study of the validity of the CAPM is one performed by Modigliani and Miller.;Question 28;Which of the following is NOT a potential problem with beta and its estimation?;Sometimes a security or project does not have a past history which can be used as a basis for calculating beta.;Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different than the ?true? or ?expected future? beta.;The beta of ?the market,? can change over time, sometimes drastically.;Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.;There is a wide confidence interval around a typical stock?s estimated beta.;Question 29;Which of the following are NOT ways risk management can be used to increase the value of a firm?;Risk management can increase debt capacity.;Risk management can help a firm maintain its optimal capital budget.;Risk management can reduce the expected costs of financial distress.;Risk management can help firms minimize taxes.;Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.;Question 30;Which of the following is not correct?;Collection policy is how a firm goes about collecting past-due accounts.;A more aggressive collection policy will reduce bad debt expenses, but may also decrease sales.;Collection policy usually has little impact on sales since collecting past-due accounts occurs only after the customer has already purchased.;Typically a firm will turn over an account to a collection agency only after it has tried several times on its own to collect the account.;A lax collection policy will frequently lead to an increase in accounts receivable.;Question 31;The Kimberly Corporation is a zero growth firm with an expected EBIT of $100,000 and a corporate tax rate of 30%. Kimberly uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%.;What is the firm's cost of equity?;21.0%;23.3%;25.9%;28.8%;32.0%;Question 32;Calculate the required rate of return for Mercury, Inc., assuming that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) Mercury has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years.;10.29%;10.83%;11.40%;12.00%;12.60%;Question 33;XYZ Company needs to borrow $200,000 from its bank. The bank has offered the company a 12-month installment loan (monthly payments) with 9 percent add-on interest. What is the effective annual rate (EAR) of this loan?;16.22%;17.97%;17.48%;18.67%;18.00%;Question 34;Picard Orchards requires a $100,000 annual loan in order to pay laborers to tend and harvest its fruit crop. Picard borrows on a discount interest basis at a nominal annual rate of 11 percent. If Picard must actually receive $100,000 net proceeds to finance its crop, then what must be the face value of the note?;$111,000;$100,000;$112,360;$ 89,000;$108,840;Question 35;Oklahoma Instruments (OI) is considering a project called F-200 that has an up-front cost of $250,000. The project?s subsequent cash flows are critically dependent on whether another of its products, F-100, becomes an industry standard. There is a 50% chance that the F-100 will become the industry standard, in which case the F-200?s expected cash flows will be $110,000 at the end of each of the next 5 years. There is a 50% chance that the F-100 will not become the industry standard, in which case the F-200?s expected cash flows will be $25,000 at the end of each of the next 5 years. Assume that the cost of capital is 12%.;Based on the above information, what is the F-200?s expected net present value?;-$6,678;-$3,251;$15,303;$20,004;$45,965

 

Paper#47455 | Written in 18-Jul-2015

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