Term
| Last year, T-bills returned 2 percent while your investment in 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? |
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Definition
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Term
| Which one of the following best defines the variance of an investment's annual returns over a number of years? |
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Definition
| The average squared difference between the actual returns and the arithmetic average return |
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Term
| Standard deviation is a measure of which one of the following? |
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Definition
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Term
| Which one of the following is defined by its mean and its standard deviation |
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Definition
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Term
| 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 that market? |
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Definition
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Term
| Which one of the following correctly describes the dividend yield? |
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Definition
| next year's annual dividend divided by today's stock price |
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Term
| As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return. |
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Definition
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Term
| Small-company stocks, as the term is used in the textbook, are best defined as the: |
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Definition
| smallest twenty percent of the firms listed on the NYSE. |
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Term
| Which one of the following categories of securities had the highest average return for the period 1926-2007? |
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Definition
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Term
| Which one of the following categories of securities had the lowest average risk premium for the period 1926-2007? |
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Definition
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Term
| You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent? |
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Definition
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Term
| Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total. Which one of the following terms most applies to Suzie's investments? |
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Definition
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Term
| Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following? |
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Definition
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Term
| A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20 percent. What type of risk does this news flash represent? |
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Definition
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Term
| The principle of diversification tells us that: |
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Definition
| spreading an investment across many diverse assets will eliminate some of the total risk. |
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Term
| 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? |
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Definition
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Term
| Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas? |
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Definition
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Term
| Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk? |
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Definition
| capital asset pricing model |
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Term
| The expected return on a stock given various states of the economy is equal to the |
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Definition
| weighted average of the returns for each economic state. |
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Term
| The expected risk premium on a stock is equal to the expected return on the stock minus the: |
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Definition
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Term
| The average of a firm's cost of equity and aftertax cost of debt that is weighted based on the firm's capital structure is called the: |
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Definition
| weighted average cost of capital. |
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Term
| When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of business as the project, the manager is utilizing the _____ approach. |
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Definition
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Term
| Which one of the following is the primary determinant of a firm's cost of capital? |
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Definition
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Term
| 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? |
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Definition
| by using the capital asset pricing model |
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Term
| The pre-tax cost of debt: |
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Definition
| is based on the current yield to maturity of the firm's outstanding bonds. |
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Term
| The cost of preferred stock is computed the same as the: |
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Definition
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Term
| The cost of preferred stock: |
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Definition
| is equal to the dividend yield. |
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Term
| The aftertax cost of debt: |
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Definition
| has a greater effect on a firm's cost of capital when the debt-equity ratio increases. |
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Term
| Incorporating flotation costs into the analysis of a project will: |
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Definition
| increase the initial cash outflow of the project. |
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Term
| Flotation costs for a levered firm should: |
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Definition
| be weighted and included in the initial cash flow. |
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Term
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Definition
| the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage. |
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Term
| Which one of the following states that the value of a firm is unrelated to the firm's capital structure? |
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Definition
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Term
| Which one of the following states that a firm's cost of equity capital is directly and proportionally related to the firm's capital structure? refer to 16.3 |
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Definition
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Term
| Butter & Jelly reduced its taxes last year by $350 by increasing its interest expense by $1,000. Which of the following terms is used to describe this tax savings? |
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Definition
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Term
| The unlevered cost of capital refers to the cost of capital for a(n): |
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Definition
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Term
| The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as _____ costs. |
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Definition
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Term
| The proposition that a firm borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs is called: |
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Definition
| the static theory of capital structure |
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Term
| A business firm ceases to exist as a going concern as a result of which one of the following? |
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Definition
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Term
| A firm should select the capital structure that: |
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Definition
| maximizes the value of the firm. |
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Term
| The value of a firm is maximized when the: |
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Definition
| weighted average cost of capital is minimized. |
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Term
| The return earned in an average year over a multi-year period is called the _____ average return. |
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Definition
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Term
| As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return. |
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Definition
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Term
| Which one of the following statements is correct? |
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Definition
| The greater the volatility of returns, the greater the risk premium |
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Term
| To convince investors to accept greater volatility, you must: |
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Definition
| increase the risk premium. |
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Term
| Which one of the following statements is correct concerning market efficiency? |
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Definition
| A firm will generally receive a fair price when it issues new shares of stock. |
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Term
| Efficient financial markets fluctuate continuously because: |
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Definition
| the markets are continually reacting to new information. |
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Term
| Inside information has the least value when financial markets are: |
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Definition
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Term
| According to theory, studying historical stock price movements to identify mispriced stocks: |
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Definition
| is ineffective even when the market is only weak form efficient. |
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Term
| If you excel in analyzing the future outlook of firms, you would prefer the financial markets be ____ form efficient so that you can have an advantage in the marketplace. |
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Definition
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Term
You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor continually brags to you about the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best _____ form efficient.
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Definition
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Term
| The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than _____ form efficient. |
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Definition
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Term
| Which one of the following is a risk that applies to most securities? |
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Definition
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Term
| Which one of the following is represented by the slope of the security market line? |
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Definition
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Term
| Standard deviation measures which type of risk? |
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Definition
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Term
| Which one of the following is an example of systematic risk? |
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Definition
| investors panic causing security prices around the globe to fall precipitously |
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Term
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Definition
| can be effectively eliminated by portfolio diversification |
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Term
| Which one of the following is an example of unsystematic risk? |
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Definition
| consumer spending on entertainment decreased nationally |
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Term
| Which one of the following statements is correct concerning unsystematic risk? |
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Definition
| Eliminating unsystematic risk is the responsibility of the individual investor. |
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Term
| Which one of the following risks is irrelevant to a well-diversified investor? |
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Definition
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Term
Which of the following are examples of diversifiable risk?
I. earthquake damages an entire town
II. federal government imposes a $100 fee on all business entities
III. employment taxes increase nationally
IV. toymakers are required to improve their safety standards |
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Definition
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Term
| Which one of the following is the best example of a diversifiable risk? |
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Definition
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Term
| Which one of the following indicates a portfolio is being effectively diversified? |
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Definition
| a decrease in the portfolio standard deviation |
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Term
| Systematic risk is measured by: |
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Definition
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Term
| Textile Mills borrows money at a rate of 13.5 percent. This interest rate is referred to as the: |
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Definition
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Term
| A firm's cost of capital: |
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Definition
| depends upon how the funds raised are going to be spent. |
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Term
| The capital structure weights used in computing the weighted average cost of capital: |
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Definition
| are based on the market value of the firm's debt and equity securities. |
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Term
| The subjective approach to project analysis: |
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Definition
| assigns discount rates to projects based on the discretion of the senior managers of a firm. |
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Term
| Which one of the following statements is correct? |
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Definition
| Overall, a firm makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects. |
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Term
| When a firm has flotation costs equal to 7 percent of the funding need, project analysts should: |
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Definition
| increase the initial project cost by dividing that cost by (1 - 0.07). |
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Term
| The flotation cost for a firm is computed as: |
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Definition
| the weighted average of the flotation costs associated with each form of financing. |
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Term
| Edwards Farm Products was unable to meet its financial obligations and was forced into using legal proceedings to restructure itself so that it could continue as a viable business. The process this firm underwent is known as a: |
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Definition
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Term
| The absolute priority rule determines: |
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Definition
| which parties receive payment first in a bankruptcy proceeding. |
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Term
| The optimal capital structure has been achieved when the: |
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Definition
| debt-equity ratio results in the lowest possible weighted average cost of capital |
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Term
| AA Tours is comparing two capital structures to determine how to best finance its operations. The first option consists of all equity financing. The second option is based on a debt-equity ratio of 0.45. What should AA Tours do if its expected earnings before interest and taxes (EBIT) are less than the break-even level? Assume there are no taxes. |
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Definition
| select the unlevered option since the expected EBIT is less than the break-even level |
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Term
| Which one of the following statements is correct concerning the relationship between a levered and an unlevered capital structure? Assume there are no taxes. |
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Definition
| At the break-even point, there is no advantage to debt. |
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Term
| Which one of the following makes the capital structure of a firm irrelevant? |
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Definition
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Term
| M&M Proposition I with no tax supports the argument that: |
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Definition
| the debt-equity ratio of a firm is completely irrelevant. |
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Term
| M&M Proposition I with taxes is based on the concept that: |
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Definition
| the value of a firm increases as the firm's debt increases because of the interest tax shield. |
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Term
| M&M Proposition II with taxes: |
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Definition
| has the same general implications as M&M Proposition II without taxes |
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Term
| The present value of the interest tax shield is expressed as: |
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Definition
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Term
| Which one of the following is a direct bankruptcy cost? |
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Definition
| paying an outside accountant fees to prepare bankruptcy reports |
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