Finance multiple choice questions In Tutorial Library

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TITLE: Finance multiple choice questions

UNIVERSITY / INSTITUTE: Purdue University

CLASS / COURSE: MGMT 310

QUESTION DESCRIPTION:

  1. If the adoption of a new product will reduce the sales of an existing product, then the: 
    A. new product should not be undertaken.
    B. old product should be abandoned.
    C. incremental benefits of the new product may be over-estimated.
    D. incremental benefits of the new product may be under-estimated.

 

  1. The value of a proposed capital budgeting project depends upon the: 
    A. total cash flows produced.
    B. incremental cash flows produced.
    C. accounting profits produced.
    D. increase in total sales produced.

 

  1. The rationale for not including sunk costs in capital budgeting decisions is that they: 
    A. are usually small in magnitude.
    B. revert at the end of the investment.
    C. have no incremental effect.
    D. reduce the estimated NPV.

 

  1. A cost should be considered sunk when it: 
    A. is fully depreciated.
    B. produces no additional sales revenues.
    C. has no effect on future flows.
    D. is replaced by costs that are not yet sunk.

 

  1. Assume your firm has an unused machine that originally cost $75,000, has a book value of $20,000, and is currently worth $25,000. Ignoring taxes, the correct opportunity cost for this machine in capital budgeting decisions is: 
    A. $75,000
    B. $25,000
    C. $20,000
    D. $5,000

 

  1. Which of the following changes in working capital is least likely, given an increase in the overall level of sales? 
    A. An increase in inventories
    B. An increase in accounts payable
    C. A decrease in accounts receivable
    D. A decrease in accruals

 

  1. Which of the following represents a common reason for increases in net working capital with new projects? 
    A. Inventory can now be held at lower levels.
    B. Accounts receivable are often not paid on time.
    C. Inventory increases more than accounts payable increase.
    D. Accounts payable must be increased.

 

  1. What is the net effect on a firm's working capital if a new project requires: $30,000 increase in inventory, $10,000 increase in accounts receivable, $35,000 increase in machinery, and a $20,000 increase in accounts payable? 
    A. -$5,000
    B. +$10,000
    C. +$20,000
    D. +$55,000

 

  1. In capital budgeting analysis, an increase in working capital can be shown as: 
    A. A cash inflow at the beginning of the project.
    B. An outflow at the beginning and an equal inflow at the end of the project.
    C. An inflow at the beginning and an equal outflow at the end of the project.
    D. A decrease in the initial amount invested.

 

  1. Adding depreciation expense to net profit equals: 
    A. profit before tax.
    B. total revenues.
    C. the depreciation tax shield.
    D. cash flows from operations.

 

  1. For a profitable firm in the 30% marginal tax bracket with $100,000 of annual depreciation expense, the depreciation tax shield would be: 
    A. $10,500
    B. $30,000
    C. $35,000
    D. $65,000

 

  1. What is the amount of the operating cash flow for a firm with $500,000 profit before tax, $100,000 depreciation expense, and a 35% marginal tax rate? 
    A. $260,000
    B. $325,000
    C. $360,000
    D. $425,000

 

  1. When a depreciable asset is ultimately sold, the sales price is: 
    A. fully taxable.
    B. non-taxable.
    C. not taxable only if accelerated depreciation was used.
    D. taxable if sales price exceeds book value.

 

  1. What is the undiscounted cash flow in the final year of an investment, assuming: $10,000 after-tax cash flows from operations, the fully depreciated machine is sold for $1,000, the project had required $2,000 in additional working capital, and a 35% tax rate? 
    A. $8,450
    B. $12,600
    C. $12,650
    D. $14,000

 

  1. What is the NPV of a project that costs $100,000, provides $23,000 in cash flows annually for six years, requires a $5,000 increase in net working capital, and depreciates the asset straight line over six years while ignoring the half-year convention? The discount rate is 14%. 
    A. -$15,561
    B. -$13,283
    C. $13,283
    D. $15,561

 

  1. In the MACRS depreciation schedules, the depreciation percentage is lower in the first year than in the second year. This is due to the fact that: 
    A. the depreciation percentage increases in each year.
    B. assets are assumed to be acquired at mid year.
    C. depreciation expense increases at the rate of inflation.
    D. MACRS depreciation is less attractive than straight-line depreciation.

 

  1. A project that increased sales was accompanied by a $50,000 increase in inventory, a $20,000 increase in accounts receivable, and a $25,000 increase in accounts payable. Assuming these amounts remain constant, by how much has net working capital increased? 
    A. $5,000
    B. $25,000
    C. $30,000
    D. $45,000

 

  1. What is the present value at a 10% discount rate of the depreciation tax shield for a firm in the 35% tax bracket that purchases a $50,000 asset being depreciated straight-line over a five-year life to a zero salvage value? 
    A. $10,866
    B. $13,268
    C. $17,500
    D. $37,908

 

  1. The correct method to handle overhead costs in capital budgeting is to: 
    A. allocate a portion to each project.
    B. allocate them to projects with the highest NPVs.
    C. ignore all except identifiable incremental amounts.
    D. ignore them in all cases.

 

  1. What effect is expected at the end of the life of a project that initially required a $20,000 increase in net working capital? 
    A. The $20,000 must now be paid by the firm.
    B. The firm receives a $20,000 cash inflow.
    C. Taxable income is reduced by $20,000.
    D. No effects are expected from sunk costs.

 

 

Chapter 10

  1. What is the percentage return on a stock that was purchased for $40.00, paid a $3.00 dividend after one year and was then sold for $39.00? 
    A. (2.50%)
    B. 2.50%
    C. 5.00%
    D. 7.50%

 

  1. If a share of stock provided a 14.0% nominal rate of return over the previous year while the real rate of return was 6.0%, then the inflation rate was: 
    A. 1.89%
    B. 7.55%
    C. 8.00%
    D. 9.12%

 

  1. The Dow Jones Industrial Average is: 
    A. the most representative of stock market indexes.
    B. an index of America's 500 major corporations.
    C. an index of 30 major industrial stocks.
    D. an equally weighted index of all stocks traded on the New York Stock Exchange.

 

  1. The primary difference between U.S. Treasury bills and U.S. Treasury bonds is that the bills: 
    A. do not have default risk.
    B. have more price volatility.
    C. have a shorter maturity at time of issue.
    D. offer a higher return.

 

  1. A maturity premium is offered on long-term Treasury bonds due to: 
    A. the risk of changing interest rates.
    B. the risk of default.
    C. their unique risk.
    D. their systematic risk.

 

  1. The risk premium that is offered on common stock is equal to the: 
    A. expected return on the stock.
    B. real rate of return on the stock.
    C. excess of expected return over a risk-free return.
    D. expected return on the S&P 500 index.

 

  1. What is the approximate variance (with the dimension %x%) of returns if over the past three years an investment returned 8.0%, -12.0%, and 15.0%? 
    A. 31
    B. 131
    C. 182
    D. 961

 

  1. What is the approximate standard deviation of returns if over the past four years an investment returned 8.0%, -12.0%, -12% and 15.0%? 
    A. 9.26%
    B. 10.26%
    C. 11.26%
    D. 12.26%

 

  1. In general, which stocks should be combined in a portfolio if the goal is to reduce overall risk? 
    A. Stocks with returns that are positively correlated.
    B. Stocks with returns that are negatively correlated.
    C. Stocks with returns that are not correlated.
    D. Stocks that have the highest expected returns.

 

  1. Risk factors that are expected to affect only a specific firm are referred to as: 
    A. market risk.
    B. diversifiable risk.
    C. systematic risk.
    D. risk premiums.

 

 

   Chapter 11

  1. In practice, the market portfolio is often represented by: 
    A. a portfolio of U.S. Treasury securities.
    B. a diversified stock market index.
    C. an investor's mutual fund portfolio.
    D. the historic record of stock market returns.

 

  1. A stock's beta measures the: 
    A. average return on the stock.
    B. variability in the stock's returns compared to that of the market portfolio.
    C. difference between the return on the stock and return on the market portfolio.
    D. market risk premium on the stock.

 

  1. When the overall market experiences a decline of 8%, an investor with a portfolio of aggressive stocks will probably experience: 
    A. negative portfolio returns of less than 8%.
    B. negative portfolio returns of greater than 8%.
    C. positive portfolio returns of less than 8%.
    D. positive portfolio returns of greater than 8%.

 

  1. The average of beta values for all individual stocks is: 
    A. greater than 1.0; most stocks are aggressive.
    B. less than 1.0; most stocks are defensive.
    C. unknown; betas are continually changing.
    D. exactly 1.0; these stocks represent the market.

 

  1. If a stock consistently goes down (up) by 1.6% when the market portfolio goes down (up) by 1.2% then its beta: 
    A. equals 1.40.
    B. equals 1.24.
    C. equals 1.33.
    D. equals 1.40.

 

  1. What is the beta of a three-stock portfolio including 25% of Stock A with a beta of .90, 40% Stock B with a beta of 1.05, and 35% Stock C with a beta of 1.73? 
    A. 1.05
    B. 1.17
    C. 1.22
    D. 1.25

 

  1. What should be the beta of a replacement stock if an investor wishes to achieve a portfolio beta of 1.0 by replacing Stock C in the following equally weighted portfolio: Stock A = .9 beta; Stock B = 1.1 beta; Stock C = 1.35 beta? 
    A. .93 beta
    B. 1.00 beta
    C. 1.08 beta
    D. 1.15 beta

 

  1. A considerable scattering in the plot of points representing the historic returns of a stock versus the returns on the market indicates the: 
    A. high beta of the stock.
    B. unique risk of the stock.
    C. changes in market risk premium over time.
    D. current underpricing of the stock.

 

  1. The beta of an investment in U.S. Treasury bills is: 
    A. 0.0
    B. 0.5
    C. 1.0
    D. meaningless; only common stocks have betas.

 

  1. Which of the following statements is correct when Treasury bills yield 7.5% and the market risk premium is 9.5%? 
    A. The S&P 500 would be expected to yield about 8.50%.
    B. The S&P 500 would be expected to yield about 9.50%.
    C. The S&P 500 would be expected to yield about 12.68%.
    D. The S&P 500 would be expected to yield about 17.00%.

 

  1. What is the expected yield on the market portfolio at a time when Treasury bills yield 6% and a stock with a beta of 1.4 is expected to yield 18%? 
    A. 8.6%
    B. 10.8%
    C. 12.0%
    D. 14.6%

 

  1. What rate of return should an investor expect for a stock that has a beta of 0.8 when the market is expected to yield 14% and Treasury bills offer 6%? 
    A. 9.2%
    B. 11.2%
    C. 12.4%
    D. 12.8%

 

  1. If a two-stock portfolio is equally invested in stocks with betas of 1.4 and 0.7, then the portfolio beta is: 
    A. 0.70.
    B. 1.05.
    C. 1.40.
    D. 2.10.

 

  1. What return would be expected by an investor whose portfolio was 25% market portfolio and 75% Treasury bills if the risk-free rate was 7% and the market risk premium was 8%? 
    A. 8.00%
    B. 9.00%
    C. 10.75%
    D. 13.00%

 

  1. The slope of the security market line equals: 
    A. one.
    B. beta.
    C. the market risk premium.
    D. the expected return on the market portfolio.

 

  1. What would you recommend to an investor who is considering an investment which, according to its beta, plots below the security market line (SML)? 
    A. Invest; return is high relative to risk.
    B. Don't invest; risk is high relative to return.
    C. Invest; stocks revert to the SML over time.
    D. Don't invest; stocks below the SML have too much unique risk.

 

  1. What happens to expected portfolio return if the portfolio beta increases from 1.0 to 1.5, the risk-free rate decreases from 5% to 4%, and the market risk premium increases from 8% to 9%? 
    A. It increases from 12% to 14%.
    B. It increases from 13% to 17.5%.
    C. It increases from 14% to 21%.
    D. It remains unchanged.

 

  1. A stock's risk premium is equal to the: 
    A. expected market return times beta.
    B. Treasury bill yield plus expected market return.
    C. risk-free rate plus expected market risk premium.
    D. expected market risk premium times beta.

 

  1. What rate of return should an investor expect for a stock that has a beta of 1.25 when the market is expected to yield 14% and Treasury bills offer 6%? 
    A. 9.2%
    B. 11.2%
    C. 12.4%
    D. 16.0%

 

  1. If a stock's beta is .8 during a period when the market portfolio was down by 10%, then, a priori, we could expect the return on this individual stock to: 
    A. lose more than 10%.
    B. lose, but less than 10%.
    C. gain more than 10%.
    D. gain, but less than 10%.

 

 

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