A firm has a cost of equity of 10 percent, a cost of preferred of 9 percent, and an aftertax cost of debt of 5 percent. Given this, which one of the following will decrease the firm's weighted average cost of capital?
Issuing new debt
The cost of preferred sock
is equal to the stock's dividend yield.
All else constant, an increase in a firm's cost of debt
will result in an increase in the firm's cost of capital
The cost of capital for a project depends primarily on the
Use of the funds.
The weighted average cost of capital is defined as the weight average of a firm's
cost of equity and its aftertax cost of debt.
Woven Goods is considering adding a new line of baskets to its product line-up. Which of the following are relevant cash flows for this project?
I. increased revenue from existing goods if these baskets are added to the lineup
II. revenue from the new lin
I, II, and IV only
Payback ignores the
time value of money
A net present value of zero implies that an investment
is earning a return that exactly matches the requirement
The IRR decision rule states that a project should be accepted if its IRR:
exceeds the required rate.
An indicator that a project has a rate of return that exceeds its required return is:
a positive NPV
The most valuable alternative that is forfeited if a particular investment is undertaken is called:
an opportunity cost
The payback period is the period of time it takes an investment to generate sufficient cash flows to:
recover the investment's initial cost
A proposed project will increase a firm's accounts payable. This increase:
is a cash inflow at time zero a cash outflow at the end of the project.
The change in a firm's future cash flows that results from adding a new project are referred to as _____ cash flows.
incremental
The NPV rule states that you should accept an investment if the NPV:
is positive
The discount rate that causes the net present value of a project to equal zero is called the:
internal rate of return.
A sunk cost is:
a cost that has already been incurred and cannot be recouped.
The hypothesis that stock market,s such as the NYSE, are efficient is called the:
efficient markets hypothesis
The lower the standard deviation of a security, the ______ the expected rate of return and the ______ the risk.
lower; lower
What is used as the risk-free rate of return?
U.S. Treasury bills
If the financial markets are efficient then:
stock prices should only respond to unexpected news and events.
The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield, are based on:
the stocks of the 500 companies included in the S&P 500 index.
Weak form market efficiency state that the value of a security is based on:
historical price information only.
Standard deviation measure the _____ of a security's returns over time.
volatility
A bell-shaped frequency distribution that is defined by its average and standard deviation is called a:
normal distribution
Over the period of 1926-2006:
long-term government bonds underperformed long-term corporate bonds.
Which of the following statement are correct?
I. The risk-free rate of return has a zero risk premium
II. The reward for bearing risk is called the standard deviation
III. Based on historical returns, there are rewards for bearing risk.
IV. In general, th
I, III, and IV only
The distribution of returns for which stocks of the period of 1926-2006 produces the widest bell curve (or distribution)?
small-company stocks
Systematic risk is
a risk that affects a large number of assets
What must total to 100 percent?
portfolio weights and probabilities of occurrence for the various economic states
The concept of investing in a variety of diverse assets to reduce risk is referred to as:
the principle of diversification
An example of systematic risk?
Inflation exceeding market expectations
Diversifying a portfolio across various sectors and industries will tend to:
reduce the firm-specific risk
The goal of diversification is to eliminate:
unsystematic risk
An example of unsystematic risk?
an unexpected increase in the sales of a firm
A U.S. Treasur bill has a beta of ___ while the overall market has a beta of ____.
0; 1
The difference between beta and standard deviation is best described as:
Beta measures the risk investors are compensated for, while standard deviation measures both systematic and unsystematic risk.
The amount of systematic risk present in a particular risk asset relative to that in an average risk asset (or the market in general) is called the:
beta coefficient