Which one of the following best exemplifies unsystematic risk

Exam3 FIN370-02 Winter
Version B

1. Auction markets:
I. match sellers with buyers.
II. have a physical location.
III. consist solely of electronic trades.
IV. are based on dealers.
A. II only
B. III only
C. III and IV only
D. I and II only
E. I, III, and IV only

2. The Town Talker has a printing press that is not being used at the present time. In fact, this press has not been used for over a year. The press has no market value because it utilizes old technology. The firm could get $150 for the press as scrap metal. The press is five years old and originally cost $97,000. The current book value is $1,450. The president of the firm is considering a new project and feels he can use this press for that project. What value should be assigned to the press and included in the initial project cost?
A. $1,450
B. $1,300
C. $150
D. $0
E. $1,600

3. Which one of the following correctly defines the average accounting return?
A. average cash flow divided by average book value
B. average net income divided by average book value
C. average book value divided by average net income
D. average book value divided by average cash flow
E. average book value divided by average market value

4. Percentage returns:
I. easily convey the return for each dollar invested.
II. relay information about a security more easily than dollar returns do.
III. are not affected by the amount of the investment.
IV. can be easily separated into dividend and capital gain yields.
A. I, II, and IV only
B. I and III only
C. II and III only
D. II and IV only
E. I, II, III, and IV

5. Which one of the following ignores the time value of money?
A. profitability index
B. payback
C. discounted cash flow analysis
D. internal rate of return
E. net present value

6. The stock of Uptown Men's Wear is expected to produce the following returns given the various states of the economy. What is the expected return on this stock?

A. 9.6 percent
B. 12.8 percent
C. 13.6 percent
D. 10.4 percent
E. 15.3 percent

7. Your portfolio has provided you with returns of 7.9 percent, 11.2 percent, 3.8 percent, and 14.7 percent over the past four years, respectively. What is the geometric average return for this period?
A. 9.16 percent
B. 9.33 percent
C. 9.40 percent
D. 9.44 percent
E. 8.98 percent

8. The goal of diversification is to eliminate:
A. all investment risk.
B. the market risk premium.
C. unsystematic risk.
D. the effects of beta.
E. systematic risk.

9. What is the payback period for a project with the following cash flows?

A. 2.14 years
B. 2.20 years
C. 2.50 years
D. 2.54 years
E. 2.23 years

10. Garner, Inc. has a return on equity of 12.5 percent, an equity multiplier of 1.7, and a total asset turnover of 2.1. What is the profit margin?
A. 4.70 percent
B. 4.63 percent
C. 3.50 percent
D. 7.35 percent
E. 3.57 percent

11. Two brothers are discussing a truck they use for local deliveries. Which one of the following items from their discussion represents a sunk cost?
A. new tail gate that is needed since the old one was damaged in an accident last week
B. transmission repair that was done last week
C. cost of the state required annual inspection that must be done this month
D. new set of tires that will be needed for winter
E. engine tune-up that is scheduled for this afternoon

12. A 5-year project is expected to generate revenues of $92,000, variable costs of $67,000, and fixed costs of $11,000. The annual depreciation is $4,000 and the tax rate is 35 percent. What is the annual operating cash flow?
A. $11,100
B. $9,100
C. $10,500
D. $9,900
E. $8,700

13. You can deposit $850 today into a savings account. How long must you wait for the investment to grow to $5,000 if you can earn 6 percent on this money?
A. 31.45 years
B. 30.41 years
C. 23.81 years
D. 22.63 years
E. 59.95 years

14. Julie owns a stock with a market price of $43 per share. This stock pays a constant annual dividend of $1.34 a share. If the price of the stock suddenly falls to $31 a share, you would expect the:
I. dividend yield to increase.
II. dividend yield to decrease.
III. capital gains yield to increase.
IV. capital gains yield to decrease.
A. I only
B. I and III only
C. II only
D. II and IV only
E. III only

15. A pro forma financial statement is a financial statement that:
A. values all assets based on their current market values.
B. projects future years' operations.
C. compares actual results to the budgeted amounts.
D. expresses all values as a percentage of either total assets or total sales.
E. compares the performance of a firm to its industry.

16. The primary benefit of cumulative voting is:
A. that each shareholder receives an equal number of total votes.
B. the ability to vote by proxy.
C. the ability of the shareholders to replace the entire board of directors in one election.
D. an increased probability that minority shareholders can elect at least one director of their choice.
E. an increased probability that the largest shareholder will be able to control the entire board of directors.

17. You can ensure that an investment is expected to create value for a firm's owners by selecting projects that:
A. have a PI equal to zero.
B. have positive NPVs.
C. have positive AARs.
D. produce negative rates of return.
E. have positive IRRs.

18. The annual interest on a bond divided by the bond's market price is called the:
A. yield to call.
B. required yield.
C. total yield.
D. current yield.
E. yield to maturity.

19. The concept that the expected return on an investment depends solely on that asset's nondiversifiable risk is referred to as:
A. the principle of diversification.
B. systematic investing.
C. the expected return theory.
D. the principle of elimination.
E. the systematic risk principle.

20. Which one of the following best exemplifies unsystematic risk?
A. an unexpected economic boom
B. an expected increase in tax rates
C. a sudden increase in the inflation rate
D. an unexpected increase in the sales of a firm
E. an unexpected decrease in interest rates

21. B&T, Inc. is expected to pay its first annual dividend five years from now. That payment will be $3.10 a share. Starting in year six, the company will increase the dividend by 2 percent per year. The required return is 15 percent. What is the value of this stock today?
A. $13.63
B. $11.86
C. $14.66
D. $15.71
E. $12.09

22. Which one of the following is the preferred method of analyzing a proposed investment?
A. profitability index
B. internal rate of return
C. net present value
D. accounting rate of return
E. payback

23. Which one of the following is a perpetuity?
A. social security payments of $1,100 a month for life
B. $680 a month over the life of a lease
C. $1,000 annual payments from a trust fund forever
D. student loan payments of $360 a month for five years
E. car payments of $260 a month for 60 months

24. A project has the following cash flows. What is the internal rate of return?

A. 12.46 percent
B. 13.97 percent
C. 14.08 percent
D. 16.20 percent
E. 15.39 percent

25. Which one of the following will increase the cash flow from assets, all else constant?
A. an increase in depreciation
B. a decrease in dividends paid
C. an increase in the change in net working capital
D. a decrease in the cash flow to creditors
E. an increase in net capital spending

26. Brook's is a specialty retailer of souvenir wear. Currently, the firm offer T-shirts, sweatshirts, and caps. Its most recent annual sales consisted of $18,000 of T-shirts, $9,000 of sweatshirts, and $1,800 of caps. The company is adding polo shirts to the line-up and projects that this addition will result in sales next year of $15,000 of T-shirts, $10,000 of sweatshirts, $9,500 of polo shirts, and $2,000 of caps. What amount of next year's revenue is from side effects of the additional product?
A. $420
B. $1,800
C. $1,600
D. $580
E. $750

27. The return on which one of the following is used as the risk-free rate of return?
A. long-term corporate bonds
B. long-term government bonds
C. U.S. Treasury bills
D. the Consumer Price Index
E. short-term corporate bonds

28. Which of the following will increase the profit margin of a firm, all else constant?
I. increasing depreciation
II. decreasing cost of goods sold
III. decreasing the tax rate
IV. increasing interest expense
A. I and III only
B. I, II, and III only
C. II and IV only
D. II and III only
E. I, II, III, and IV

29. The profit margin is the amount of net profit earned for every $1 of:
A. long-term debt.
B. total assets.
C. external financing.
D. equity.
E. sales.

30. Swenson's is considering a project with a five-year life. The project requires $90,000 of fixed assets that are classified as five-year property for MACRS. Variable costs equal 64 percent of sales. Fixed costs are $13,500 and the tax rate is 34 percent. What is the operating cash flow for year 3 given the following sales amounts and MACRS depreciation allowance percentages?

A. $5,825.80
B. $7,301.19
C. $6,231.60
D. $6,714.21