Download FRL 301 MT1 Exam Questions and Correct Answers (A+) and more Exams Advanced Education in PDF only on Docsity!
FRL 301 MT1 EXAM QUESTIONS AND CORRECT
ANSWERS (A+)
Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices,
have differing operating costs and machine lives, and will be replaced when worn out. Which one of the
following computational methods should Dan use as the basis for his decision? - ANSWER Equivalent annual cost
Estimates of the rate of return on a security based on the historical arithmetic average will probably tend to
_____ the expected return for the long-term and estimates using the historical geometric average will
probably tend to _____ the expected return for the short-term. - ANSWER Overestimate; underestimate
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. - ANSWER Semi strong
The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it
does not accept the project is referred to as the project's: - ANSWER Incremental cash flows
Inside information has the least value when financial markets are: - ANSWER Strong form efficient
Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the
following terms best defines the stock market under these conditions? - ANSWER Efficient capital market
Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The firm is currently
considering making handmade wreaths as well. Which one of the following is the best example of an
incremental operating cash flow related to the wreath project? - ANSWER Hiring additional employees to handle the increased workload should the firm accept the wreath project
The stand-alone principle advocates that project analysis should be based solely on which one of the
following costs? - ANSWER Incremental
Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? - ANSWER Selling fewer hot dogs because hamburgers were added to the menu
Which one of the following statements is correct? - ANSWER A project can create a positive operating cash flow without affecting sales
The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles? - ANSWER Stand-alone principle
Net working capital: - ANSWER Can create either an initial cash inflow or outflow
The depreciation method currently allowed under U.S. tax law governing the
accelerated write-off of property under various lifetime classifications is called: - ANSWER MACRS
The tax savings generated as a result of a firm's depreciation expense is called the: - ANSWER depreciation tax shield
The annual annuity stream of payments with the same present value as a project's costs
is called the project's _____ cost. - ANSWER equivalent annual
Lester's Dairy gathers and processes cow's milk for distribution to retail outlets.
Lester's is currently considering processing goat's milk as well. Which one of the
following is most apt to be an incremental cash flow related to the goat milk project? - ANSWER purchasing additional milk jugs to handle the increased volume of milk
The stand-alone principle advocates that project analysis should focus on _____ costs. - ANSWER incremental
You spent $600 last week repairing the brakes on your car. Now, the starter is acting
up and you are trying to decide whether to fix the starter or trade the car in for a newer
model. In analyzing the starter situation, the $600 you spent fixing the brakes is a(n)
_____ cost. - ANSWER sunk
Which one of the following best illustrates erosion as it relates to project analysis? - ANSWER selling less hamburgers because you also started selling hot dogs
You are considering the purchase of new equipment. Your analysis includes the
evaluation of two machines which have differing initial and ongoing costs and differing
lives. Whichever machine is purchased will be replaced at the end of its useful life. You
should select the machine which has the: - ANSWER lowest equivalent annual cost.
The bid price is: - ANSWER the minimum price you should charge if you want to financially breakeven.
Changes in the net working capital: - ANSWER can affect the cash flows of a project every year of the project's life.
Which one of the following is a cash inflow? Ignore any tax effects. - ANSWER a decrease in accounts receivable
The operating cash flows for a cost reduction project: - ANSWER must consider the depreciation tax shield.
A company which utilizes the MACRS system of depreciation: - ANSWER will have a greater tax shield in year two of a project than they would have if the firm
had opted for straight-line depreciation.
The book value of a fixed asset must be used in the computation of which one of the
following? - ANSWER tax due on the sale of a fixed asset
The book value of equipment will: - ANSWER decrease slower under straight-line depreciation than under MACRS.
The pre-tax salvage value of an asset is equal to the: - ANSWER market value.
A project's operating cash flow will increase when: - ANSWER depreciation expense increases.
The equivalent annual cost method is useful in determining: - ANSWER which one of two machines to purchase when the machines are mutually exclusive,
have different machine lives, and will be replaced once they are worn out.
The excess return required from a risky asset over that required from a risk-free asset is called the: - ANSWER risk premium.
The average squared difference between the actual return and the average return is called the: - ANSWER variance.
What is a standard deviation? - ANSWER positive square root of a variance
What is a normal distribution? - ANSWER a symmetrical frequency distribution which is defined by its mean and standard deviation
The average compound return earned per year over a multi-year period is called the _____ average
return. - ANSWER geometric
The return earned in an average year over a multi-year period is called the _____ average return. - ANSWER arithmetic
An efficient capital market defined as a market in which: - ANSWER security prices reflect available information.
The notion that capital markets, such as the NYSE, price securities fairly based on available
information is called the: - ANSWER efficient market hypothesis.
Which one of the following correctly describes the dividend yield? - ANSWER next year's annual dividend divided by today's stock price
Uptown Stores just announced they are increasing their annual dividend from $1.34 per share to
$1.40 per share. If the dividend yield remains at its pre-announcement level, then you know the
stock price: - ANSWER increased proportionately with the dividend increase.
The total return on a security is based on the: - ANSWER both the dividend yield and the capital gains yield.
The real rate of return on a stock is approximately equal to the nominal rate of return: - ANSWER minus the inflation rate.
Small-company stocks, as the term is used in the textbook, are defined as the common stock of: - ANSWER the smallest twenty percent of the firms listed on the NYSE.
The excess return is computed as the: - ANSWER return on a risky security minus the risk-free rate.
Which one of the following is a correct statement concerning risk premium? - ANSWER The greater the volatility of returns, the greater the risk premium.
The excess return you earn by moving from a relatively risk-free investment to a risky investment is
called the: - ANSWER risk premium.
To convince investors to accept greater volatility in the annual rate of return on an investment, you
must: - ANSWER increase the risk premium.
Which one of the following takes the shape of a bell curve? - ANSWER frequency
stocks based on information he overhears in the office. You know that this information is not known
to the general public. Your friend continually brags to you about the profits he earns on these trades.
Based on this information, you would tend to argue that the financial markets are at best _____ form
efficient. - ANSWER semistrong
The U.S. Securities and Exchange Commission periodically charges individuals with insider trading
and claims those individuals have made unfair profits. Based on this fact, you would tend to argue
that the financial markets are at best _____ form efficient. - ANSWER semistrong
Individuals who continually monitor the financial markets seeking mispriced securities: - ANSWER make the markets increasingly more efficient.
