Principle of Finance Milestone 3 Sophia Course,100% correct.

Principle of Finance Milestone 3 Sophia Course 1 You invest $1,000 in a stock that has a 15% chance of a 1% return, a 60% chance of a 5% return and a 25% chance of a 7% return. What is your expected return after one year? · 4.3% · 4.9% · 4.5% · 5.3% CONCEPT Expected Return 2 Which of the following credit ratings would make a country or company have the easiest time raising capital? · CC · A · BBB · AAA CONCEPT The Impact of News of Expected Returns 3 A security that falls above the security market line has __________. · a low expected return and a low price · a high expected return and a high price · a high expected return and a low price · a low expected return and a high price CONCEPT Understanding the Security Market Line 4 Using the following variables, calculate an organization's cost of debt on a $500,000 bond. ·Rf: 1% ·credit-risk rate: 5% ·t: 15% · $4,500 · $30,000 · $29,550 · $25,500 CONCEPT Valuing Different Costs 5 Anais purchased stock with an initial share price of $52, and sold it when the share price was $60. While she owned the stock, she earned $7 in dividends. What was her total percentage return on the investment? · 13.33% · 25.00% · 19.83% · 28.85% CONCEPT Understanding Returns 6 The risk that your investment will lose value because your return is dependant on the stability of a secondary investment is known as __________. · liquidity risk · asset-backed risk · model risk · prepayment risk CONCEPT Risk 7 The discounted cash flow approach is useful for __________. · graphing an asset's position on the security market line · determining the value of a company’s publicly traded equity · evaluating whether an asset is over-valued, under-valued or correctly priced · determining the value of future profits (or losses) in today’s terms CONCEPT Approaches to Calculating the Cost of Capital 8 You own a small manufacturing business that produces widgets. You have spent $150,000 acquiring the fixed assets you need to produce widgets. Each widget costs you $2 to make and they sell for $15 each, so your variable cost is 13.3% of the overall revenue. At your current level of operating leverage, how many widgets must you sell to break even? · 11,539 · 10,000 · 19,950 · 13,482 CONCEPT Thinking About Operating Leverage 9 Which of the following is true of systematic risk? · It cannot be diversified away by holding a pool of individual assets. · It is less tightly linked to the market as a whole than unsystematic risk. · It does not require additional compensation in terms of expected return. · An investor can avoid this type of risk through calculated investment choices. CONCEPT Diversification 10 Calculate a company's total leverage given the following information: ·Change in sales = 7% ·Change in earnings = 10% · 0.7 · Cannot calculate without net income data · Cannot calculate without EBIT data · 1.43 CONCEPT Thinking About Financial Leverage 11 Which of the following portfolios theoretically diversifies away the most risk? · One whose investments are highly correlated · One whose investments have a negative covariance · One whose investments have a large covariance · One whose investments have zero correlation CONCEPT Implications Across Portfolios 12 Before selling bonds to investors, Matteo's company must provide audited financial statements and a detailed description of the terms of the bonds. By doing so, which federal regulation is he complying with? · Securities Act of 1933 · Securities Act Amendments of 1975 · Securities Exchange Act of 1934 · Sarbanes-Oxley Act of 2002 CONCEPT Market Regulation 13 Which of the following is true of portfolio diversification? · A diversified portfolio containing negatively correlated investments has a lower variance than a portfolio containing a single asset type. · A diversified portfolio containing positively correlated investments has a lower variance than a portfolio containing a single asset type. · A diversified portfolio containing positively correlated investments has a higher variance than a portfolio containing a single asset type. · A diversified portfolio containing negatively correlated investments has a higher variance than a portfolio containing a single asset type. CONCEPT Portfolio Considerations 14 One reason a company may choose to issue additional debt instead of equity when raising capital is that __________. · debt interest payments are tax-deductible · equity increases volatility · too much equity raises the risk of bankruptcy · the company will be less leveraged 15 What is the amount of money foregone by investing in one asset compared to another known as? · The overall cost of capital · The opportunity cost of capital · The required rate of return on capital · The weighted average cost of capital CONCEPT The Basics of the Cost of Capital 16 Company A Company B Market Value of Equity $400,000 $600,000 Market Value of Debt $100,000 $800,000 Cost of Equity 9% 9% Cost of Debt 3% 4% Tax Rate 35% 35% Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 6.5%? · Neither Company A nor Company B · Only Company A · Both Company A and Company B · Only Company B CONCEPT The WACC 17 Select the true statement about the bankruptcy process. · A Chapter 7 bankruptcy allows a company to restructure its debt. · A bankruptcy reorganization plan is voted on by a company's shareholders. · A company receives a stay from any collections activity after filing a bankruptcy petition. · Corporations file bankruptcy petitions with the states. CONCEPT Understanding the Bankruptcy Process 18 A social media start-up wants to raise funds to support growth by offering shares to a select group of investors. What type of market transaction should they pursue? · IPO · Secondary market offering · Share buyback · Private placement CONCEPT The Security Markets 19 Which of the following is a tenet of strong-form efficiency? · Future prices cannot be predicted based on past prices. · Some forms of technical analysis techniques can be useful for producing excess returns. · Share prices respond immediately to all information, whether public or private. · Investors can use the past prices of securities to predict their future prices. CONCEPT Market Efficiency 1 Marty receives a tip that the price of shares of an oil company are about to fall significantly. In order to avoid a huge loss, he goes into his online brokerage account and sells all of the stock that he owns in the oil company. What type of market transaction is taking place? · Secondary market offering · Share buyback · Primary market offering · Private placement CONCEPT The Security Markets 2 Using the following variables, calculate an organization's cost of common equity. ·Rf: 1.5% ·βs: 1.4 ·(Rm – Rf): 8% · 10.2% · 12.7% · 9.7% · 11.6% CONCEPT Valuing Different Costs 3 You invest $3,000 in a stock that has a 10% chance of a 2% return, a 70% chance of a 6% return and a 20% chance of a 15% return. What is your expected return after one year? · 7.4% · 5.6% · 6.0% · 8.8% CONCEPT Expected Return 4 Before selling bonds to investors, Matteo's company must provide audited financial statements and a detailed description of the terms of the bonds. By doing so, which federal regulation is he complying with? · Securities Act Amendments of 1975 · Securities Exchange Act of 1934 · Securities Act of 1933 · Sarbanes-Oxley Act of 2002 CONCEPT Market Regulation 5 Why is an investment portfolio containing a mix of stocks and bonds less risky than one containing a single asset class? · Because bonds typically have a high variance and stocks typically have a low variance. · Because stocks and bonds are positively correlated. · Because stocks and bonds are negatively correlated. · Because the markets for stocks and bonds tend to move in the same direction at the same time. CONCEPT Portfolio Considerations 6 Calculate a company's total leverage given the following information: ·Net income = $80,000 ·Revenue = $120,000 ·Variable costs = $25,000 · 1.14 · 1.19 · Cannot calculate without EPS data · Cannot calculate without knowing degree of financial leverage CONCEPT Thinking About Financial Leverage 7 Anais purchased stock with an initial share price of $52, and sold it when the share price was $60. While she owned the stock, she earned $7 in dividends. What was her total percentage return on the investment? · 13.33% · 19.83% · 28.85% · 25.00% CONCEPT Understanding Returns 8 Company A Company B Market Value of Equity $400,000 $600,000 Market Value of Debt $100,000 $800,000 Cost of Equity 9% 9% Cost of Debt 3% 4% Tax Rate 35% 35% Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 6.5%? · Both Company A and Company B · Neither Company A nor Company B · Only Company A · Only Company B CONCEPT The WACC 9 The capital asset pricing model is useful for __________. · assessing the ratio between risk and return on an investment · determining the discount rate on a company's long-term debt · projecting a company's future performance · valuing the net present value of a project CONCEPT Approaches to Calculating the Cost of Capital 10 You own a small manufacturing business that produces widgets. You have spent $100,000 acquiring the fixed assets you need to produce widgets. Each widget costs you $4 to make and they sell for $22 each, so your variable cost is 18.2% of the overall revenue. At your current level of operating leverage, how many widgets must you sell to break even? · 9,450 · 5,556 · 18,200 · 4,546 CONCEPT Thinking About Operating Leverage 11 Which of the following is true of unsystematic risk? · The correlation among the returns of assets within a portfolio are irrelevant to this type of risk. · Its presence commands a return in excess of the risk-free rate. · It can be diversified away by relying on the lack of a tight positive relationship among the returns of a set of individual assets. · It is also known as non-diversifiable risk. CONCEPT Diversification 12 A company is considering a new plan for its capital structure. Which of the following is true if, under the new plan, the company's weighted average cost of capital exceeds the expected return? · The company's cost of capital is still at a comfortable level. · The company's proposed capital structure may put it at risk for bankruptcy. · The company is over-leveraged. · The company's value will increase. 13 Which of the following portfolios theoretically diversifies away the most risk? · One whose investments have zero correlation · One whose investments have a large covariance · One whose investments are highly correlated · One whose investments have a negative covariance CONCEPT Implications Across Portfolios 14 Select the true statement about the bankruptcy process. · A company receives a stay from any collections activity after filing a bankruptcy petition. · Corporations file bankruptcy petitions with the states. · A bankruptcy reorganization plan is voted on by a company's shareholders. · A Chapter 7 bankruptcy allows a company to restructure its debt. CONCEPT Understanding the Bankruptcy Process 15 The risk that your investment in a stock will lose value because the company's labor force goes on strike is known as __________. · market risk · asset-backed risk · default risk · operational risk CONCEPT Risk 16 What is the amount of money foregone by investing in one asset compared to another known as? · The weighted average cost of capital · The overall cost of capital · The opportunity cost of capital · The required rate of return on capital CONCEPT The Basics of the Cost of Capital 17 Which of the following credit ratings would make a country or company have the easiest time raising capital? · A · BBB · AAA · CC CONCEPT The Impact of News of Expected Returns 18 Which of the following is a tenet of semi-strong-form efficiency? · Share prices respond immediately to new information that is made public. · Individual investors can