MBA 621 Midterm Test Questions with Correct Answers Latest Update

MBA 621 Midterm Test Questions with Correct Answers Latest Update Investors demand a higher return for investments that have larger fluctuations in values because ________. - Answers They do not like risk. Which of the following investments offered the highest overall return over the past eighty years? - Answers Small Stocks Which of the following investments had the largest fluctuations overall return over the past eighty years? - Answers Small Stocks Suppose you invested $60 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.63 today and then you sold it for $65. What was your return on the investment? - Answers (0.63 + 65 -60)/60 = 9.38% Suppose you invested $93 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $0.53 today and then you sold it for $94. What was your dividend yield and capital gains yield on the investment? - Answers 0.57%, 1.08% A stock prices gave a realized return of 5%, -5%, 11%, and -11% over four successive quarters. What is the annual realized return for A for the year? - Answers (1 + 0.05) x (1 - 0.05) x (1 + 0.11) x (1 - 0.11) = 0.9854; 0.9854 - 1 = -1.46% The S&P 500 index delivered a return of 20%, -10%, 20%, and 5% over four successive years. What is the arithmetic average annual return for four years? - Answers 8.75% Ford Motor Company had realized returns of 20%, 30%, 30%, and 20% over four quarters. What is the quarterly standard deviation of returns for Ford calculated from this sample? - Answers average quarterly return is 25% standard deviation is the square root of sum of the squared deviation divided by (# of samples - 1): = sqrt {( (0.2-0.25)^2 + (0.3 - 0.25)^2 + (0.3-0.25)^ + (0.2-0.25)^2) /3} = 0.0577 Treasury bill returns are 4%, 3%, 2%, and 5% over four years. The standard deviation of returns of Treasury bills is ________. - Answers =sqrt{ ( (0.04-0.035)^2 + (0.03- 0.035)^2 + (0.02 - 0.035)^2 + (0.05-0.035)^2)/3} = 0.0129 T/F: Net Working Capital = Cash + Inventory + Payables - Receivables - Answers FASLE T/F: Depreciation is not a cash expense paid by the firm/ - Answers TRUE T/F: Since 1997, companies can "carry back" losses for two years and "carry forward" losses for 20 years. - Answers TRUE T/F: Earnings do not represent real profits. - Answers TRUE Which of the following statements is TRUE? I) Most projects will require the firm to invest in net working capital. II) The main components of net working capital are cash, inventory, receivables, and property, plant, and equipment. III) ΔNWCt = NWCt -1 IV) In the final year of a product, the firm ultimately recovers the investment in net working capital. - Answers I, III, and IV only T/F: Free Cash Flow = (Revenues - Costs - Depreciation) x (1-τc) - Capital Expenditures - ΔNWC + τc x Depreciation. - Answers FALSE T/F: Depreciation expenses have a positive impact on free cash flow. - Answers TRUE T/F: The firm cannot use its earnings to buy goods, pay employees, fund new investments, or pay dividends to shareholders. - Answers TRUE T/F: The depreciation tax shield is the tax savings that results from the ability to deduct depreciation. - Answers TRUE Which of the following is true? I) The tax savings brought about by the project's depreciation expense. II) The cost of a marketing survey you conducted to determine demand for the proposed project. III) Interest payments on debt used to finance the project. IV) Research and Development expenditures you will make in carrying out the project. - Answers I and IV only The NPV profile graphs: - Answers The project's NPV over a range of discount rates. Rearden Metals is considering opening a strip mining operation to provide some of the raw materials needed in producing Rearden metal. The initial purchase of the land and the associated costs of opening up mining operations will cost $100 million today. The mine is expected to generate $16 million worth of ore per year for the next 12 years. At the end of the 12th year Rearden will need to spend $20 million to restore the land to its original pristine nature appearance. The number of potential IRRs that exist for Rearden's mining operation is equal to: - Answers Answer: 2 [ This project begins with a negative cash flow, then continues with 11 positive cash flows and finally ends at one least negative cash flow. Thus, there are two changes in the signs of the cash flows so there will be two IRRs. ] T/F: The fundamental investment rule is the NPV investment rule. - Answers TRUE T/F: The IRR investment rule will identify the correct decision in all situations. - Answers FAL