Sophia Finance Milestone 3_Complete Questions and Answers (Latest 2022/2023]

Sophia Finance Milestone 3 1 Which of the following is true of portfolio diversification? 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 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 negatively correlated investments has a higher variance than a portfolio containing a single asset type. CONCEPT Portfolio Considerations 2 A security that falls below the security market line has __________. a high expected return and a high price a low expected return and a high price a low expected return and a low price a high expected return and a low price CONCEPT Understanding the Security Market Line 3 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? 4,546 18,200 5,556 9,450 CONCEPT Thinking About Operating Leverage 4 The risk that your investment will lose value because your return is dependant on the stability of a secondary investment is known as __________. prepayment risk model risk liquidity risk asset-backed risk CONCEPT Risk 5 Which of the following portfolios theoretically diversifies away the most risk? One whose investments have a large covariance One whose investments are highly correlated One whose investments have zero correlation One whose investments have a negative covariance CONCEPT Implications Across Portfolios 6 What is the effect on the stock price of a company that announces it earned higher-than-expected quarterly profits? The stock price will likely go up because it's a clear indication that the financial health of the company is strong. The stock price will likely go up because the announcement suggests that the company is undervalued. The effect depends on what generated the profits and how analysts forecast this information. The stock price will likely go down because analysts do not like unexpected surprises from company financial reporting. CONCEPT The Impact of News of Expected Returns 7 You invest $7,000 in a stock that has a 25% chance of a 6% return, a 35% chance of a 9% return and a 40% chance of a 10% return. What is your expected return after one year? 8.25% 9.00% 8.65% 7.85% CONCEPT Expected Return 8 Calculate a company's total leverage given the following information: Change in sales = 7% Change in earnings = 10% 1.43 0.7 Cannot calculate without net income data Cannot calculate without EBIT data CONCEPT Thinking About Financial Leverage 9 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. Corporations file bankruptcy petitions with the states. A company receives a stay from any collections activity after filing a bankruptcy petition. CONCEPT Understanding the Bankruptcy Process 10 The discounted cash flow approach is useful for __________. determining the value of future profits (or losses) in today’s terms determining the value of a company’s publicly traded equity graphing an asset's position on the security market line evaluating whether an asset is over-valued, under-valued or correctly priced CONCEPT Approaches to Calculating the Cost of Capital 11 Using the following variables, calculate an organization's cost of preferred stock. Dpref: $4 Ppref: $30 g: 2% 15% $12.66% 24% 15.33% CONCEPT Valuing Different Costs 12 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? 28.85% 25.00% 19.83% 13.33% CONCEPT Understanding Returns 13 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 B Both Company A and Company B Only Company A CONCEPT The WACC 14 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 15 One reason a company may choose to issue additional debt instead of equity when raising capital is that __________. too much equity raises the risk of bankruptcy equity increases volatility debt interest payments are tax-deductible the company will be less leveraged 16 As a securities dealer, Patrick is able to easily know and compare the prices of stocks, which are now consolidated in a national market system. Which federal regulation established this process? Sarbanes-Oxley Act of 2002 Securities Exchange Act of 1934 Securities Act Amendments of 1975 Securities Act of 1933 CONCEPT Market Regulation 17 What is the amount of money foregone by investing in one asset compared to another known as? The weighted average cost of capital The opportunity cost of capital The required rate of return on capital The overall cost of capital CONCEPT The Basics of the Cost of Capital 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? Share buyback Secondary market offering IPO Private placement CONCEPT The Security Markets 19 Which of the following is a tenet of semi-strong-form efficiency? Some forms of fundamental analysis can provide investors excess returns. Share prices respond immediately to new information that is made public. Historical data can be used to generate excess returns in the present day. Individual investors can