BFIN3321 Review 1. This is the risk that a security issuer will

| June 2, 2016

BFIN3321 Review
1. This is the risk that a security issuer will miss an interest or principal payment
or continue to miss such payments.
A. price risk
B. default risk
C. liquidity risk D. maturity risk
2. This is a comparison of market yields on securities, assuming all
characteristics except maturity are the same.
A. market risk
B. liquidity risk
C. maturity risk
D. term structure of interest rates
3. The volatility of an investment, which includes firm specific risk as well as
market risk is C. standard deviation
A. diversifiable risk
B. market risk
D. total risk
4. This is defined as the portion of total risk that is attributable to firm or industry
factors and can be reduced through diversification.
A. modern portfolio risk
B. firm specific risk
C. market risk D. total risk
5. This is defined as a combination of investment assets held by an investor. A.
B. portfolio
C. market basket
D. All of these
6. This is the portion of total risk that is attributable to overall economic factors. A.
modern portfolio risk
B. firm specific risk
C. market risk
D. total risk
7. This is the investor’s combination of securities that achieves the highest
expected return for a given risk level.
A. efficient portfolio
B. modern portfolio
C. optimal portfolio D. total portfolio

8. This is the term for portfolios with the highest return possible for each risk
level. A. efficient portfolios
B. modern portfolios
C. optimal portfolios
D. total portfolios
9. A measurement of the co­movement between two variables that ranges
between ­1 and +1, is A. coefficient of variation
B. standard deviation
C. correlation
D. total risk
10. Dominant Portfolios Determine which one of these three portfolios dominates
another. Name the dominated portfolio and the portfolio that dominates it.
Portfolio Blue has an expected return of 14 percent and risk of 19 percent. The
expected return and risk of portfolio Yellow are 15 percent and 18 percent, and
for the Purple portfolio are 16 percent and 21 percent.
A. Portfolio Purple dominates Portfolio Blue B. Portfolio Blue dominates Portfolio
Yellow C. Portfolio Yellow dominates Portfolio Blue D. Portfolio Purple dominates
Portfolio Yellow
11. A security formalizing an agreement between two parties to exchange a
standard quantity of an asset at a predetermined price on a specified date in the
future is
A. liquidity asset
B. trading volume
C. derivative security D. initial public offering
12. This is the ease with which an asset can be converted into cash. A. liquidity
B. direct transfer
C. primary market
D. secondary market
13. Once firms issue financial instruments in primary markets, these same stocks
and bonds are then traded in which of these?
A. direct transfers
B. secondary markets
C. initial public offerings D. over­the­counter stocks
14. Which of the following is NOT a capital market instrument? A. U.S. Treasury
B. Corporate stocks and bonds
C. U.S. Treasury notes and bonds
D. U.S. government agency bonds

15. These provide a forum in which demanders of funds raise funds by issuing
new financial instruments, such as stocks and bonds.
A. money markets
B. primary markets
C. investment banks D. secondary markets
16. Primary market financial instruments include stock issues from firms allowing
their equity shares to be publicly traded on stock market for the first time. We
usually refer to these first­time issues as which of the following?
A. direct transfers
B. initial public offerings C. money market transfersD. over­the­counter stocks
17. This is the interest rate that is actually observed in financial markets. A.
nominal interest rates
B. real interest rates
C. real risk free rate
D. market premium
18. According to this theory of term structure of interest rates, at any given point
in time, the yield curve reflects the market’s current expectations of future short­
term rates.
A. Expectations Theory
B. Unbiased Expectations Theory
C. Future Short­term Rates Theory
D. Term Structure of Interest Rates Theory
19. This theory argues that individual investors and financial institutions have
specific maturity preferences, and to encourage buyers to hold securities with
maturities other than their most preferred requires a higher interest rate.
A. Unbiased Expectations Theory
B. Liquidity Premium Hypothesis C. Market Segmentation Theory D. Supply and
Demand Theory
20. This is the interest rate that would exist on a default free security if no
inflation were expected. A. nominal interest rate
B. real risk free rate
C. real interest rate
D. market premium
21. This is the average of the possible returns weighted by the likelihood of those
returns occurring. A. market return
B. efficient return
C. required return
D. expected return

22. This is typically considered the return on U.S. government bonds and bills
and equals the real interest and the expected inflation premium.
A. market risk premium
B. required return
C. risk­free rate D. risk premium
23. In theory, this is a combination of securities that places the portfolio on the
efficient frontier and on a line tangent from the risk­free rate.
A. efficient market
B. market portfolio
C. stock market bubble D. probability distribution
24. The use of debt to increase an investment position. A. stock market bubble
B. behavioral finance
C. financial leverage
D. probability
25. A measure of the sensitivity of a stock or portfolio to market risk. A.
behavioral finance
B. efficient market
C. hedge
D. beta
26. This is the reward investors require for taking risk. A. market risk premium
B. required return
C. risk premium
D. risk­free rate
27. Which of these is the measurement of risk for a collection of stocks for an
investor? A. beta
B. portfolio beta
C. efficient market
D. expected return
28. Which of the following is NOT a necessary condition for an efficient market?
A. Many buyers and sellers.
B. No trading or transaction costs.
C. No prohibitively high barriers to entry.
D. Free and readily available information available to all participants.
29. The constant growth model assumes which of the following? A. That there
are executive stock options available to managers. B. That there is privately held
C. That the stock is efficiently priced.
D. That there is no restricted stock.

30. A theory that describes the types of information that are reflected in current
stock prices. A. asset pricing
B. behavioral finance
C. public information
D. efficient market hypothesis
31. Accelerated depreciation allows firms to
A. receive less of the dollars of depreciation earlier in the asset’s life. B. receive
more of the dollars of depreciation earlier in the asset’s life. C. not pay any taxes
during an asset’s life.
D. receive more of the dollars of depreciation later in the asset’s life.
32. Section 179 allows a business, with certain restrictions, to do which of the
A. Offset the tax liability with the cost of the asset in the year of purchase.
B. Expense the asset immediately in the year ofpurchase.
C. Expense the asset using double declining balance depreciation during the life
of the asset. D. Get a government grant to purchase the asset.
33. For which situation below would one need to "smooth out" the variation in
each set of cash flows so that each become a perpetuity?
A. choosing between projects with differing risks
B. choosing between independent project
C. choosing between alternative assets with differing lives D. choosing between
alternative assets with equal lives
34. The best approach to convert an infinite series of asset purchases into a
perpetuity is known as A. the Net working capital approach
B. the Net present value approach
C. the Equivalent annual cost approach
D. the Equivalent annual cash flow approach
35. With regard to depreciation, the time value of money concept tells us that A.
delaying the depreciation expense is always better.
B. taking the depreciation expense sooner is always better.
C. delaying the depreciation expense is sometimes better.
D. taking the depreciation expense sooner is sometimes better.
36. When looking at these types of projects, one must consider any cash flows
that arise from surrendering old equipment before the end of its useful life.
A. incremental
B. replacement
C. cost­cutting D. new
37. Of the capital budgeting techniques discussed, which works equally well with
normal and non­ normal cash flows and with independent and mutually exclusive

A. payback period
B. discounted payback period
C. modified internal rate of return D. net present value
38. The Net Present Value decision technique may not be the only pertinent unit
of measure if the firm is facing
A. time or resource constraints.
B. a labor union.
C. the election of a new board of directors. D. a major investment.
39. Neither payback period nor discounted payback period techniques for
evaluating capital projects accounts for
A. time value of money.
B. market rates of return.
C. cash flows that occur after payback. D. cash flows that occur during payback.
40. Which rate­based decision statistic measures the excess return the amount
above and beyond the cost of capital for a project, rather than the gross return?
A. Internal Rate of Return, IRR
B. Modified Internal Rate of Return, MIRR
C. Profitability Index, PI D. Net Present Value, NPV
41. When calculating the weighted average cost of capital, weights are based on
A. book values.
B. book weights.
C. market values.
D. market betas.
42. Which of the following is a true regarding the appropriate tax rate to be used
in the WACC?
A. One would use the marginal tax rate that the firm paid the prior year.
B. One would use the average tax rate that the firm paid the prior year.
C. One would use the weighted average of the marginal tax rates that would
have been paid on the taxable income shielded by the interest deduction.
D. One would use the marginal tax rates that would have been paid on the
taxable income shielded by the interest deduction.
43. Which of these is the basic intuition behind calculating the cost of capital?
A. Firms need to know what the cost of all their current sources of capital cost
B. When firms use multiple sources of capital, they need to calculate the current
expenditures in a dollar amount format.
C. When firms use multiple sources of capital, they need to calculate the
appropriate interest rate for valuing their firm’s cash flows as a weighted average

of the capital components.
D. When firms use multiple sources ofcapital, they need to calculate the
appropriate interest rate after taxes for estimating current cash outflows.
44. These are fees paid by firms to investment bankers for issuing new
securities. A. floatation costs
B. interest expense
C. seller financing charges
D. user fees
45. This is a principle of capital budgeting which states that the calculations of
cash flows should remain independent of financing.
A. generally accepted accounting principle
B. financing principle
C. separation principle D. WACC principle
46. This is the process of estimating expected future cash flows of a project using
only the relevant parts of the balance sheet and income statements.
A. incremental cash flows
B. cash flow analysis
C. pro forma analysis
D. substitutionary analysis
47. Concerning incremental project cash flow, this is a cost one would never
count as an expense of the project.
A. initial investment
B. taxes paid
C. operating expenses of the project D. financing costs
48. This is used as a measure of the total amount of available cash flow from a
project. A. free cash flow
B. operating cash flow
C. investment in operating capital
D. sunk cash flow
49. When calculating operating cash flow for a project, one would calculate it as
being mathematically equal to which of the following?
A. EBIT ­ Interest ­ Taxes + Depreciation
B. EBIT ­ Taxes
C. EBIT + Depreciation
D. EBIT ­ Taxes + Depreciation
50. A decrease in net working capital (NWC) is treated as a A. cash inflow
B. cash outflow
C. sunk cost

D. historical cost
51. These are groups or pairs of projects where you can accept one but not all. A.
B. independent
C. mutually exclusive
D. mutually dependent
52. A capital budgeting technique that converts a project’s cash flows using a
more consistent reinvestment rate prior to applying the Internal Rate of Return,
IRR, decision rule.
A. discounted payback
B. net present value
C. modified internal rate of return D. profitability index
53. Investing in stocks is like gambling when: A. Both have a short time horizon
B. Both involve risk
C. Both involve an initial outflow of cash
D. Both result in long­term loses.
54. Which of the following is false?
A. Incremental costs can be Opportunity costs.
B. Opportunity costs can be Incremental cost.
C. Of the three categories of Opportunity costs, only one is usually an
Incremental cost. D. Opportunity costs and Incremental costs are the same thing.
E. Some Opportunity costs are not incremental costs.
55. If the risk of an investment project is different than the firm’s risk then:
A. you must adjust the discount rate for the project based on the firm’s risk.
B. you must adjust the discount rate for the project based on the project risk.
C. you must exercise risk aversion and use the market rate.
D. an average rate across prior projects is acceptable because estimates contain
errors. E. one must have the actual data to determine any differences in the
56. Insider trading does not offer any advantages if the financial markets are: A.
strong form efficient.
B. semi­strong form efficient.
C. semi­weak form efficient.
D. weak form efficient. E. inefficient.

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