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UNIT 3 — MILESTONE 3
Score
... [Show More] 17/19
You passed this Milestone
17 questions were answered correctly.
2 questions were answered incorrectly.
1
Calculate a company's total leverage given the following information:
Net income = $80,000
Revenue = $120,000
Variable costs = $25,000
Cannot calculate without knowing degree of financial leverage
1.14
Cannot calculate without EPS data
1.19
CONCEPT
Thinking About Financial Leverage
2
Like the capital asset pricing model, the bond yield plus risk premium (BYPRP) approach is useful for
__________.12/8/2020 Sophia :: Welcome
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calculating the relative time value of money of projected cash flows
determining whether it makes financial sense to pursue a new project
estimating the equity risk premium
estimating the required return on a company's equity
CONCEPT
Approaches to Calculating the Cost of Capital
3
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.
An investor can avoid this type of risk through calculated investment choices.
It does not require additional compensation in terms of expected return.
CONCEPT
Diversification
4
The risk that your investment in a stock will lose value because the company's labor force goes on strike is
known as __________.
default risk
asset-backed risk12/8/2020 Sophia :: Welcome
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market risk
operational risk
CONCEPT
Risk
5
Select one reason a company's capital structure may include more equity than debt.
Too much debt will decrease a company's volatility.
Equity has significant tax advantages that debt does not.
Relying too heavily on debt can increase the interest rate that a company must pay on its debt.
Taking on more equity means that a company will be more leveraged.
6
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 negatively correlated investments has a higher 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 positively correlated investments has a lower variance than a portfolio
containing a single asset type.
CONCEPT12/8/2020 Sophia :: Welcome
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Portfolio Considerations
7
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
$29,550
$30,000
$25,500
CONCEPT
Valuing Different Costs
8 Y
ou 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?
13,482
19,950
10,000
11,539
CONCEPT12/8/2020 Sophia :: Welcome
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Thinking About Operating Leverage
9
Which of the following is a tenet of semi-strong-form efficiency?
Share prices respond immediately to new information that is made public.
Historical data can be used to generate excess returns in the present day.
Some forms of fundamental analysis can provide investors excess returns.
Individual investors can "beat" the market if enough information is made public.
CONCEPT
Market Efficiency
10
Company A Company B
Market Value of Equity $250,000 $200,000
Market Value of Debt $600,000 $500,000
Cost of Equity 8% 10%
Cost of Debt 2% 2%
Tax Rate 35% 30%
Based solely on their current weighted average cost of capital, which company should pursue an
investment opportunity with an expected return of 5%?
Neither Company A nor Company B
Only Company B
Only Company A
Both Company A and Company B12/8/2020 Sophia :: Welcome
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CONCEPT
The WACC
11
Select the true statement about the bankruptcy process.
In a Chapter 7 bankruptcy, creditors are guaranteed to recoup at least part of what is owed to them.
Companies that cannot meet their debts can try to reduce their debt obligations before filing for
bankruptcy.
A Chapter 11 bankruptcy is a liquidation filing.
Filing for bankruptcy is the best way for a company to remedy financial distress.
CONCEPT
Understanding the Bankruptcy Process
12
A stock's beta, which can be affected by surprise news or announcements, is a measure of its __________
in relation to a benchmark like an index fund.
yield
credit rating
price
volatility
CONCEPT
The Impact of News of Expected Returns
1312/8/2020 Sophia :: Welcome
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Mason is a financial analyst who specializes in securities. When providing an analysis of securities to which he
has a personal connection, he discloses his conflict of interest.
By doing so, which federal regulation is he complying with?
Securities Exchange Act of 1934
Securities Act Amendments of 1975
Sarbanes-Oxley Act of 2002
Securities Act of 1933
CONCEPT
Market Regulation
14
What is the weighted average cost of capital for a borrower equivalent to?
The calculated required return of all sources of capital
The opportunity cost of foregone investments
The net present value of all current investments
The valuation of the company's equity
CONCEPT
The Basics of the Cost of Capital
15
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?12/8/2020 Sophia :: Welcome
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Secondary market offering
Share buyback
Primary market offering
Private placement
CONCEPT
The Security Markets
16
A security that falls above the security market line has __________.
a high expected return and a high price
a low expected return and a low price
a high expected return and a low price
a low expected return and a high price
CONCEPT
Understanding the Security Market Line
17
Which of the following portfolios theoretically diversifies away the most risk?
One whose investments have a large covariance
One whose investments have zero correlation12/8/2020 Sophia :: Welcome
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One whose investments have a negative covariance
One whose investments are highly correlated
CONCEPT
Implications Across Portfolios
18
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%
8.8%
5.6%
6.0%
CONCEPT
Expected Return
19
Curtis purchased stock with an initial share price of $140, and sold it when the share price was $119. While he
owned the stock, he earned $10 in dividends.
What was his total percentage return on the investment?
-7.86%
-15.00%12/8/2020 Sophia :: Welcome
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-9.24%
-17.65%
CONCEPT
Understanding Returns
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