21. If financial markets are not efficient, then: A. Expected returns are not needed, B. The need for a discount rate to analyze project cash flows is not needed, C. Estimates of expected returns based on security prices are not reliable, D. None of the above.

21. If financial markets are not efficient, then:

A. Expected returns are not needed,

B. The need for a discount rate to analyze project cash flows is not needed,

C. Estimates of expected returns based on security prices are not reliable,

D. None of the above.

22. Scenario analysis: A. determines the impact a $1 change in sales has on the internal rate of return. B. determines which variable has the greatest impact on a project’s net present value. C. helps determine the reasonable range of expectations for a project’s anticipated outcome. D. evaluates a project’s net present value while sensitivity analysis evaluates a project’s internal rate of return. E. determines the absolute worst and absolute best outcome that could ever occur. 23. Turner Industries started a new project three months ago. Sales arising from this project are exceeding all expectations. Given this, which one of the following is management most apt to implement? A. Option to wait B. Soft rationing C. Strategic option D. Option to abandon E. Option to expand 24. Ignoring the option to wait: A. may overestimate the internal rate of return on a project. B. may underestimate the net present value of a project. C. ignores the ability of a manager to increase output after a project has been implemented. D. is the same as ignoring all strategic options. E. ignores the value of discontinuing a project early. 25. The ability to delay an investment: A. is commonly referred to as the best-case scenario. B. is valuable provided there are conditions under which the investment will have a positive net

present value in the future. C. ensures that the investment will have an expected net present value that is positive. D. offsets the need to conduct sensitivity analysis. E. is referred to as the option to abandon. 26. Explain the concept of incremental cash flow analysis and its purpose. 27. Identify three managerial options that relate to project analysis and explain how those options affect the net present value of a project. 28. Which one of the following describes systemic risk? A. Economic-driven risk that affects a large number of assets B. An individual security’s total risk C. Diversifiable risk D. Asset specific risk E. Risk unique to a firm’s management 29. Which of the following terms can be used to describe unsystematic risk? I. Asset-specific risk

II. Diversifiable risk III. Market risk IV. Unique risk A. I and IV only B. II and III only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV 30. Which one of the following statistics measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset? A. Squared deviation B. Beta coefficient C. Standard deviation D. Mean E. Variance 31. From the financial point of view the asset side of the balance sheet of a corporation includes:

A. Fixed assets,

B. Growth assets,

C. Assets in place,

D. [B] and [C].

32. Which one of the following is the slope of the security market line? A. Risk-free rate B. Market risk premium C. Beta coefficient D. Risk premium on an individual asset E. Market rate of return 33. Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive to any potential investor? A. Risk-free rate B. Market risk premium C. Expected return minus the risk-free rate D. Market rate of return E. Cost of capital 34. Which one of the following is the computation of the risk premium for an individual security? E(R) is the expected return on the security, Rf is the risk-free rate, β is the security’s beta, and E(RM) is the expected rate of return on the market. A. E(RM) – Rf B. E(R) – E(RM) C. E(R) – [E(RM) + Rf] D. β[E(RM) – Rf] E. β[E(R) – Rf]

35. Which one of the following is the best example of unsystematic risk? A. Inflation exceeding market expectations B. A warehouse fire C. Decrease in corporate tax rates D. Decrease in the value of the dollar E. Increase in private personal consumer spending 36. Which one of the following is the best example of systematic risk? A. Discovery of a major gas field B. Decrease in textile imports C. Increase in agricultural exports D. Decrease in gross domestic product E. Decrease in management bonuses for banking executives 37. Standard deviation measures _____ risk while beta measures _____ risk. A. systematic; unsystematic B. unsystematic; systematic C. total; unsystematic D. total; systematic E. asset-specific; market 38. Which one of the following portfolios will have a beta of zero? A. A portfolio that is equally as risky as the overall market B. A portfolio that consists of a single stock C. A portfolio comprised solely of U. S. Treasury bills D. A portfolio with a zero variance of returns E. No portfolio can have a beta of zero. 39. A risky security has less risk than the overall market. What must the beta of this security be? A. 0 B. > 0 but 1 E. The beta cannot be determined based on the information provided. 40. The addition of a risky security to a fully diversified portfolio: A. must decrease the portfolio’s expected return. B. must increase the portfolio beta. C. may or may not affect the portfolio beta. D. will increase the unsystematic risk of the portfolio. E. will have no effect on the portfolio beta or its expected return. 41. Which one of the following is the vertical intercept of the security market line? A. Market rate of return B. Individual security rate of return C. Market risk premium D. Individual security beta multiplied by the market risk premium E. Risk-free rate

42. Based on the capital asset pricing model, investors are compensated based on which of the following? I. Market risk premium II. Portfolio standard deviation III. Portfolio beta IV. Risk-free rate A. I and III only B. II and IV only C. I, II, and III only D. I, III, and IV only E. I, II, III, and IV 43. Ben & Terry’s has an expected return of 12.9 percent and a beta of 1.25. The expected return on the market is 11.7 percent. What is the risk-free rate? A. 3.87 percent B. 4.24 percent C. 4.61 percent D. 6.29 percent E. 6.92 percent 44. Under the narrow definition of corporate governance, the financial manager is responsible for making

decisions that are in the best interest of the firm’s owners.

A. True,

B. False