Exam 4 (Chapters 8 and 10)

Question 1

the process of planning and managing firms long term financial investments

Answer 1

Capital Budgeting

Question 2

What are the 4 different types of Projects?

Answer 2

1. Expansion
2. Improvements of efficiency
3. Recalls or Replacements
4. Government Mandated

Question 3

What are the 3 Capital Budgeting Methods?

Answer 3

Payback, NPV, and IRR

Question 4

Time required for an investment to generate cash flows, to recover initial costs

Answer 4

Payback

Question 5

what is another terms for Payback?

Answer 5

“Get your bait back” method

Question 6

What are the advantages of payback?

Answer 6

Easiest
Adjust cash flows
Biased towards liquidity

Question 7

What are the disadvantages of payback?

Answer 7

Ignores TVM
Requires an arbitrary cutoff point
Ignores cash flows beyond cutoff date
Biased against long term projects

Question 8

what is the rule regarding payback?

Answer 8

accept on the project if the payback is less than the project cutoff

Question 9

the difference between a projects market value and its cost

Answer 9

NPV

Question 10

What is the rule of NPV?

Answer 10

accept projects with a positive NPV

reject projects with a negative NPV

Question 11

what are the advantages of NPV?

Answer 11

Most reliable capital budgeting method
Provides a direct measure of investor contributions
DOES consider TVM

Question 12

What are the disadvantages of NPV?

Answer 12

the growth rate is arbitrary

Question 13

the discount rate (interest rate) that makes NPV of an investment zero

Answer 13

Internal Rate of Return (IRR)

Question 14

the point at which you make nothing

Answer 14

Break even point

Question 15

What is the rule of IRR?

Answer 15

accept project if the IRR that we calculate is the same or greater than the return investors require

Question 16

What are the advantages of IRR?

Answer 16

investors prefer to speak %

Question 17

what are the disadvantages of IRR?

Answer 17

often lead to inaccurate investment decisions

Question 18

if you take on one investment, you cannot take on any other

Answer 18

mutually exclusive projects

Question 19

as the level of risk increases, so does the potential for higher returns and greater losses. invested money renders higher profits only if subject to the possibility of being lost

Answer 19

Risk and Return

Question 20

an investor’s preference toward risk

Answer 20

risk tolerance

Question 21

what happened in 2008 for the stock market?

Answer 21

record lows since the great depression

Question 22

who were the biggest winners during the Great Recession

Answer 22

Emergent Bio Solutions, and Mexico Energy

Question 23

who were the biggest losers during the Great Recession?

Answer 23

AIG and Fannie Mae/Freddie Mac

Question 24

Who were the biggest winners in 2014?

Answer 24

RadNet and Achillon Pharmaceutical

Question 25

Who were the biggest losers of 2014?

Answer 25

TransOcean and Avon Products

Question 26

the smallest 20% of companies listed on the NYSE, also measured by total market value of outstanding stock

Answer 26

Small-company stocks

Question 27

standard & poors 500 index, composed of the 500 largest companies, in terms of total market value of outstanding stock

Answer 27

Large-company stock

Question 28

high-quality corporate bonds with 20 year to maturity

Answer 28

Long-term Corporate Bonds

Question 29

US government bonds with 20 years to maturity

Answer 29

Long-term US Government Bonds

Question 30

one month maturity

Answer 30

US Treasury Bills

Question 31

sum of actual returns divided by number of terms

Answer 31

Average Returns

Question 32

the average squared difference between the actual return and the average return

Answer 32

Variance

Question 33

the positive square root of the variance

Answer 33

standard deviation

Question 34

a symmetric, bell-shaped frequency curve that is completely defined by its average and standard deviations (most commonly 2 positive and 3 negative deviations)

Answer 34

Normal Distribution

Question 35

history suggests that the market value of securities fluctuations widely from year to year due to info available to investors

Answer 35

Capital market efficiency

Question 36

what is the percent chance of stock falling within 1 deviation?

Answer 36

68%

Question 37

what is the percent chance of stock falling within 2 deviation?

Answer 37

95%

Question 38

what is the percent chance of stock falling within 3 deviation?

Answer 38

99%

Question 39

the hypothesis that well-organised markets, such as New York Stock Exchange are efficient

Answer 39

Efficient Market Hypothesis (EMH)

Question 40

the price of stock instantaneously adjusts to reflect new info

Answer 40

efficient market reaction

Question 41

the price partially adjusts to the new information slowly, usually over a period of 8 days

Answer 41

delayed reation

Question 42

the price over-adjusts and subsequently corrects itself

Answer 42

Over-reaction and correction

Question 43

all info of every kind is reflected in stock prices

Answer 43

strong form efficient

Question 44

all public info is reflected in stock prices

Answer 44

semi-strong form efficient

Question 45

stock prices reflect a company's own past prices

Answer 45

weak form efficient

Question 46

what does history tell us about the stock market?

Answer 46

prices generally do respond very well to new info future prices are difficult to predict based on publicly available info if mis-priced stocks do exist, there is not an obvious way to identify them in advance