26. The key inputs to the valuation process include

a. profits and depreciation.

b. profits, cash flows and discount rate.

c. cash flows, timing and risk.

d. profits, risk and timing.

27. If the NPV is zero the IRR is

A. greater than the required return B. less than the required return

C. 10% D. equal to the required return

28. A change in inflationary expectation resulting from events such as international trade embargoes or major changes in Federal Reserve policy such as increasing the interest rates will result in a shift or change in the SML.

a. True b. False

29. The ______ is the discount rate that equates the present value of the cash inflows with the initial investment.

A. profitability index B. cost of capital C. average rate of return D. internal rate of return

30. Cash Flow Bias is a part of the Agency Theory as this is present when executives act or make decisions that enhance their own wealth and not the shareholders. a. True b. False

31. _______ is the systematic process of evaluating and selecting longterm investments consistent with the firm's goal of owner wealth maximization.

A. Recapitalizing assets B. Ratio analysis C. Capital budgeting D. CAPM

32. _____ measure(s) the risk of a capital budgeting project by estimating the NPVs associated with the change in one of the project's cash flow assumptions.

A. Certainty equivalents B. Risk-adjusted discount rates

C. Sensitivity analysis D. Multiple regression analysis

33. The risk-adjusted discount rate (RADR) is a method where the cash flows are adjusted to reflect the riskiness of the project. A. True B. False

34. Sensitivity analysis is a way to investigate risk by evaluating a projects cash flows using probability estimates, variances and CE values. a. True b. False

35. When businesses do not invest in positive NPV projects because they do not have enough human resources, they are employing capital rationing. a. True b. False

36. The Cajun Corp. common stock is selling for $100 per share. If the firm's P/E ratio is 10, what is Cajun's EPS? P/E is Stock Price /EPS.

a. $5 c. $10

b. moe (enny, meany, miney & moe) d. $20

37. The Expansion type of capital budgeting project is normally

A Mutually Exclusive Project c. An Independent Project

An Other Project d. RADR

38. If the required return is greater than the coupon interest rate, a bond will sell at:

a. par b. a discount

c. a premium d. book value

39. Jill borrows $500,000 at 10 percent annually compounded interest to be repaid in five equal annual installments. The actual endofyear payment is

a. $131,899. c. $160,482

b. $152,760. d. $136,380

40. A debenture is basically a Corporate IOU.

a. True b. False

41. _____ is the chance of loss or the variability of returns associated with a given asset.

a. Return c. Risk

b. Value d. Probability

42. ? risk represents the portion of an asset's risk that cannot be eliminated by proper diversification.

a. Nonsystematic c. Systematic

b. Subjective d. Coefficient of Variation

43. The __________ describes the relationship between nondiversifiable risk and return for all assets.

a. EBIT-EPS approach to capital structure b. supply-demand function for assets

c. capital asset pricing model d. Gordon model

44. Depreciation is a very important Cash Flow for a firm. a. True b. False

45. The lower an asset's beta,

a. the more responsive it is to changing market returns.

b. the less responsive it is to changing market returns.

c. the higher the systematic.

d. the higher the market risk.

46. The Gordon Model (dividend growth model) explains how to calculate the value of a commercial bond.

a. True b. False

47. Bond covenants protect the Common Stock Investors from the Bond Investors.

a. True b. False

48. An S&P Bond Rating of Aaa is a very poor rating for a Corporate Bond.

a. True b. False

49. The Basic Valuation Equation uses Profits, the Standard Deviation and the Time to determine value.

a. True b. False

50. The SML is a positive slope linear line that illustrates the risk and expected return relationship.

a. True b. False