Convenience of location.

Competitive cost of services provided.

Size of the bank's deposits.

Experience of personnel.

Loyalty and willingness to assume lending risks.

The tax shields should be discounted at the unlevered cost of equity.

The value of a growing tax shield is greater than the value of a constant tax shield.

For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM’s original (with tax) assumptions.

For a given D/S, the WACC is less than the WACC under MM’s original (with tax) assumptions.

The total value of the firm increases with the amount of debt.

Credit period, cash discounts, credit standards, receivables monitoring.

Credit period, cash discounts, credit standards, collection policy.

Credit period, cash discounts, receivables monitoring, collection policy.

Cash discounts, credit standards, receivables monitoring, collection policy.

Credit period, receivables monitoring, credit standards, collection policy.
 

The tax shields should be discounted at the cost of debt.

The value of a growing tax shield is greater than the value of a constant tax shield.

For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM’s original (with tax) assumptions.

For a given D/S, the WACC is greater than the WACC under MM’s original (with tax) assumptions.

The total value of the firm increases with the amount of debt.

The expected rate of return must be equal to the required rate of return; that is, .

The past realized rate of return must be equal to the expected rate of return; that is, .

The required rate of return must equal the realized rate of return; that is, .

all companies must pay dividends.

no companies can be in danger of declaring bankruptcy.

If the fixed per order cost increases by 20%, then EOQ will increase by 20%

If the annual sales, in units, increases by 20%, then EOQ will increase by 20%.

If the average inventory increases by 20%, then the total carrying costs will increase by 20%.

If the average inventory increases by 20% the total order costs will increase by 20%.

The EOC is the same for all comppanies.

Collection policy is how a firm goes about collecting past-due accounts.

A more aggressive collection policy will reduce bad debt expenses, but may also decrease sales.

Collection policy usually has little impact on sales since collecting past-due accounts occurs only after the customer has already purchased.

Typically a firm will turn over an account to a collection agency only after it has tried several times on its own to collect the account.

A lax collection policy will frequently lead to an increase in accounts receivable.

A defined contribution plan is, in effect, a savings plan that is funded by employers, although many plans also permit additional contributions by employees.

Under a defined benefit plan, the employer agrees to give retirees a specifically defined benefit, such as $500 per month or 50 percent of the employee’s final salary.

A portable pension plan is one that an employee can carry from one employer to another.

An employer’s obligation is satisfied under a defined contribution plan when it makes the required contributions to the plan.  The risk of inadequate investment returns is borne by the employee.

If assets exceed the present value of benefits, the pension plan is fully funded.
 

The option to expand production if the product is successful.

The option to buy shares of stock if its price goes up.

The option to expand into a new geographic region.

The option to abandon a project.

The option to switch the type of fuel used in an industrial furnace.

A defined contribution plan places the risk of poor pension portfolio performance on the employee.

In general, employees can choose the investment vehicle under a defined contribution plan.  Thus, highly risk-averse employees can choose low-risk investments, while more risk-tolerant employees can choose high-risk investments.

In a defined contribution plan, the employer must make larger-than-average contributions to the pension plan when investment returns have been below expectations.

Defined benefit plans are used more often by large corporations than by small companies.

The PBGC insures a portion of pension benefits.

Fixed order costs double.

The purchase price of inventory items decreases by 50 percent.

The carrying price of an item decreases (as a percent of purchase price).

The sales forecast is revised downward by 10 percent.

Interest rates fall.

The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation.

The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.

The beta of the portfolio is less than the betas of each of the individual stocks.

The beta of the portfolio is greater than the beta of one or two of the individual stocks’ betas.

The beta of the portfolio can not be equal to 1.

One advantage of forward contracts is that they are default free.

Futures contracts generally trade on an organized exchange and are marked to market daily.

Goods are never delivered under forward contracts, but are almost always delivered under futures contracts.

There are futures contracts for currencies but no forward contracts for currencies.

Futures contracts don’t have any margin requirements but forward contracts do.

personal taxes increase the value of using corporate debt.

personal taxes decrease the value of using corporate debt.

financial distress and agency costs reduce the value of using corporate debt.

equity costs increase with financial leverage.

debt costs increase with financial leverage.           

The tax shields should be discounted at the unlevered cost of equity.

The value of a growing tax shield is greater than the value of a constant tax shield.

For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM’s original (with tax) assumptions.

For a given D/S, the WACC is greater than the WACC under MM’s original (with tax) assumptions.

The total value of the firm is independent of the amount of debt it uses.

The excess market return, a size factor, and a book-to-market factor.

The excess market return, a debt factor, and a book-to-market factor.

The excess market return, a size factor, and a debt.

A debt factor, a size factor, and a book-to-market factor.

The excess market return, an industrial production factor, and a book-to-market factor.

Tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time.

Richard Roll has argued that it is possible to test the CAPM to see if it is correct.

Tests have shown that the risk/return relationship appears to be linear, but the slope of the relationship is greater than that predicted by the CAPM.

Tests have shown that the betas of individual stocks are stable over time, but that the betas of large portfolios are much less stable.

The most widely cited study of the validity of the CAPM is one performed by Modigliani and Miller.

Risk management can increase debt capacity.

Risk management can help a firm maintain its optimal capital budget.

Risk management can reduce the expected costs of financial distress.

Risk management can help firms minimize taxes.

Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.

A company has an option to invest in a project today or to wait a year.

A company has an option to close down an operation if it turns out to be unprofitable.

A company agrees to pay more to build a plant in order to be able to change the plant’s inputs and/or outputs at a later date if conditions change.

A company invests in a project today to gain knowledge that may enable it to expand into different markets at a later date.

A company invests in a jet aircraft so that its CEO, who must travel frequently, can arrive for distant meetings feeling less tired than if he had to fly commercial.

Variance; correlation coefficient.

Standard deviation; correlation coefficient.

Beta; variance.

Coefficient of variation; beta.

Beta; beta.

Lengthening the time in which a real option must be exercised.

An increase in the volatility of the underlying source of risk.

An increase in the risk-free rate.

An increase in the cost of obtaining the real option.

A decrease in the probability that a competitor will enter the market of the project in question.

The major contribution of Miller's theory is that it demonstrates that personal taxes decrease the value of using corporate debt.

Under MM with zero taxes, financial leverage has no effect on a firm’s value.

Under MM with corporate taxes, the value of a levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt.

Under MM with corporate taxes, rs increases with leverage, and this increase exactly offsets the tax benefits of debt financing.

Under MM with corporate taxes, the effect of business risk is automatically incorporated because rsL is a function of rsU.

A; A.

A; B.

B; C.

C; A.

C; B.

Sometimes a security or project does not have a past history which can be used as a basis for calculating beta.

Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different than the “true” or “expected future” beta.

The beta of “the market,” can change over time, sometimes drastically.

Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.

There is a wide confidence interval around a typical stock’s estimated beta.

The market risk of a project is not relevant to not-for-profit firms.

A project’s corporate beta measures the contribution of the project to the overall corporate risk of the firm.

A project’s corporate beta is found (at least conceptually) by regressing returns on the project against returns on the market portfolio.

A project’s corporate beta is defined as (σP/σF)rPF, where σP
is the standard deviation of the project’s returns, σF
is the standard deviation of the firm’s returns, and rPF is the correlation among the two sets of returns.

In practice, it is usually difficult, if not impossible, to directly measure a project’s corporate risk, so project risk analysis typically focuses on stand-alone risk.
 

The typical R2 for a stock is about 0.3 and the typical R2
for a portfolio is also about 0.3.

The typical R2 for a stock is about 0.94 and the typical R2
for a portfolio is about 0.6.

The typical R2 for a stock is about 0.3 and the typical R2 for a large portfolio is about 0.94.

The typical R2 for a stock is about 0.94 and the typical R2 for a portfolio is also about 0.94.

The typical R2 for a stock is about 0.6 and the typical R2 for a portfolio is also about 0.6.

The Capital Market Line (CML) is a curved line that connects the risk-free rate and the market portfolio.

The slope of the CML is (M – rRF)/bM.

All portfolios that lie on the CML to the right of sM are inefficient.

All portfolios that lie on the CML to the left of sM are inefficient.

The slope of the CML is (M – rRF)/sM..

Pension fund sponsors must evaluate the performance of their portfolio managers periodically as a basis for future asset allocations.

Alpha analysis, which relies on the Capital Asset Pricing Model, considers the risk of the portfolio when measuring performance.

Peer comparison examines the relative performance of portfolio managers with similar investment objectives.

A portfolio annual return of 12 percent from one investment advisor is not necessarily better than a return of 10 percent from another advisor.

In managing the retiree portfolio, fund managers often use immunization techniques such as alpha analysis to eliminate, or at least significantly reduce, the risk associated with changing interest rates.

When held in isolation, Stock A has greater risk than Stock B.

Stock B must be a more desirable addition to a portfolio than Stock A.

Stock A must be a more desirable addition to a portfolio than Stock B.

The expected return on Stock A should be greater than that on Stock B.

The expected return on Stock B should be greater than that on Stock A.

A swap involves the exchange of cash payment obligations.

The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, say dollars and pounds.

Swaps are very often arranged by a financial intermediary, who may or may not take the position of one of the counterparties.

A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market.

A company can swap fixed interest payments for floating interest payments.

-$6,678

-$3,251

$15,303

$20,004

$45,965

14.00%

8.57%

16.28%

21.21%

28.00%

$111,000

$100,000

$112,360

$ 89,000

$108,840

21.0%

23.3%

25.9%

28.8%

32.0%

16.22%

17.97%

17.48%

18.67%

18.00%