CML Finance Assingment Help With Solution
Select the best answer for each of the following.
a. In finance, the topic of agency issues deals with motivations of individuals. Which of the following issues is not one of the traditional agency conflicts discussed in finance literature?
1. One controlling shareholder against minority shareholders
2. Entrenched management of a firm against shareholders
3. Shareholders against creditors
4. Entrenched management of a firm against bankers
b. If you are deciding whether to invest in a number of capital investment projects and can borrow in an efficient market, which one of the following projects should you select?
1. Those projects in which the marginal cost of each investment is less than its marginal revenue
2. Those projects whose marginal return is greater than the required market return
3. Those projects in which the total cost of each investment is less than the revenue contribution
4. Those projects that have a total return at least as great as the return on the next less-favourable project
c. In a CAPM environment, the expected return for a stock with a beta of 0.5 is 7.5%, and the expected market return is 12%. If the return required to compensate consumers for delaying consumption is 1.5%, what is the approximate expected inflation rate?
d. In comparing the capital market line (CML) and the security market line (SML), which of the following statements is most correct?
1. The x-axis of the CML is total return volatility or standard deviation, while for the SML it is return risk relative to the volatility of the market.
2. The market portfolio return is on the y-axis for the CML, while the expected individual stock return is on the y-axis for the SML.
3. The slope of both CML and SML lines when graphed is E(rM) – rf.
4. The SML has a zero beta return equal to the risk-free rate, but the CML does not.
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e. Recently there have been some U.S. legal cases in which high-profile individuals are prosecuted for insider trading on stocks. Which of the following best represents the reason why the U.S. legal system and the SEC prosecute these cases?
1. The SEC is worried that individuals without access to inside information will be jealous of the wealth of the high-profile individuals.
2. The SEC believes that U.S. stock markets are not strong form efficient.
3. Academic research has shown the SEC that U.S. stock markets allow investors to make abnormal returns based on historical market information.
4. The SEC is trying to increase revenues from prosecutions to help the government offset its deficit.
f. If you are comparing capital budgeting projects with normal cash flows, then which one of the following statements is true?
1. The profitability index and the internal rate of return criteria will give the same acceptance/rejection decision.
2. The net present value (NPV) and internal rate of return criteria will give different acceptance/rejection decisions.
3. Economic value added (EVA) will be positive, so projects should be accepted regardless of the NPV.
4. The payback period will give the correct acceptance/rejection decision.
g. Your company is planning to make a substantial investment. Which of the following describes a situation when you would most want to use the coefficient of variation as one of the indicators of whether to proceed with this investment?
1. The investment is mutually exclusive with an alternative investment.
2. There is a limited budget available and you want to choose the best investment alternative within the budget.
3. The average rate of return is lower than the company’s usual cut-off rate.
4. The investment is large enough that the total risk to the company’s portfolio becomes important.
h. The CEO of a company has selected what she believes are all the projects with positive NPVs for the next year’s budget. However, this may mean restricting payments to shareholders until next year. If financial markets are efficient, which one of the following statements should also be true?
1. Shareholders without other funds will have to wait to consume until next year.
2. Investors in the company will not make as high a return as they could by investing the same funds in the stock market.
3. Shareholders can borrow easily for current consumption or investment in other companies.
4. Investors should put all their funds into this company due to its correct investment strategy.
i. A financial analyst believes that NNX Corporation will increase the dividend on its shares by 12% per year for the next two years, and then by 5% per year thereafter. He thinks the risk-adjusted return for this company should be 8%. NNX just paid a dividend of $5.00 yesterday. If the financial analyst’s expectations are correct and the market is efficient, what should the approximate price per share of NNX’s shares be today?
j. Today, taxpayers expect governments to provide them with transparent information on the effectiveness and efficiency of capital investments made on their behalf. Which one of the six steps in capital budgeting would be most likely to provide the information taxpayers expect and want?
1. Generate new product ideas.
2. Conduct post-completion audits.
3. Evaluate project proposals.
4. Review project progress.
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