| Question 1.1. We assume investors are risk averse, and therefore they: (Points : 1) |
are equally concerned with upside potential and downside risk.
expect a higher return for bearing more risk.
will pay more for an investment with higher risk.
have very high required rates of return.
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| Question 2.2. Which of the following statements regarding the cost of equity is true? (Points : 1) |
It can be estimated in three different ways.
It is always estimated using the present value of future dividends approach.
It is estimated by solving for the discount rate for a perpetuity.
It is generally lower than the cost of debt because equity holders are paid after taxes are paid.
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| Question 3.3. The Hamada Equation allows the firm to: (Points : 1) |
solve for a company’s total risk.
adjust the beta of a pure-play firm for its use of debt financing.
estimate its asset beta.
Both b and c are correct.
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| Question 4.4. Which of the following statements regarding the cost of debt is true? (Points : 1) |
The cost of debt for bonds equals the coupon rate of outstanding bonds.
The cost of debt for bonds is found by dividing the price by the annual coupon.
The cost of debt for bonds is found by calculating their yield to maturity.
The cost of debt equals the flotation costs charged by investment bankers who advise the firm.
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| Question 5.5. Total risk is measured by: (Points : 1) |
the standard deviation of returns.
the firm’s beta.
Moody’s, Standard & Poor’s, and Fitch ratings.
the variability of EBIT.
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| Question 6.6. Investors will make an investment if: (Points : 1) |
the historical rate of return exceeds the expected rate of return.
the required rate of return exceeds the expected rate of return.
the expected rate of return exceeds the actual rate of return.
the expected rate of return exceeds the required rate of return.
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| Question 7.7. A bond pays semiannual coupon payments of $30 each. It matures in 20 years and is selling for $1,200. What is the firm’s cost of debt if the bond’s par value is $1,000? (Don’t forget this is a semiannual coupon.) (Points : 1) |
2.23%
4.48%
1.80%
3.60%
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| Question 8.8. Which of the following statements regarding business risk, financial risk, and investors’ risk, is true? (Points : 1) |
Business risk is very similar to the risk of bankruptcy and is closely linked to the amount of debt in a firm’s financing mix.
Financial risk is associated with the returns earned by equity investors.
Business risk is often measured by the variability of earnings before depreciation and taxes and is closely associated with the risk inherent in the goods and services a business is selling.
Investment risk is the uncertainty associated with a firm’s investment projects. It can be thought of as the likelihood that the expected IRR or NPV from an investment project will not materialize.
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| Question 9.9. If an investor purchases a share of stock for $300, collects a dividend during the year equal to $35 a share, and sells the stock at the end of the year for $289, what is the investor’s return for the year? (Points : 1) |
12.11%
8.30%
8.00%
15.33%
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| Question 10.10. In the Capital Asset Pricing Model, the market risk premium is estimated over a long period of time because: (Points : 1) |
more data is always better than less.
a longer holding period gives a more reliable estimate because it is, in effect, a larger sample size.
almost all investors hold stocks for many years, so it matches their investment horizon.
historical returns are the best indicators of future returns.
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