Finance 10 Q

Question 1.1. Beta is estimated as the slope of a regression line fit to pairs of periodic returns, (r_x, r_y), where: (Points : 1)

       r_x is the return for a market index such as the S&P 500 Index.
       r_x is the return for the stock being analyzed—for example, IBM’s return if we are estimating IBM’s beta.
       the slope measures the average return for the market portfolio for each percentage change in the value of the security of interest.
       r_y is the return for the market index such as the S&P 500 Index.

Question 2.2. In the Capital Asset Pricing Model, the market risk premium can be thought of as: (Points : 1)

       the return investors expect to earn for each unit of risk as measured by beta.
       the risk premium that any asset must pay above the risk-free rate.
       the expected return on the market portfolio (or a broad market index).
       a measure of risk of an asset.

Question 3.3. 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.

Question 4.4. Which of the following statements regarding the cost of preferred stock is true? (Points : 1)

       It is typically found by solving for an annuity’s discount rate.
       It is typically found by solving for an annuity due’s discount rate.
       It is found similarly to a perpetuity’s discount rate but with irregular spacing of the dividends.
       It is typically found by solving for a perpetuity’s discount rate.

Question 5.5. Which of the following is true of flotation costs? (Points : 1)

       They include expenses like investment banker fees and commissions.
       They include the underwriting spread.
       They tend to raise the cost of capital.
       all of the above

Question 6.6. 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.

Question 7.7. In order to find the cost of equity using the firm’s cost of debt, the rule of thumb is to: (Points : 1)

       multiply K_d by one plus the tax rate.
       multiply K_d by one minus the tax rate.
       add 3% to 6% to K_d.
       multiply K_d by the firm’s beta.

Question 8.8. Weights used in calculating the WACC should: (Points : 1)

       sum to 1.00.
       always include W_d.
       be based on the book value of each source of financing.
       be calculated according to the price of each security—so if the price of a bond is $1,000, and the price of common stock is $50, then the weight of debt would be .20.

Question 9.9. One reason why we are not concerned with idiosyncratic risk (also called firm-specific risk) is that: (Points : 1)

       most risk is not firm-specific, so we can ignore it.
       through hedging and insurance, investors may now invest in stocks with almost no risk exposure of any kind.
       it is easy and almost costless to diversify one’s portfolio and eliminate idiosyncratic risk.
       investing in bonds can offset the idiosyncratic risks of shares of stock.

Question 10.10. In the Capital Asset Pricing Model, the risk-free rate: (Points : 1)

       links the CAPM to current market conditions.
       is the historic long-term average rate of government bonds.
       can be approximated by using yields on high-rated corporate bonds.
       is always the current yield on 30-year US government Treasury bonds.

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Finance 10 Q

Finance Questions