Quiz

       rx is the return for a market index such as the S&P 500 Index.        rx 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.        ry is the return for the market index such as the S&P 500 Index.

       sum to 1.00.        always include Wd.        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.

       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.

       the most recent one-year return on the S&P 500 Index (or another market index).        the long-term historic return on a stock market index such as the S&P 500 (or another market index).        the long-term average spread of the S&P 500 (or another market index) over the yield of long-term government bonds.        the return of the S&P 500 (or another market index) over the current yield of long-term government bonds.

       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.

       the standard deviation of returns.        the firm’s beta.        Moody’s, Standard & Poor’s, and Fitch ratings.        the variability of EBIT.

       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.

       8.61%        11.22%        14.22%        16.83%

       reflect the desired mix and not necessarily the mix being used to finance a specific project.        vary from project to project, depending on how they are financed.        always reflect the firm’s current capital structure.        None of these answers is correct.

       the actual rate of return        the expected rate of return        the risk-free rate of return        the required rate of return