Question 1

Which of the following statements is FALSE?

Accepted Answer

A) Beta is the expected percent change in the excess return of the security for a 1% change in the excess return of the market portfolio. 
B) Beta represents the amount by which risks that affect the overall market are amplified for a given stock or investment. 
C) It is common practice to estimate beta based on the historical correlation and volatilities. 
D) Beta measures the diversifiable risk of a security,as opposed to its market risk,and is the appropriate measure of the risk of a security for an investor holding the market portfolio. 
A) Beta is the expected percent change in the excess return of the security for a 1% change in the excess return of the market portfolio. 
B) Beta represents the amount by which risks that affect the overall market are amplified for a given stock or investment. 
C) It is common practice to estimate beta based on the historical correlation and volatilities. 
D) Beta measures the diversifiable risk of a security,as opposed to its market risk,and is the appropriate measure of the risk of a security for an investor holding the market portfolio. D

Question 2

Which of the following statements is FALSE?

Accepted Answer

A) The CAPM states that we should use the risk-free interest rate corresponding to the investment horizon of the firm's investors. 
B) To determine the risk premium for a stock using the security market line,we need an estimate of the market risk premium. 
C) Most financial analysts report using the yields of Treasury Bills to determine the risk-free rate when valuing a long-term investment with an indefinite horizon. 
D) The risk-free interest rate is generally determined using the yields of U.S.Treasury securities,which are free from default risk. 
A) The CAPM states that we should use the risk-free interest rate corresponding to the investment horizon of the firm's investors. 
B) To determine the risk premium for a stock using the security market line,we need an estimate of the market risk premium. 
C) Most financial analysts report using the yields of Treasury Bills to determine the risk-free rate when valuing a long-term investment with an indefinite horizon. 
D) The risk-free interest rate is generally determined using the yields of U.S.Treasury securities,which are free from default risk. C

Question 3

Use the following information to answer the question(s)below.
Suppose all possible investment opportunities in the world are limited to the four stocks listed in the table below:  
-Suppose that you have invested $30,000 invested in the market portfolio.Then the amount that you have invested in Wyatt Oil is closest to:

Accepted Answer

A) $4500. 
B) $6000. 
C) $7715. 
D) $9000. 
A) $4500. 
B) $6000. 
C) $7715. 
D) $9000. A

Question 4

Use the following information to answer the question(s) below
 
Assume that the risk-free rate of interest is 3% and you estimate the market's expected return to be 9%.
-The equity cost of capital for "Meenie" is closest to:

Accepted Answer

A) 4.50%. 
B) 7.50%. 
C) 9.30%. 
D) 9.75%. 
A) 4.50%. 
B) 7.50%. 
C) 9.30%. 
D) 9.75%.

Question 5

Use the following information to answer the question(s)below.   The risk-free rate of interest is 3% and the market risk premium is 5%.
-The value of the oil exploration division (in $ millions)is closest to:

Accepted Answer

A) $4500. 
B) $7500. 
C) $8750. 
D) $10,000. 
A) $4500. 
B) $7500. 
C) $8750. 
D) $10,000.

Question 6

Suppose that because of the large need for steel in building railroad infrastructure,Taggart Transcontinental and Rearden Metal decide to form into one large conglomerate.Your estimate of the asset beta for this new conglomerate is closest to:

Accepted Answer

A) 0.42. 
B) 0.59. 
C) 0.66. 
D) 0.68. 
A) 0.42. 
B) 0.59. 
C) 0.66. 
D) 0.68.

Question 7

In a world with taxes,which of the following is the rate we should use to evaluate a project with the same risk and the same financing as the firm itself?

Accepted Answer

A) The weighted-average cost of capital 
B) The pre-tax WACC 
C) The cost of equity 
D) The cost of debt 
A) The weighted-average cost of capital 
B) The pre-tax WACC 
C) The cost of equity 
D) The cost of debt

Question 8

In practice which market index would best be used as a proxy for the market portfolio in the CAPM?

Accepted Answer

A) S&P 500 
B) Dow Jones Industrial Average 
C) U.S.Treasury Bill 
D) Wilshire 5000 
A) S&P 500 
B) Dow Jones Industrial Average 
C) U.S.Treasury Bill 
D) Wilshire 5000

Question 9

Use the following information to answer the question(s)below.Consider the following information regarding corporate bonds:    
-Your estimate of the asset beta for Taggart Transcontinental is closest to:

Accepted Answer

A) 0.42. 
B) 0.59. 
C) 0.66. 
D) 0.71. 
A) 0.42. 
B) 0.59. 
C) 0.66. 
D) 0.71.

Question 10

Trucks R' Us (TRUS)has a market capitalization of $142 billion,$78 billion in BB rated debt,and $10 billion in cash.If Trucks R' Us' equity beta is 1.68,then their underlying asset beta is closest to:

Accepted Answer

A) 1.00. 
B) 1.20. 
C) 1.32. 
D) 1.48. 
A) 1.00. 
B) 1.20. 
C) 1.32. 
D) 1.48.

Question 11

Use the table for the question(s)below.
Consider the following stock price and shares outstanding data:  
-Assume that you have $250,000 to invest and you are interested in creating a value-weighted portfolio of these four stocks.How many shares of each of the four stocks will you hold? What percentage of the shares outstanding of each stock will you hold?

Accepted Answer

@#IMG-DLM& Number of shares of each stoc

Question 12

Rearden Metal has a bond issue outstanding with ten years to maturity,a yield to maturity of 8.6%,and a B rating.The corresponding risk-free rate is 3% and the market risk premium is 6%.Assuming a normal economy,the expected return on Rearden Metal's debt is closest to:

Accepted Answer

A) 0.6%. 
B) 1.6%. 
C) 4.6%. 
D) 6.0%. 
A) 0.6%. 
B) 1.6%. 
C) 4.6%. 
D) 6.0%.

Question 13

If a project has a higher proportion of fixed to variable costs,holding the risk of its revenues constant:

Accepted Answer

A) its beta will be lower,hence its cost of capital will be lower. 
B) its beta will be higher,hence its cost of capital will be higher. 
C) its beta will be unaffected,since beta does not measure the sensitivity of the project's cash flows to market risk. 
D) its financial leverage will be higher. 
A) its beta will be lower,hence its cost of capital will be lower. 
B) its beta will be higher,hence its cost of capital will be higher. 
C) its beta will be unaffected,since beta does not measure the sensitivity of the project's cash flows to market risk. 
D) its financial leverage will be higher.

Question 14

Use the following information to answer the question(s)below.
Suppose all possible investment opportunities in the world are limited to the four stocks listed in the table below:  
-The weight on Taggart Transcontinental stock in the market portfolio is closest to:

Accepted Answer

A) 15%. 
B) 20%. 
C) 25%. 
D) 30%. 
A) 15%. 
B) 20%. 
C) 25%. 
D) 30%.

Question 15

Use the following information to answer the question(s)below.   The risk-free rate of interest is 3% and the market risk premium is 5%.
-The overall cost of capital for Wyatt Oil is closest to:

Accepted Answer

A) 8.1%. 
B) 8.5%. 
C) 8.8%. 
D) 9.3%. 
A) 8.1%. 
B) 8.5%. 
C) 8.8%. 
D) 9.3%.

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) We should be suspicious of beta estimates that are extreme relative to industry norms. 
B) When using historical data,there is always the possibility of estimation error. 
C) Evidence suggests that betas tend to revert toward zero over time. 
D) For stocks,common practice is to use at least two years of weekly return data or five years of monthly return data when estimating beta. 
A) We should be suspicious of beta estimates that are extreme relative to industry norms. 
B) When using historical data,there is always the possibility of estimation error. 
C) Evidence suggests that betas tend to revert toward zero over time. 
D) For stocks,common practice is to use at least two years of weekly return data or five years of monthly return data when estimating beta.

Question 17

Which of the following statements is FALSE?

Accepted Answer

A) If investors have homogeneous expectations,then each investor will identify the same portfolio as having the highest Sharpe ratio in the economy. 
B) Homogeneous expectations are when all investors have the same estimates concerning future investments and returns. 
C) There are many investors in the world,and each must have identical estimates of the volatilities,correlations,and expected returns of the available securities. 
D) The combined portfolio of risky securities of all investors must equal the efficient portfolio. 
A) If investors have homogeneous expectations,then each investor will identify the same portfolio as having the highest Sharpe ratio in the economy. 
B) Homogeneous expectations are when all investors have the same estimates concerning future investments and returns. 
C) There are many investors in the world,and each must have identical estimates of the volatilities,correlations,and expected returns of the available securities. 
D) The combined portfolio of risky securities of all investors must equal the efficient portfolio.

Question 18

Use the following information to answer the question(s)below.Consider the following information regarding corporate bonds:  
-Wyatt Oil has a bond issue outstanding with seven years to maturity,a yield to maturity of 7.0%,and a BBB rating.The bondholders' expected loss rate in the event of default is 70%.Assuming the economy is in recession,then the expected return on Wyatt Oil's debt is closest to:

Accepted Answer

A) 3.5%. 
B) 4.9%. 
C) 5.5%. 
D) 7.0%. 
A) 3.5%. 
B) 4.9%. 
C) 5.5%. 
D) 7.0%.

Question 19

Use the following information to answer the question(s)below.Consider the following information regarding corporate bonds:    
-Your estimate of the asset beta for Nielson Motors is closest to:

Accepted Answer

A) 0.59. 
B) 0.66. 
C) 0.71. 
D) 1.75. 
A) 0.59. 
B) 0.66. 
C) 0.71. 
D) 1.75.

Question 20

Firms should adjust for execution risk by:

Accepted Answer

A) assigning a higher cost of capital to new projects. 
B) ignoring execution risk since it is diversifiable. 
C) capturing this risk in the expected cash flows generated by the project. 
D) noticing missteps in the firm's execution of new projects. 
A) assigning a higher cost of capital to new projects. 
B) ignoring execution risk since it is diversifiable. 
C) capturing this risk in the expected cash flows generated by the project. 
D) noticing missteps in the firm's execution of new projects.

Exam 12: Estimating the Cost of Capital

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Use the following information to answer the question(s) below Assume that the risk-free rate of interest is 3% and you estimate the market's expected return to be 9%. -The equity cost of capital for "Meenie" is closest to:

Use the following information to answer the question(s)below. The risk-free rate of interest is 3% and the market risk premium is 5%. -The value of the oil exploration division (in $ millions)is closest to:

Suppose that because of the large need for steel in building railroad infrastructure,Taggart Transcontinental and Rearden Metal decide to form into one large conglomerate.Your estimate of the asset beta for this new conglomerate is closest to:

In a world with taxes,which of the following is the rate we should use to evaluate a project with the same risk and the same financing as the firm itself?

In practice which market index would best be used as a proxy for the market portfolio in the CAPM?

Use the following information to answer the question(s)below.Consider the following information regarding corporate bonds: -Your estimate of the asset beta for Taggart Transcontinental is closest to:

Trucks R' Us (TRUS)has a market capitalization of $142 billion,$78 billion in BB rated debt,and $10 billion in cash.If Trucks R' Us' equity beta is 1.68,then their underlying asset beta is closest to:

Rearden Metal has a bond issue outstanding with ten years to maturity,a yield to maturity of 8.6%,and a B rating.The corresponding risk-free rate is 3% and the market risk premium is 6%.Assuming a normal economy,the expected return on Rearden Metal's debt is closest to:

If a project has a higher proportion of fixed to variable costs,holding the risk of its revenues constant:

Use the following information to answer the question(s)below. Suppose all possible investment opportunities in the world are limited to the four stocks listed in the table below: -The weight on Taggart Transcontinental stock in the market portfolio is closest to:

Use the following information to answer the question(s)below. The risk-free rate of interest is 3% and the market risk premium is 5%. -The overall cost of capital for Wyatt Oil is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Use the following information to answer the question(s)below.Consider the following information regarding corporate bonds: -Your estimate of the asset beta for Nielson Motors is closest to:

Firms should adjust for execution risk by:

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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