Question 1

Which of the following statements is FALSE?

Accepted Answer

A) A market index reports the value of a particular portfolio of securities. 
B) The S&P 500 is the standard portfolio used to represent "the market" when using the CAPM in practice. 
C) Even though the S&P 500 includes only 500 of the more than 7,000 individual U.S.Stocks in existence,it represents more than 70% of the U.S.stock market in terms of market capitalization. 
D) The S&P 500 is an equal-weighted portfolio of 500 of the largest U.S.stocks. 
A) A market index reports the value of a particular portfolio of securities. 
B) The S&P 500 is the standard portfolio used to represent "the market" when using the CAPM in practice. 
C) Even though the S&P 500 includes only 500 of the more than 7,000 individual U.S.Stocks in existence,it represents more than 70% of the U.S.stock market in terms of market capitalization. 
D) The S&P 500 is an equal-weighted portfolio of 500 of the largest U.S.stocks.

Question 2

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%.
-Which firm has the highest cost of equity capital?

Accepted Answer

A) Eenie 
B) Meenie 
C) Miney 
D) Moe 
A) Eenie 
B) Meenie 
C) Miney 
D) Moe

Question 3

Which of the following statements is FALSE?

Accepted Answer

A) Many practitioners prefer to use average industry betas rather than individual stock betas. 
B) When estimating beta by using past returns it is best to use the longest time horizon of returns available. 
C) The CAPM predicts that a security's expected return depends on its beta with regard to the market portfolio of all risky investments available to investors. 
D) If we use too short a time horizon when estimating beta,our estimate of beta will be unreliable. 
A) Many practitioners prefer to use average industry betas rather than individual stock betas. 
B) When estimating beta by using past returns it is best to use the longest time horizon of returns available. 
C) The CAPM predicts that a security's expected return depends on its beta with regard to the market portfolio of all risky investments available to investors. 
D) If we use too short a time horizon when estimating beta,our estimate of beta will be unreliable.

Question 4

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 are holding a market portfolio and you have invested $18,000 in Taggart Transcontinental.The number of shares of Rearden Metal that you hold is closest to:

Accepted Answer

A) 780 shares. 
B) 925 shares. 
C) 1730 shares. 
D) 2075 shares. 
A) 780 shares. 
B) 925 shares. 
C) 1730 shares. 
D) 2075 shares.

Question 5

Use the following information to answer the question(s)below.
Suppose the market consists only of Merck (MRK)and Boeing (BA).Merck stock is trading for $36.70 per share with 2.11 billion shares outstanding while Boeing has 697.5 million shares outstanding and a market capitalization of $38.223 billion.Assume that you hold the market portfolio.
-If you hold 1000 shares of Merck,then the number of shares of Boeing that you hold is closest to:

Accepted Answer

A) 240 shares. 
B) 330 shares. 
C) 510 shares. 
D) 780 shares. 
A) 240 shares. 
B) 330 shares. 
C) 510 shares. 
D) 780 shares.

Question 6

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 in the market portfolio.Then the number of shares of Rearden Metal that you hold is closest to:

Accepted Answer

A) 450 shares. 
B) 690 shares. 
C) 1400 shares. 
D) 2300 shares. 
A) 450 shares. 
B) 690 shares. 
C) 1400 shares. 
D) 2300 shares.

Question 7

Use the equation for the question(s)below.Consider the following linear regression model:
(Ri - rf)= ai + bi(RMkt - rf)+ ei
-The ai in the regression:

Accepted Answer

A) measures the sensitivity of the security to market risk. 
B) measures the deviation from the best-fitting line and is zero on average. 
C) measures the diversifiable risk in returns. 
D) measures the historical performance of the security relative to the expected return predicted by the SML. 
A) measures the sensitivity of the security to market risk. 
B) measures the deviation from the best-fitting line and is zero on average. 
C) measures the diversifiable risk in returns. 
D) measures the historical performance of the security relative to the expected return predicted by the SML.

Question 8

Which of the following is TRUE of asset betas?

Accepted Answer

A) Asset betas are expected to vary greatly within firms in the same industry. 
B) Businesses that are less sensitive to market and economic conditions tend to have higher asset betas than more cyclical industries. 
C) Businesses that are less sensitive to market and economic conditions tend to have lower asset betas than more cyclical industries. 
D) A and B are correct. 
A) Asset betas are expected to vary greatly within firms in the same industry. 
B) Businesses that are less sensitive to market and economic conditions tend to have higher asset betas than more cyclical industries. 
C) Businesses that are less sensitive to market and economic conditions tend to have lower asset betas than more cyclical industries. 
D) A and B are correct.

Question 9

Use the table for the question(s)below.
Consider the following stock price and shares outstanding data:  
-If you are interested in creating a value-weighted portfolio of these four stocks,then the percentage amount that you would invest in Lowes is closest to:

Accepted Answer

A) 27.2%. 
B) 10.6%. 
C) 15.2%. 
D) 14.2%. 
A) 27.2%. 
B) 10.6%. 
C) 15.2%. 
D) 14.2%.

Question 10

One factor that can affect the market risk of a project is its degree of operating leverage,which is:

Accepted Answer

A) the relative proportion of operating assets versus non-operating assets. 
B) the relative proportion of operating assets versus equity. 
C) the relative proportion of operating expenses versus non-operating expenses. 
D) the relative proportion of fixed versus variable costs. 
A) the relative proportion of operating assets versus non-operating assets. 
B) the relative proportion of operating assets versus equity. 
C) the relative proportion of operating expenses versus non-operating expenses. 
D) the relative proportion of fixed versus variable costs.

Question 11

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 gas and convenience store division (in $ millions)is closest to:

Accepted Answer

A) $4500. 
B) $6000. 
C) $8600. 
D) $15,000. 
A) $4500. 
B) $6000. 
C) $8600. 
D) $15,000.

Question 12

Nielson Motors plans to issue 10-year bonds that it believes will have an BBB rating.Suppose AAA bonds with the same maturity have a 3.5% yield.Assume that the market risk premium is 5% and the expected loss rate in the event of default on the bonds is 60%.The yield that these bonds will have to pay during a recession is closest to:

Accepted Answer

A) 3.50%. 
B) 3.75%. 
C) 4.00%. 
D) 5.55%. 
A) 3.50%. 
B) 3.75%. 
C) 4.00%. 
D) 5.55%.

Question 13

Use the following information to answer the question(s)below.  
-Wyatt Oil's average historical excess return is closest to:

Accepted Answer

A) -2.50%. 
B) -3.33%. 
C) -4.33%. 
D) -5.17%. 
A) -2.50%. 
B) -3.33%. 
C) -4.33%. 
D) -5.17%.

Question 14

Which of the following statements is FALSE?

Accepted Answer

A) Because very little trading is required to maintain it,an equal-weighted portfolio is called a passive portfolio. 
B) If the number of shares in a value-weighted portfolio does not change,but only the prices change,the portfolio will remain value-weighted. 
C) The CAPM says that individual investors should hold the market portfolio,a value-weighted portfolio of all risky securities in the market. 
D) A price-weighted portfolio holds an equal number of shares of each stock,independent of their size. 
A) Because very little trading is required to maintain it,an equal-weighted portfolio is called a passive portfolio. 
B) If the number of shares in a value-weighted portfolio does not change,but only the prices change,the portfolio will remain value-weighted. 
C) The CAPM says that individual investors should hold the market portfolio,a value-weighted portfolio of all risky securities in the market. 
D) A price-weighted portfolio holds an equal number of shares of each stock,independent of their size.

Question 15

Use the following information to answer the question(s)below.Consider the following information regarding corporate bonds:  
-Galt Industries has a market capitalization of $50 billion,$30 billion in BBB rated debt,and $8 billion in cash.If Galt's equity beta is 1.15,then Galt's underlying asset beta is closest to:

Accepted Answer

A) 0.83. 
B) 0.92. 
C) 1.00. 
D) 1.15. 
A) 0.83. 
B) 0.92. 
C) 1.00. 
D) 1.15.

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) All investors should demand the same efficient portfolio of securities in the same proportions. 
B) The Capital Asset Pricing Model (CAPM)allows corporate executives to identify the efficient portfolio (of risky assets)by using knowledge of the expected return of each security. 
C) If investors hold the efficient portfolio,then the cost of capital for any investment project is equal to its required return calculated using its beta with the efficient portfolio. 
D) The CAPM identifies the market portfolio as the efficient portfolio. 
A) All investors should demand the same efficient portfolio of securities in the same proportions. 
B) The Capital Asset Pricing Model (CAPM)allows corporate executives to identify the efficient portfolio (of risky assets)by using knowledge of the expected return of each security. 
C) If investors hold the efficient portfolio,then the cost of capital for any investment project is equal to its required return calculated using its beta with the efficient portfolio. 
D) The CAPM identifies the market portfolio as the efficient portfolio.

Question 17

Nielson Motors plans to issue 10-year bonds that it believes will have a BBB rating.Suppose AAA bonds with the same maturity have a 3.5% yield.Assume that the market risk premium is 5% and the expected loss rate in the event of default on the bonds is 60%.The yield that these bonds will have to pay during average economic times is closest to:

Accepted Answer

A) 3.50%. 
B) 3.75%. 
C) 4.00%. 
D) 5.50%. 
A) 3.50%. 
B) 3.75%. 
C) 4.00%. 
D) 5.50%.

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 corresponding risk-free rate is 3% and the market risk premium is 5%.Assuming a normal economy,the expected return on Wyatt Oil's debt is closest to:

Accepted Answer

A) 3.0%. 
B) 3.5%. 
C) 4.9%. 
D) 5.5%. 
A) 3.0%. 
B) 3.5%. 
C) 4.9%. 
D) 5.5%.

Question 19

Which of the following statements is FALSE?

Accepted Answer

A) The market portfolio contains more of the smallest stocks and less of the largest stocks. 
B) For the market portfolio,the investment in each security is proportional to its market capitalization. 
C) Because the market portfolio is defined as the total supply of securities,the proportions should correspond exactly to the proportion of the total market that each security represents. 
D) Market capitalization is the total market value of the outstanding shares of a firm. 
A) The market portfolio contains more of the smallest stocks and less of the largest stocks. 
B) For the market portfolio,the investment in each security is proportional to its market capitalization. 
C) Because the market portfolio is defined as the total supply of securities,the proportions should correspond exactly to the proportion of the total market that each security represents. 
D) Market capitalization is the total market value of the outstanding shares of a firm.

Question 20

Use the table for the question(s)below.
Consider the following stock price and shares outstanding data:  
-The market capitalization for Walmart is closest to:

Accepted Answer

A) $415 Billion. 
B) $276 Billion. 
C) $479 Billion. 
D) $200 Billion. 
A) $415 Billion. 
B) $276 Billion. 
C) $479 Billion. 
D) $200 Billion.

Exam 12: Estimating the Cost of Capital

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%. -Which firm has the highest cost of equity capital?

Which of the following statements is FALSE?

Use the equation for the question(s)below.Consider the following linear regression model: (Ri - rf)= ai + bi(RMkt - rf)+ ei -The ai in the regression:

Which of the following is TRUE of asset betas?

Use the table for the question(s)below. Consider the following stock price and shares outstanding data: -If you are interested in creating a value-weighted portfolio of these four stocks,then the percentage amount that you would invest in Lowes is closest to:

One factor that can affect the market risk of a project is its degree of operating leverage,which is:

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 gas and convenience store division (in $ millions)is closest to:

Use the following information to answer the question(s)below. -Wyatt Oil's average historical excess return is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Use the table for the question(s)below. Consider the following stock price and shares outstanding data: -The market capitalization for Walmart is closest to:

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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