Question 1

Which of the following statements is FALSE?

Accepted Answer

A) Many practitioners analyze other financial characteristics of a firm when they forecast betas. 
B) U.S.Treasuries are never subject to interest rate risk unless we select a maturity equal to our investment horizon. 
C) If a firm were to change industries,using its historical beta would be inferior to using the beta of other firms in the new industry. 
D) When using historical returns to forecast future betas,we must be mindful of changes in the environment that might cause the future to differ from the past. 
A) Many practitioners analyze other financial characteristics of a firm when they forecast betas. 
B) U.S.Treasuries are never subject to interest rate risk unless we select a maturity equal to our investment horizon. 
C) If a firm were to change industries,using its historical beta would be inferior to using the beta of other firms in the new industry. 
D) When using historical returns to forecast future betas,we must be mindful of changes in the environment that might cause the future to differ from the past.

Question 2

The difference between the weighted-average cost of capital (WACC)and the pre-tax (unlevered)WACC is:

Accepted Answer

A) the weighted-average cost of capital is based on the after-tax cost of equity and the pre-tax WACC is based on the after-tax cost of debt. 
B) the weighted-average cost of capital multiplies the cost of equity and the cost of debt by (1-tax rate)and the pre-tax WACC does not. 
C) the weighted-average cost of capital multiplies the cost of debt by (1-tax rate)and the pre-tax WACC does not. 
D) the weighted-average cost of capital multiplies the component costs of equity and debt by their weight in the capital structure,and the pre-tax WACC does not. 
A) the weighted-average cost of capital is based on the after-tax cost of equity and the pre-tax WACC is based on the after-tax cost of debt. 
B) the weighted-average cost of capital multiplies the cost of equity and the cost of debt by (1-tax rate)and the pre-tax WACC does not. 
C) the weighted-average cost of capital multiplies the cost of debt by (1-tax rate)and the pre-tax WACC does not. 
D) the weighted-average cost of capital multiplies the component costs of equity and debt by their weight in the capital structure,and the pre-tax WACC does not.

Question 3

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 value of Wyatt Oil (in $ millions)is closest to:

Accepted Answer

A) $25,000. 
B) $18,846. 
C) $31,250. 
D) $15,000. 
A) $25,000. 
B) $18,846. 
C) $31,250. 
D) $15,000.

Question 4

Use the following information to answer the question(s)below.  
-Using just the return data for 2009,your estimate of Wyatt Oil's beta is closest to:

Accepted Answer

A) 0.84. 
B) 0.87. 
C) 1.00. 
D) 1.16. 
A) 0.84. 
B) 0.87. 
C) 1.00. 
D) 1.16.

Question 5

Use the following information to answer the question(s)below.Consider the following information regarding corporate bonds:    
-Your estimate of the asset beta for Rearden Metal 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 6

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 asset beta for Wyatt Oil is closest to:

Accepted Answer

A) 0.95. 
B) 1.05. 
C) 1.15. 
D) 1.25. 
A) 0.95. 
B) 1.05. 
C) 1.15. 
D) 1.25.

Question 7

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 most total risk?

Accepted Answer

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

Question 8

Assume that the Wilshire 5000 currently has a dividend yield of 2% and that on average,the dividends of Wilshire 5000 firms have increased by about 7% per year.If the risk-free interest rate is 4%,then your estimate for the future market risk premium is:

Accepted Answer

A) 4%. 
B) 7%. 
C) 8%. 
D) 5%. 
A) 4%. 
B) 7%. 
C) 8%. 
D) 5%.

Question 9

In practice which market index is most widely used as a proxy for the market portfolio in the CAPM?

Accepted Answer

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

Question 10

Use the following information to answer the question(s)below.  
-Wyatt Oil's excess return for 2009 is closest to:

Accepted Answer

A) 18.6%. 
B) 19.6%. 
C) 20.0%. 
D) 21.5%. 
A) 18.6%. 
B) 19.6%. 
C) 20.0%. 
D) 21.5%.

Question 11

Use the following information to answer the question(s)below.  
-Using the average historical excess returns for both Wyatt Oil and the Market portfolio,estimate Wyatt Oil's beta.When using this beta,the alpha for Wyatt Oil in 2007 is closest to:

Accepted Answer

A) -0.5000%. 
B) -0.0250%. 
C) -0.0125%. 
D) +0.0250%. 
A) -0.5000%. 
B) -0.0250%. 
C) -0.0125%. 
D) +0.0250%.

Question 12

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

Accepted Answer

A) 0.10. 
B) 0.17. 
C) 1.00. 
D) 1.68. 
A) 0.10. 
B) 0.17. 
C) 1.00. 
D) 1.68.

Question 13

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

Accepted Answer

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

Question 14

Use the following information to answer the question(s)below.  
-Using just the return data for 2008,your estimate of Wyatt Oil's beta is closest to:

Accepted Answer

A) 0.85. 
B) 0.87. 
C) 1.00. 
D) 1.17. 
A) 0.85. 
B) 0.87. 
C) 1.00. 
D) 1.17.

Question 15

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 $9000 in Rearden Metal.The amount that you have invested in Nielson Motors is closest to:

Accepted Answer

A) $6000. 
B) $7715. 
C) $9000. 
D) $10,500. 
A) $6000. 
B) $7715. 
C) $9000. 
D) $10,500.

Question 16

Your firm is planning to invest in a new electrostatic power generation system.Electrostat Inc is a firm that specializes in this business.Electrostat has a stock price of $25 per share with 16 million shares outstanding.Electrostat's equity beta is 1.18.It also has $220 million in debt outstanding with a debt beta of 0.08.If the risk-free rate is 3%,and the market risk premium is 6%,then your estimate of your cost of capital for electrostatic power generators is closest to:

Accepted Answer

A) 7.50%. 
B) 7.75%. 
C) 9.50%. 
D) 10.10%. 
A) 7.50%. 
B) 7.75%. 
C) 9.50%. 
D) 10.10%.

Question 17

Which of the following statements is FALSE?

Accepted Answer

A) A value-weighted portfolio is an equal-ownership portfolio: We hold an equal fraction of the total number of shares outstanding of each security in the portfolio. 
B) When buying a value-weighted portfolio,we end up purchasing the same percentage of shares of each firm. 
C) To maintain a value-weighted portfolio,we do not need to trade securities and rebalance the portfolio unless the number of shares outstanding of some security changes. 
D) In a value-weighted portfolio the fraction of money invested in any security corresponds to its share of the total number of shares outstanding of all securities in the portfolio. 
A) A value-weighted portfolio is an equal-ownership portfolio: We hold an equal fraction of the total number of shares outstanding of each security in the portfolio. 
B) When buying a value-weighted portfolio,we end up purchasing the same percentage of shares of each firm. 
C) To maintain a value-weighted portfolio,we do not need to trade securities and rebalance the portfolio unless the number of shares outstanding of some security changes. 
D) In a value-weighted portfolio the fraction of money invested in any security corresponds to its share of the total number of shares outstanding of all securities in the portfolio.

Question 18

Which of the following statements is FALSE?

Accepted Answer

A) Securities that tend to move more than the market have betas lower than 0. 
B) Securities whose returns tend to move in tandem with the market on average have a beta of 1. 
C) Beta corresponds to the slope of the best-fitting line in the plot of the securities excess returns versus the market excess return. 
D) The statistical technique that identifies the best-fitting line through a set of points is called linear regression. 
A) Securities that tend to move more than the market have betas lower than 0. 
B) Securities whose returns tend to move in tandem with the market on average have a beta of 1. 
C) Beta corresponds to the slope of the best-fitting line in the plot of the securities excess returns versus the market excess return. 
D) The statistical technique that identifies the best-fitting line through a set of points is called linear regression.

Question 19

The firm's unlevered (asset)cost of capital is:

Accepted Answer

A) the weighted average of the equity cost of capital and the debt cost of capital. 
B) the weighted average of the levered cost of capital and the equity cost of capital. 
C) the debt cost of capital minus the equity cost of capital. 
D) the unlevered beta minus the cost of capital. 
A) the weighted average of the equity cost of capital and the debt cost of capital. 
B) the weighted average of the levered cost of capital and the equity cost of capital. 
C) the debt cost of capital minus the equity cost of capital. 
D) the unlevered beta minus the cost of capital.

Question 20

If a firm's excess cash holdings are greater than its debt,using net debt as the measure of leverage will result in:

Accepted Answer

A) its unlevered beta and cost of capital equaling zero. 
B) its unlevered beta and cost of capital being greater than its equity beta and cost of capital. 
C) the risk of the firm's equity being increased by its cash holdings in excess of its operating needs. 
D) the risk of the firm's debt being increased by its cash holdings in excess of its operating needs. 
A) its unlevered beta and cost of capital equaling zero. 
B) its unlevered beta and cost of capital being greater than its equity beta and cost of capital. 
C) the risk of the firm's equity being increased by its cash holdings in excess of its operating needs. 
D) the risk of the firm's debt being increased by its cash holdings in excess of its operating needs.

Exam 12: Estimating the Cost of Capital

Which of the following statements is FALSE?

The difference between the weighted-average cost of capital (WACC)and the pre-tax (unlevered)WACC 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 overall value of Wyatt Oil (in $ millions)is closest to:

Use the following information to answer the question(s)below. -Using just the return data for 2009,your estimate of Wyatt Oil's beta is closest to:

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

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 most total risk?

Assume that the Wilshire 5000 currently has a dividend yield of 2% and that on average,the dividends of Wilshire 5000 firms have increased by about 7% per year.If the risk-free interest rate is 4%,then your estimate for the future market risk premium is:

In practice which market index is most widely used as a proxy for the market portfolio in the CAPM?

Use the following information to answer the question(s)below. -Wyatt Oil's excess return for 2009 is closest to:

Use the following information to answer the question(s)below. -Using the average historical excess returns for both Wyatt Oil and the Market portfolio,estimate Wyatt Oil's beta.When using this beta,the alpha for Wyatt Oil in 2007 is closest to:

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

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

Use the following information to answer the question(s)below. -Using just the return data for 2008,your estimate of Wyatt Oil's beta is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

The firm's unlevered (asset)cost of capital is:

If a firm's excess cash holdings are greater than its debt,using net debt as the measure of leverage will result in:

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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