Question 1

Project cost of capital and company cost of capital are synonymous terms.

Accepted Answer

A) True 
 B)False

Question 2

If an investor's portfolio is allocated 75% to the market portfolio and 25% to Treasury bills,then the investor should expect to receive:

Accepted Answer

A)  the risk-free rate plus 75% of the expected return on the market. 
B)  the risk-free rate plus 75% of the expected market risk premium. 
C)  75% of the expected return on the market. 
D)  25% of the risk-free rate plus 75% of the expected return on the market. 
A)  the risk-free rate plus 75% of the expected return on the market. 
B)  the risk-free rate plus 75% of the expected market risk premium. 
C)  75% of the expected return on the market. 
D)  25% of the risk-free rate plus 75% of the expected return on the market.

Question 3

One of the easiest methods of diversifying away firm-specific risks is to:

Accepted Answer

A)  buy stocks with a Beta of 1.0. 
B)  build a portfolio with 20-25 individual stocks. 
C)  purchase the shares of a mutual fund. 
D)  purchase stocks that plot above the security market line. 
A)  buy stocks with a Beta of 1.0. 
B)  build a portfolio with 20-25 individual stocks. 
C)  purchase the shares of a mutual fund. 
D)  purchase stocks that plot above the security market line.

Question 4

Beta measures a stock's sensitivity to market risks.

Accepted Answer

A) True 
 B)False

Question 5

How can a manager calculate the opportunity cost of capital for a project?

Accepted Answer

The opportunity cost of capital is the r

Question 6

Given the CAPM's noted difficulties,which of the following statements may be correct concerning a low price-earnings ratio stock?

Accepted Answer

A)  the stock has too much systematic risk. 
B)  the stock plots above the security market line. 
C)  the stock plots below the security market line. 
D)  the stock has a zero Beta. 
A)  the stock has too much systematic risk. 
B)  the stock plots above the security market line. 
C)  the stock plots below the security market line. 
D)  the stock has a zero Beta.

Question 7

If the Treasury bill rate is 4%,what does the CAPM say about the fair expected rate of return on the two stocks?

Accepted Answer

According to the CAPM,the expected retur

Question 8

What will happen to a stock that offers a lower risk premium than predicted by the CAPM?

Accepted Answer

A)  its Beta will increase. 
B)  its Beta will decrease. 
C)  its price will decrease until yield is increased. 
D)  its price will increase until the yield is reduced. 
A)  its Beta will increase. 
B)  its Beta will decrease. 
C)  its price will decrease until yield is increased. 
D)  its price will increase until the yield is reduced.

Question 9

A project should be accepted if its return plots above the security market line.

Accepted Answer

A) True 
 B)False

Question 10

When Treasury bills yield 7.0% and the expected return on the market is 16%,then the risk premium on an asset is equal to:

Accepted Answer

A)  7.0%. 
B)  16.0%. 
C)  9.0% times the asset's Beta. 
D)  8.0% plus the risk-free rate. 
A)  7.0%. 
B)  16.0%. 
C)  9.0% times the asset's Beta. 
D)  8.0% plus the risk-free rate.

Question 11

Stock A has a current price of $25.00,a Beta of 1.25,and a dividend yield of 6%.If the Treasury bill yield is 5% and the market portfolio is expected to return 14%,what should Stock A sell for at the end of an investor's two year investment horizon?

Accepted Answer

Expected Return = 5% + 1.25 (14% - 5%)
=

Question 12

The correct opportunity cost for a project is determined to be 15% and the project is expected to generate $1 million in cash flows at the end of the next four years after an initial outlay of $3 million.Based on this information,the project would plot:

Accepted Answer

A)  above the security market line. 
B)  below the security market line. 
C)  on the security market line. 
D)  on the security market line, with a Beta of 1.0. 
A)  above the security market line. 
B)  below the security market line. 
C)  on the security market line. 
D)  on the security market line, with a Beta of 1.0.

Question 13

Which of the following statements is correct when Treasury bills yield 7.5% and the market risk premium is 9.5%?

Accepted Answer

A)  The S&P 500 would be expected to yield about 8.50% 
B)  The S&P 500 would be expected to yield about 9.50% 
C)  The S&P 500 would be expected to yield about 12.68% 
D)  The S&P 500 would be expected to yield about 17.00% 
A)  The S&P 500 would be expected to yield about 8.50% 
B)  The S&P 500 would be expected to yield about 9.50% 
C)  The S&P 500 would be expected to yield about 12.68% 
D)  The S&P 500 would be expected to yield about 17.00%

Question 14

Why would a stock market investor not be concerned with unique risks when calculating expected rates of return?

Accepted Answer

A)  there is no method to quantify unique risks. 
B)  unique risks are assumed to be diversified away. 
C)  unique risks are compensated by the risk-free rate. 
D)  Beta includes a component to compensate unique risk. 
A)  there is no method to quantify unique risks. 
B)  unique risks are assumed to be diversified away. 
C)  unique risks are compensated by the risk-free rate. 
D)  Beta includes a component to compensate unique risk.

Question 15

A stock's risk premium is equal to the:

Accepted Answer

A)  expected market return times Beta. 
B)  treasury bill yield plus expected market return. 
C)  risk-free rate plus expected market risk premium. 
D)  expected market risk premium times Beta. 
A)  expected market return times Beta. 
B)  treasury bill yield plus expected market return. 
C)  risk-free rate plus expected market risk premium. 
D)  expected market risk premium times Beta.

Question 16

If the slope of the line measuring a stock's historic returns against the market's historic returns is positive,then the stock:

Accepted Answer

A)  has a Beta greater than 1.0. 
B)  has no unique risk. 
C)  has a positive Beta. 
D)  plots above the security market line. 
A)  has a Beta greater than 1.0. 
B)  has no unique risk. 
C)  has a positive Beta. 
D)  plots above the security market line.

Question 17

Investors expect aggressive stocks to outperform the market periods of strong economic activity.

Accepted Answer

A) True 
 B)False

Question 18

If a two-stock portfolio is equally invested in stocks with Betas of 1.4 and 0.7,then the portfolio Beta is:

Accepted Answer

A)  0.70. 
B)  1.05. 
C)  1.40. 
D)  2.10 
A)  0.70. 
B)  1.05. 
C)  1.40. 
D)  2.10

Question 19

Investment projects that plot above the security market line would be considered to have:

Accepted Answer

A)  A positive NPV. 
B)  A negative NPV. 
C)  A zero NPV. 
D)  an excessively high discount rate. 
A)  A positive NPV. 
B)  A negative NPV. 
C)  A zero NPV. 
D)  an excessively high discount rate.

Question 20

What rate of return should an investor expect for a stock that has a Beta of 0.8 when the market is expected to yield 14% and Treasury bills offer 6%?

Accepted Answer

A)  9.2% 
B)  11.2% 
C)  12.4% 
D)  12.8% 
A)  9.2% 
B)  11.2% 
C)  12.4% 
D)  12.8%

Exam 12: Risk, Return, and Capital Budgeting

Project cost of capital and company cost of capital are synonymous terms.

If an investor's portfolio is allocated 75% to the market portfolio and 25% to Treasury bills,then the investor should expect to receive:

One of the easiest methods of diversifying away firm-specific risks is to:

Beta measures a stock's sensitivity to market risks.

How can a manager calculate the opportunity cost of capital for a project?

Given the CAPM's noted difficulties,which of the following statements may be correct concerning a low price-earnings ratio stock?

If the Treasury bill rate is 4%,what does the CAPM say about the fair expected rate of return on the two stocks?

What will happen to a stock that offers a lower risk premium than predicted by the CAPM?

A project should be accepted if its return plots above the security market line.

When Treasury bills yield 7.0% and the expected return on the market is 16%,then the risk premium on an asset is equal to:

Stock A has a current price of $25.00,a Beta of 1.25,and a dividend yield of 6%.If the Treasury bill yield is 5% and the market portfolio is expected to return 14%,what should Stock A sell for at the end of an investor's two year investment horizon?

The correct opportunity cost for a project is determined to be 15% and the project is expected to generate $1 million in cash flows at the end of the next four years after an initial outlay of $3 million.Based on this information,the project would plot:

Which of the following statements is correct when Treasury bills yield 7.5% and the market risk premium is 9.5%?

Why would a stock market investor not be concerned with unique risks when calculating expected rates of return?

A stock's risk premium is equal to the:

If the slope of the line measuring a stock's historic returns against the market's historic returns is positive,then the stock:

Investors expect aggressive stocks to outperform the market periods of strong economic activity.

If a two-stock portfolio is equally invested in stocks with Betas of 1.4 and 0.7,then the portfolio Beta is:

Investment projects that plot above the security market line would be considered to have:

What rate of return should an investor expect for a stock that has a Beta of 0.8 when the market is expected to yield 14% and Treasury bills offer 6%?

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt and Payout Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters