Question 1

The project cost of capital depends on the risk of the company undertaking the project.

Accepted Answer

A) True 
 B)False

Question 2

A proposed investment must earn at least as much as the ______ if it is to be deemed acceptable.

Accepted Answer

A)  company cost of capital 
B)  risk-free rate 
C)  market risk premium 
D)  project cost of capital 
A)  company cost of capital 
B)  risk-free rate 
C)  market risk premium 
D)  project cost of capital

Question 3

According to the CAPM,a stock's expected return is positively related to its beta.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

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

Question 5

A project has a beta of 1.24,the risk-free rate is 3.8%,and the market rate of return is 9.2%.What is the project's expected rate of return?

Accepted Answer

A)  15.21% 
B)  11.41% 
C)  10.50% 
D)  14.61% 
A)  15.21% 
B)  11.41% 
C)  10.50% 
D)  14.61%

Question 6

If a project has a risk of a bad outcome,the company should always set a higher discount rate to compensate.

Accepted Answer

A) True 
 B)False

Question 7

If a stock consistently goes down (up)by 1.6% when the market portfolio goes down (up)by 1.2%,then its beta equals:

Accepted Answer

A)  1.04. 
B)  1.24. 
C)  1.33. 
D)  1.40. 
A)  1.04. 
B)  1.24. 
C)  1.33. 
D)  1.40.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Investment projects that plot above the security market line 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 10

There is little doubt that the CAPM captures everything that is going on in the market.

Accepted Answer

A) True 
 B)False

Question 11

A portfolio consists of an index mutual fund which represents the overall market and Treasury bills.The fund has a portfolio weight of 60%.The risk-free rate is 3.2% and the market risk premium is 7.6%.What is your best estimate of the portfolio expected rate of return?

Accepted Answer

A)  8.39% 
B)  7.76% 
C)  10.80% 
D)  9.02% 
A)  8.39% 
B)  7.76% 
C)  10.80% 
D)  9.02%

Question 12

If changing discount rates from the company cost of capital to the project cost of capital changes NPV from negative to positive,then the project should use the:

Accepted Answer

A)  company cost of capital and be accepted. 
B)  company cost of capital and be rejected. 
C)  project cost of capital and be accepted. 
D)  project cost of capital and be rejected. 
A)  company cost of capital and be accepted. 
B)  company cost of capital and be rejected. 
C)  project cost of capital and be accepted. 
D)  project cost of capital and be rejected.

Question 13

Over the long run value stocks have:

Accepted Answer

A)  had low ratios of book value to market value. 
B)  performed exactly as predicted by CAPM. 
C)  provided a higher return than growth stocks. 
D)  consistently underperformed. 
A)  had low ratios of book value to market value. 
B)  performed exactly as predicted by CAPM. 
C)  provided a higher return than growth stocks. 
D)  consistently underperformed.

Question 14

If a project could have a bad outcome:

Accepted Answer

A)  the discount rate should be increased. 
B)  expected cash flows should be adjusted downward to reflect this possibility. 
C)  the beta should be increased. 
D)  the market risk premium should be revised downward. 
A)  the discount rate should be increased. 
B)  expected cash flows should be adjusted downward to reflect this possibility. 
C)  the beta should be increased. 
D)  the market risk premium should be revised downward.

Question 15

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%

Question 16

Last month a stock with a beta of 1.0 lost 20% while the S&P 500 had a 10% gain.Given this,it is most likely that the:

Accepted Answer

A)  stock's beta has been calculated incorrectly. 
B)  S&P 500 cannot represent the overall market. 
C)  firm released some negative information about itself. 
D)  the market index had an exceptionally good month. 
A)  stock's beta has been calculated incorrectly. 
B)  S&P 500 cannot represent the overall market. 
C)  firm released some negative information about itself. 
D)  the market index had an exceptionally good month.

Question 17

A stock's beta measures the:

Accepted Answer

A)  average return on the stock. 
B)  sensitivity of the stock's returns to those of the market portfolio. 
C)  difference between the return on the stock and the return on the market portfolio. 
D)  market risk premium on the stock. 
A)  average return on the stock. 
B)  sensitivity of the stock's returns to those of the market portfolio. 
C)  difference between the return on the stock and the return on the market portfolio. 
D)  market risk premium on the stock.

Question 18

If a well-diversified portfolio of stocks has an expected return of 25% when the expected return on the market portfolio is 15%,then

Accepted Answer

A)  Treasury bills are offering a 10% yield. 
B)  The portfolio beta is greater than 1.0. 
C)  The portfolio beta equals 1.67. 
D)  The investor's portfolio contains many defensive stocks. 
A)  Treasury bills are offering a 10% yield. 
B)  The portfolio beta is greater than 1.0. 
C)  The portfolio beta equals 1.67. 
D)  The investor's portfolio contains many defensive stocks.

Question 19

When Treasury bills yield 7% and the expected return on the market is 16%,then the risk premium on an asset is equal to:

Accepted Answer

A)  9%. 
B)  16%. 
C)  9% times the asset's beta. 
D)  9% plus the risk-free rate. 
A)  9%. 
B)  16%. 
C)  9% times the asset's beta. 
D)  9% plus the risk-free rate.

Question 20

If the company cost of capital is 20% and a proposed project's cost of capital is 15%,then discounting the projects' cash flows at 20% would:

Accepted Answer

A)  determine where the project plots in relation to the security market line. 
B)  make the project look more attractive than it should be. 
C)  be correct from a theoretical perspective. 
D)  be incorrect and could cause the project to be erroneously rejected. 
A)  determine where the project plots in relation to the security market line. 
B)  make the project look more attractive than it should be. 
C)  be correct from a theoretical perspective. 
D)  be incorrect and could cause the project to be erroneously rejected.

Exam 12: Risk,Return,and Capital Budgeting

The project cost of capital depends on the risk of the company undertaking the project.

A proposed investment must earn at least as much as the ______ if it is to be deemed acceptable.

According to the CAPM,a stock's expected return is positively related to its beta.

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

A project has a beta of 1.24,the risk-free rate is 3.8%,and the market rate of return is 9.2%.What is the project's expected rate of return?

If a project has a risk of a bad outcome,the company should always set a higher discount rate to compensate.

If a stock consistently goes down (up)by 1.6% when the market portfolio goes down (up)by 1.2%,then its beta equals:

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

Investment projects that plot above the security market line have:

There is little doubt that the CAPM captures everything that is going on in the market.

A portfolio consists of an index mutual fund which represents the overall market and Treasury bills.The fund has a portfolio weight of 60%.The risk-free rate is 3.2% and the market risk premium is 7.6%.What is your best estimate of the portfolio expected rate of return?

If changing discount rates from the company cost of capital to the project cost of capital changes NPV from negative to positive,then the project should use the:

Over the long run value stocks have:

If a project could have a bad outcome:

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%?

Last month a stock with a beta of 1.0 lost 20% while the S&P 500 had a 10% gain.Given this,it is most likely that the:

A stock's beta measures the:

If a well-diversified portfolio of stocks has an expected return of 25% when the expected return on the market portfolio is 15%,then

When Treasury bills yield 7% and the expected return on the market is 16%,then the risk premium on an asset is equal to:

If the company cost of capital is 20% and a proposed project's cost of capital is 15%,then discounting the projects' cash flows at 20% would:

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 Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers,Acquisitions,and Corporate Control

International Financial Management

Options

Risk Management

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