Question 1

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% A

Question 2

Use the following information to answer the question(s)below.
Suppose all possible investment opportunities in the world are limited to the four stocks list 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 Taggart Transcontinental is closest to:

Accepted Answer

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

Question 3

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.
-Which of the following statements is FALSE?

Accepted Answer

A) The S&P 500 and the Wilshire 5000 indexes are both well-diversified indexes that roughly correspond to the market of U.S.stocks. 
B) Practitioners commonly use the S&P 500 as the market portfolio in the CAPM because they believe that this index is actually the market portfolio. 
C) Standard & Poor's Depository Receipts (SPDR,nicknamed "spider")trade on the American Stock Exchange and represent ownership in the S&P 500. 
D) The S&P 500 was the first widely publicized value weighted index and it has become a benchmark for professional investors. 
A) The S&P 500 and the Wilshire 5000 indexes are both well-diversified indexes that roughly correspond to the market of U.S.stocks. 
B) Practitioners commonly use the S&P 500 as the market portfolio in the CAPM because they believe that this index is actually the market portfolio. 
C) Standard & Poor's Depository Receipts (SPDR,nicknamed "spider")trade on the American Stock Exchange and represent ownership in the S&P 500. 
D) The S&P 500 was the first widely publicized value weighted index and it has become a benchmark for professional investors. B

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 list 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) 700 shares 
C) 1400 shares 
D) 2300 shares 
A) 450 shares 
B) 700 shares 
C) 1400 shares 
D) 2300 shares

Question 5

Use the following information to answer the question(s)below.  
-Which of the following statements is FALSE?

Accepted Answer

A) One difficulty when trying to estimate beta for a security is that beta depends on the correlation and volatilities of the security's and market's returns in the future. 
B) It is common practice to estimate beta based on the expectations of future correlations and volatilities. 
C) One difficulty when trying to estimate beta for a security is that beta depends on investors' expectations of the correlation and volatilities of the security's and market's returns. 
D) Securities that tend to move less than the market have betas below 1. 
A) One difficulty when trying to estimate beta for a security is that beta depends on the correlation and volatilities of the security's and market's returns in the future. 
B) It is common practice to estimate beta based on the expectations of future correlations and volatilities. 
C) One difficulty when trying to estimate beta for a security is that beta depends on investors' expectations of the correlation and volatilities of the security's and market's returns. 
D) Securities that tend to move less than the market have betas below 1.

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 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 7

Use the following information to answer the question(s)below.
Suppose all possible investment opportunities in the world are limited to the four stocks list 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 8

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:  
-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 9

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

Accepted Answer

A) 0.05 
B) 0.10 
C) 0.17 
D) 1.00 
A) 0.05 
B) 0.10 
C) 0.17 
D) 1.00

Question 10

Use the following information to answer the question(s)below.
Luther Industries has 25 million shares outstanding trading at $18 per share.In addition,Luther has $150 million in outstanding debt.Suppose Luther's equity cost of capital is 13%,its debt cost of capital is 7%,and the corporate tax rate is 40%.
-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 11

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.
-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 12

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 13

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 is closest to:

Accepted Answer

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

Question 14

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:  
-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 15

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 least market risk?

Accepted Answer

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

Question 16

Use the following information to answer the question(s)below.
Suppose all possible investment opportunities in the world are limited to the four stocks list in the table below:  
-The weight on Wyatt Oil 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 17

Use the equation for the question(s)below.
Consider the following linear regression model:
(RS1U1B1iS1U1B0 - rS1U1B1fS1U1B0)= aS1U1B1iS1U1B0 + bS1U1B1iS1U1B0(RS1U1B1MktS1U1B0 - rS1U1B1fS1U1B0)+ eS1U1B1iS1U1B0
-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 18

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:  
-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 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 19

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

Accepted Answer

A) 0.76 
B) 0.79 
C) 0.93 
D) 1.10 
A) 0.76 
B) 0.79 
C) 0.93 
D) 1.10

Question 20

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:  
-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.

Exam 12: Estimating the Cost of Capital

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. -Which of the following statements is FALSE?

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. Consider the following information regarding corporate bonds: -Your estimate of the debt beta for Taggart Transcontinental would be:

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. The risk-free rate of interest is 3% and the market risk premium is 5%. -The value of the oil exploration division is closest to:

Use the following information to answer the question(s)below. Consider the following information regarding corporate bonds: -Which of the following is true of asset betas?

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 least market risk?

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

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. Consider the following information regarding corporate bonds: -The firm's unlevered (asset)cost of capital is:

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

Filters

Use the equation for the question(s)below. Consider the following linear regression model: (R_i - r_f)= a_i + b_i(R_Mkt - r_f)+ e_i -The b_i in the regression: