Question 1

Use the following information to answer the question(s)below.  
-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 bets-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 bets-fitting line through a set of points is called linear regression.

Question 2

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 most familiar stock index in the United States is the Dow Jones Industrial Average (DJI
A) . 
B) A portfolio in which each security is held in proportion to its market capitalization is called a price-weighted portfolio. 
C) The Dow Jones Industrial Average (DJI
A) consists of a portfolio of 30 large industrial stocks. 
D) The Dow Jones Industrial Average (DJI
A) is a price-weighted portfolio. 
A) The most familiar stock index in the United States is the Dow Jones Industrial Average (DJI
A) . 
B) A portfolio in which each security is held in proportion to its market capitalization is called a price-weighted portfolio. 
C) The Dow Jones Industrial Average (DJI
A) consists of a portfolio of 30 large industrial stocks. 
D) The Dow Jones Industrial Average (DJI
A) is a price-weighted portfolio.

Question 3

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 $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 4

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 5

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 6

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 market portfolio contains more of the smallest stocks and less of the larger 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 larger 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 7

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

Accepted Answer

A) 0.59 
B) 0.66 
C) 0.71 
D) 1.75 
A) 0.59 
B) 0.66 
C) 0.71 
D) 1.75

Question 8

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

Accepted Answer

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

Question 9

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) If some security were not part of the efficient portfolio,then every investor would want to own it,and demand for this security would increase causing its expected return to fall until it is no longer an attractive investment. 
B) The efficient portfolio,the portfolio that all investors should hold,must be the same portfolio as the market portfolio of all risky securities. 
C) Because every security is owned by someone,the sum of all investors' portfolios must equal the portfolio of all risky securities available in the market. 
D) If all investors demand the efficient portfolio,and since the supply of securities is the market portfolio,then two portfolios must coincide. 
A) If some security were not part of the efficient portfolio,then every investor would want to own it,and demand for this security would increase causing its expected return to fall until it is no longer an attractive investment. 
B) The efficient portfolio,the portfolio that all investors should hold,must be the same portfolio as the market portfolio of all risky securities. 
C) Because every security is owned by someone,the sum of all investors' portfolios must equal the portfolio of all risky securities available in the market. 
D) If all investors demand the efficient portfolio,and since the supply of securities is the market portfolio,then two portfolios must coincide.

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%.
-Luther's unlevered cost of capital is closest to:

Accepted Answer

A) 7.0% 
B) 9.8% 
C) 10.8% 
D) 11.5% 
A) 7.0% 
B) 9.8% 
C) 10.8% 
D) 11.5%

Question 11

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 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 value of the gas and convenience store division is closest to:

Accepted Answer

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

Question 13

Use the table for the question(s)below.
Consider the following stock price and shares outstanding data:  
-Assume that you have $250,000 to invest and you are interested in creating a value-weighted portfolio of these four stocks.How many shares of each of the four stocks will you hold? What percentage of the shares outstanding of each stock will you hold?

Accepted Answer

@#IMG-DLM& 
Number of shares = @#IMG-DLM& In a val

Question 14

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) There may be reasons to exclude certain historical data as anomalous when estimating beta. 
B) Many practitioners use adjusted betas,which are calculated by averaging the estimated beta with 1.0. 
C) The beta estimated from linear regression can be very sensitive to outliers,which are returns of unusually small magnitude. 
D) If we use very old data to when estimating beta,they data may be unrepresentative of the current market risk of the security. 
A) There may be reasons to exclude certain historical data as anomalous when estimating beta. 
B) Many practitioners use adjusted betas,which are calculated by averaging the estimated beta with 1.0. 
C) The beta estimated from linear regression can be very sensitive to outliers,which are returns of unusually small magnitude. 
D) If we use very old data to when estimating beta,they data may be unrepresentative of the current market risk of the security.

Question 15

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%.
-Assume that the S&P 500 currently has a dividend yield of 3% and that on average,the dividends of S&P 500 firms have increased by about 5% per year.If the risk-free interest rate is 4%,then your estimate for the future market risk premium is:

Accepted Answer

A) 7% 
B) 8% 
C) 6% 
D) 4% 
A) 7% 
B) 8% 
C) 6% 
D) 4%

Question 16

Use the following information to answer the question(s)below.  
-Wyatt Oil's average historical 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 17

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 cost of capital for the oil exploration division is closest to:

Accepted Answer

A) 6.0% 
B) 7.0% 
C) 8.5% 
D) 10.0% 
A) 6.0% 
B) 7.0% 
C) 8.5% 
D) 10.0%

Question 18

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:  
-Luther Industries has a market capitalization of $23 billion,no debt,and $4 billion in cash.If Luther's estimated equity beta is 1.32,then the beta of Luther's underlying business enterprise is closest to:

Accepted Answer

A) 1.09 
B) 1.32 
C) 1.48 
D) 1.60 
A) 1.09 
B) 1.32 
C) 1.48 
D) 1.60

Question 19

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 is NOT considered a difficulty with regards to the CAPM?

Accepted Answer

A) Betas are not observed. 
B) Expected returns are not observed. 
C) The market proxy is not correct. 
D) Investors risk preferences are not observed. 
A) Betas are not observed. 
B) Expected returns are not observed. 
C) The market proxy is not correct. 
D) Investors risk preferences are not observed.

Question 20

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

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. Consider the following information regarding corporate bonds: -Your estimate of the asset beta for Nielson Motors is closest to:

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 e_i in the regression:

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

Use the following information to answer the question(s)below. -Wyatt Oil's average historical return 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 cost of capital for the oil exploration division 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

Filters

Exam 12: Estimating the Cost of Capital

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. Consider the following information regarding corporate bonds: -Your estimate of the asset beta for Nielson Motors 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 ei in the regression:

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

Use the following information to answer the question(s)below. -Wyatt Oil's average historical return 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 cost of capital for the oil exploration division 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

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 e_i in the regression: