Question 1

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 volatility of the security's and market's realized returns in the past. 
B)  Having identified the S&P/TSX Composite Index as a market proxy, the next step in calculating the risk premium for a security is to determine the security's beta. 
C)  Many data sources provide estimates of beta based on historical data. 
D)  The differences in betas by industry reflect the sensitivity of each industry's profits to the general health of the economy. 
A)  One difficulty when trying to estimate beta for a security is that beta depends on the correlation and volatility of the security's and market's realized returns in the past. 
B)  Having identified the S&P/TSX Composite Index as a market proxy, the next step in calculating the risk premium for a security is to determine the security's beta. 
C)  Many data sources provide estimates of beta based on historical data. 
D)  The differences in betas by industry reflect the sensitivity of each industry's profits to the general health of the economy.

Question 2

Suppose that Monsters' expected return is 12%.Then Monsters' alpha is closest to:

Accepted Answer

A)  -2.0% 
B)  -1.0% 
C)  1.0% 
D)  0.5% 
A)  -2.0% 
B)  -1.0% 
C)  1.0% 
D)  0.5%

Question 3

Which of the following statements is false?

Accepted Answer

A)  The market capitalization is the total market value of its outstanding shares. 
B)  The market portfolio is the portfolio of all risky investments. 
C)  Many practitioners believe it insensible to use the CAPM and the security market line as a practical means to estimate a stock's required return and therefore a firm's equity cost of capital. 
D)  To estimate the equity cost of capital using the CAPM, the first thing we need to do is identify the market portfolio. 
A)  The market capitalization is the total market value of its outstanding shares. 
B)  The market portfolio is the portfolio of all risky investments. 
C)  Many practitioners believe it insensible to use the CAPM and the security market line as a practical means to estimate a stock's required return and therefore a firm's equity cost of capital. 
D)  To estimate the equity cost of capital using the CAPM, the first thing we need to do is identify the market portfolio.

Question 4

Use the information for the question(s) below.
KT Enterprises is considering undertaking a new project. Based upon analysis of firms with similar projects, KT has determined that an unlevered cost of equity of 12% is suitable for their project. KT's marginal tax rate is 35%, its borrowing rate is 7%, and KT does not believe that its borrowing rate will change if the new project is accepted.
-If KT expects to maintain a debt-to-equity ratio for this project of .6,then KT's equity cost of capital,rE,for this project is closest to:

Accepted Answer

A)  5.0% 
B)  12% 
C)  15.0% 
D)  17.0% 
A)  5.0% 
B)  12% 
C)  15.0% 
D)  17.0%

Question 5

The firm's asset cost of capital is equal to firm's ________.

Accepted Answer

A)  weighted average cost of capital 
B)  averaged cost of capital 
C)  geometric averaged cost of capital 
D)  arithmetic average cost of capital 
A)  weighted average cost of capital 
B)  averaged cost of capital 
C)  geometric averaged cost of capital 
D)  arithmetic average cost of capital

Question 6

The only way it can be possible to earn a positive alpha and beat the market is if some investors are holding portfolios with ________ alphas.

Accepted Answer

A)  positive 
B)  zero 
C)  negative 
D)  none of the above 
A)  positive 
B)  zero 
C)  negative 
D)  none of the above

Question 7

Use the information for the question(s) below.
Suppose that the risk-free rate is 5% and the market portfolio has an expected return of 13% with a volatility of 18%. Monsters Inc. has a 24% volatility and a correlation with the market of .60, while California Gold Mining has a 32% volatility and a correlation with the market of -.7. Assume the CAPM assumptions hold.
-Monsters' required return is closest to:

Accepted Answer

A)  10.0% 
B)  13.0% 
C)  11.5% 
D)  15.5% 
A)  10.0% 
B)  13.0% 
C)  11.5% 
D)  15.5%

Question 8

Which of the following statements is false?

Accepted Answer

A)  Securities that tend to move more than the market have betas higher 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 security's excess returns versus the market's 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 higher 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 security's excess returns versus the market's excess return. 
D)  The statistical technique that identifies the best-fitting line through a set of points is called linear regression.

Question 9

Which of the following statements is false?

Accepted Answer

A)  The market portfolio is the efficient portfolio. 
B)  Many practitioners believe it is sensible to use the CAPM and the security market line as a practical means to estimate a stock's required return and therefore a firm's equity cost of capital. 
C)  If we plot individual securities according to their expected return and beta, the CAPM implies that they should all fall along the CML. 
D)  As savvy investors attempt to trade to improve their portfolios, they raise the price and lower the expected return of the positive alpha stocks, and they depress the price and raise the expected return of negative alpha stocks, until the stocks are once again on the security market line and the market portfolio is efficient. 
A)  The market portfolio is the efficient portfolio. 
B)  Many practitioners believe it is sensible to use the CAPM and the security market line as a practical means to estimate a stock's required return and therefore a firm's equity cost of capital. 
C)  If we plot individual securities according to their expected return and beta, the CAPM implies that they should all fall along the CML. 
D)  As savvy investors attempt to trade to improve their portfolios, they raise the price and lower the expected return of the positive alpha stocks, and they depress the price and raise the expected return of negative alpha stocks, until the stocks are once again on the security market line and the market portfolio is efficient.

Question 10

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 11

The beta for the risk free investment is closest to:

Accepted Answer

A)  1 
B)  0 
C)  Unable to answer this question without knowing the risk-free rate. 
D)  Unable to answer this question without knowing the market's volatility. 
A)  1 
B)  0 
C)  Unable to answer this question without knowing the risk-free rate. 
D)  Unable to answer this question without knowing the market's volatility.

Question 12

Under the CAPM,the market portfolio is a well-diversified,efficient portfolio representing ________ in the economy.

Accepted Answer

A)  the diversified risk 
B)  the systematic risk 
C)  the market risk 
D)  the non-diversified risk 
A)  the diversified risk 
B)  the systematic risk 
C)  the market risk 
D)  the non-diversified risk

Question 13

Which of the following statements is false?

Accepted Answer

A)  In the real world, specific projects should differ only slightly from the average investment made by the firm. 
B)  We can estimate rU for a new project by looking at single-division firms that have similar business risks. 
C)  The project's equity cost of capital depends on its unlevered cost of capital, rU, and the debt-equity ratio of the incremental financing that will be put in place to support the project. 
D)  Projects may vary in the amount of leverage they will support - for example, acquisitions of real estate or capital equipment are often highly levered, whereas investments in intellectual property are not. 
A)  In the real world, specific projects should differ only slightly from the average investment made by the firm. 
B)  We can estimate rU for a new project by looking at single-division firms that have similar business risks. 
C)  The project's equity cost of capital depends on its unlevered cost of capital, rU, and the debt-equity ratio of the incremental financing that will be put in place to support the project. 
D)  Projects may vary in the amount of leverage they will support - for example, acquisitions of real estate or capital equipment are often highly levered, whereas investments in intellectual property are not.

Question 14

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 15

Consider the following equation: rwacc = rU - τcdrD
The term rU in this equation is

Accepted Answer

A)  the firm's unlevered cost of debt. 
B)  the firm's cost of debt. 
C)  the project's unlevered cost of capital. 
D)  the project's debt-to-value ratio. 
A)  the firm's unlevered cost of debt. 
B)  the firm's cost of debt. 
C)  the project's unlevered cost of capital. 
D)  the project's debt-to-value ratio.

Question 16

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 17

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

Accepted Answer

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

Question 18

Which of the following statements is false?

Accepted Answer

A)  Investors may have different information regarding expected returns, correlations, and volatilities, but they correctly interpret that information and the information contained in market prices and they adjust their estimates of expected returns in a rational way. 
B)  Investors may learn different information through their own research and observations, but as long as they understand the differences in information and learn from other investors by observing prices, the CAPM conclusions still stand. 
C)  Every investor, regardless of how much information he has access to, can guarantee himself an alpha of zero by holding the market portfolio. 
D)  The CAPM requires making the strong assumptions of homogeneous expectations. 
A)  Investors may have different information regarding expected returns, correlations, and volatilities, but they correctly interpret that information and the information contained in market prices and they adjust their estimates of expected returns in a rational way. 
B)  Investors may learn different information through their own research and observations, but as long as they understand the differences in information and learn from other investors by observing prices, the CAPM conclusions still stand. 
C)  Every investor, regardless of how much information he has access to, can guarantee himself an alpha of zero by holding the market portfolio. 
D)  The CAPM requires making the strong assumptions of homogeneous expectations.

Question 19

To be attractive the new investment project must have an expected return ________ that of a comparable investment opportunity.

Accepted Answer

A)  bigger than 
B)  smaller than 
C)  different than 
D)  equal to 
A)  bigger than 
B)  smaller than 
C)  different than 
D)  equal to

Question 20

Why does the yield to maturity of a firm's debt generally overestimate its debt cost of capital?

Accepted Answer

Because there is a certain deg

Exam 12: Estimating the Cost of Capital

Which of the following statements is false?

Suppose that Monsters' expected return is 12%.Then Monsters' alpha is closest to:

Which of the following statements is false?

The firm's asset cost of capital is equal to firm's ________.

The only way it can be possible to earn a positive alpha and beat the market is if some investors are holding portfolios with ________ alphas.

Which of the following statements is false?

Which of the following statements is false?

Which of the following statements is false?

The beta for the risk free investment is closest to:

Under the CAPM,the market portfolio is a well-diversified,efficient portfolio representing ________ in the economy.

Which of the following statements is false?

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

Consider the following equation: rwacc = rU - τcdrD The term rU in this equation is

Which of the following is NOT considered a difficulty with regards to the CAPM?

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

Which of the following statements is false?

To be attractive the new investment project must have an expected return ________ that of a comparable investment opportunity.

Why does the yield to maturity of a firm's debt generally overestimate its debt cost of capital?

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

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 Modelling: a Case Study

The Mechanics of 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

Consider the following equation: r_wacc = r_U - τ_cdr_D The termr_U in this equation is

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 a_i in the regression