Question 1

The yield to maturity of a bond is the ________ an investor will earn from holding the bond to maturity and receiving its promised payments.

Accepted Answer

A)  IRR 
B)  coupon rate 
C)  current yield 
D)  capital gain 
A)  IRR 
B)  coupon rate 
C)  current yield 
D)  capital gain

Question 2

If you are interested in creating a value-weighted portfolio of these four stocks,then the percentage amount that you would invest in Lowes is closest to:

Accepted Answer

A)  25% 
B)  11% 
C)  20.0% 
D)  12% 
A)  25% 
B)  11% 
C)  20.0% 
D)  12%

Question 3

Which of the following statements is false?

Accepted Answer

A)  For capital budgeting purposes, the project's financing is the incremental financing that results if the firm takes on the project. 
B)  Projects with safer cash flows can support more debt before they increase the risk of financial distress for the firm. 
C)  If the positive free cash flow from a project will increase the firm's cash holdings, then this growth in cash is equivalent to a reduction in the firm's leverage. 
D)  The incremental financing of a project corresponds directly to the financing that is directly tied to the project. 
A)  For capital budgeting purposes, the project's financing is the incremental financing that results if the firm takes on the project. 
B)  Projects with safer cash flows can support more debt before they increase the risk of financial distress for the firm. 
C)  If the positive free cash flow from a project will increase the firm's cash holdings, then this growth in cash is equivalent to a reduction in the firm's leverage. 
D)  The incremental financing of a project corresponds directly to the financing that is directly tied to the project.

Question 4

Use the table for the question(s) below.
Consider the following stock price and shares outstanding data:
  
-The total market capitalization for all four stocks is closest to:

Accepted Answer

A)  $479 billion 
B)  $415 billion 
C)  $2,100 billion 
D)  $200 billion 
A)  $479 billion 
B)  $415 billion 
C)  $2,100 billion 
D)  $200 billion

Question 5

Use the information for the question(s) below.
Tom's portfolio consists solely of an investment in Merck stock. Merck has an expected return of 13% and a volatility of 25%. The market portfolio has an expected return of 12% and a volatility of 18%. The risk-free rate is 4%. Assume that the CAPM assumptions hold in the market.
-Assuming that Tom wants to maintain the current volatility of his portfolio,then the maximum expected return that Tom could achieve by investing in the market portfolio and risk-free investment is closest to:

Accepted Answer

A)  13% 
B)  15% 
C)  16% 
D)  12.% 
A)  13% 
B)  15% 
C)  16% 
D)  12.%

Question 6

Which of the following statements is false?

Accepted Answer

A)  Short-term margin loans from a broker are often 1% to 2% lower than the rates paid on short-term Treasury securities. 
B)  In the real world investors have different information and expectations regarding securities. 
C)  The SML is still valid when interest rates differ. 
D)  When borrowing and lending occur at different rates there are different tangent portfolios identified. 
A)  Short-term margin loans from a broker are often 1% to 2% lower than the rates paid on short-term Treasury securities. 
B)  In the real world investors have different information and expectations regarding securities. 
C)  The SML is still valid when interest rates differ. 
D)  When borrowing and lending occur at different rates there are different tangent portfolios identified.

Question 7

Which of the following statements is false?

Accepted Answer

A)  There may be reasons to exclude certain historical data for being 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, the data may be unrepresentative of the current market risk of the security. 
A)  There may be reasons to exclude certain historical data for being 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, the data may be unrepresentative of the current market risk of the security.

Question 8

Assume that you have $100,000 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 valu

Question 9

It is ________ that determines the cost of capital.

Accepted Answer

A)  diversifiable risk 
B)  non-systematic risk 
C)  market risk 
D)  total risk 
A)  diversifiable risk 
B)  non-systematic risk 
C)  market risk 
D)  total risk

Question 10

You currently own $100,000 worth of Wal-Mart stock.Suppose that Wal-Mart has an expected return of 14% and a volatility of 23%.The market portfolio has an expected return of 12% and a volatility of 16%.The risk-free rate is 5%.Assuming the CAPM assumptions hold,what alternative investment has the highest possible expected return while having the same volatility as Wal-Mart? What is the expected return of this portfolio?

Accepted Answer

SD(R_xCML)= xSD(R_Mkt) .23 = x(.16)=> x

Question 11

Which of the following statements is false?

Accepted Answer

A)  The CAPM remains the predominant model used in practice to determine the equity cost of capital. 
B)  Low beta stocks have tended to perform somewhat better than the CAPM predicts. 
C)  The empirically estimated security market line is somewhat steeper than that predicted by the CAPM. 
D)  Some evidence suggests that the market risk premium has declined over time. 
A)  The CAPM remains the predominant model used in practice to determine the equity cost of capital. 
B)  Low beta stocks have tended to perform somewhat better than the CAPM predicts. 
C)  The empirically estimated security market line is somewhat steeper than that predicted by the CAPM. 
D)  Some evidence suggests that the market risk premium has declined over time.

Question 12

Which of the following statements is false?

Accepted Answer

A)  Beta is the expected percent change in the excess return of the security for a 1% change in the excess return of the market portfolio. 
B)  Beta represents the amount by which risks that affect the overall market are amplified for a given stock or investment. 
C)  It is common practice to estimate beta based on the historical correlation and volatilities. 
D)  Beta measures the diversifiable risk of a security, as opposed to its market risk, and is the appropriate measure of the risk of a security for an investor holding the market portfolio. 
A)  Beta is the expected percent change in the excess return of the security for a 1% change in the excess return of the market portfolio. 
B)  Beta represents the amount by which risks that affect the overall market are amplified for a given stock or investment. 
C)  It is common practice to estimate beta based on the historical correlation and volatilities. 
D)  Beta measures the diversifiable risk of a security, as opposed to its market risk, and is the appropriate measure of the risk of a security for an investor holding the market portfolio.

Question 13

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 14

The Canadian S&P/TSX Composite Index is a ________ stock index.

Accepted Answer

A)  price weighted 
B)  return weighted 
C)  risk weighted 
D)  value weighted 
A)  price weighted 
B)  return weighted 
C)  risk weighted 
D)  value weighted

Question 15

Which of the following equations is incorrect?

Accepted Answer

A)  E[RxCML] = rf + x(E[RMkt] + rf) 
B)  ri = rf + b(E[RMkt] - rf) 
C)  SD(RxCML)= xSD(RMkt) 
D)  E[RxCML] = (1 - x)rf + xE[RMkt] 
A)  E[RxCML] = rf + x(E[RMkt] + rf) 
B)  ri = rf + b(E[RMkt] - rf) 
C)  SD(RxCML)= xSD(RMkt) 
D)  E[RxCML] = (1 - x)rf + xE[RMkt]

Question 16

Use the table for the question(s) below.
Consider the following stock price and shares outstanding data:
  
-The market capitalization for Wal-Mart is closest to:

Accepted Answer

A)  $415 billion 
B)  $276 billion 
C)  $479 billion 
D)  $200 billion 
A)  $415 billion 
B)  $276 billion 
C)  $479 billion 
D)  $200 billion

Question 17

Which of the following statements is false?

Accepted Answer

A)  We estimate stock betas in practice by regressing future stock returns on returns of the market portfolio. 
B)  In practice the S&P/TSX Composite Index is used as the market proxy in Canada and the S&P 500 is used in the United States. 
C)  From recent historical data from Statistics Canada, we can estimate the S&P/TSX Composite Index dividend yield to be about 2.4%. 
D)  When evaluating international stocks, it is common practice to use a specific country index or international market index. 
A)  We estimate stock betas in practice by regressing future stock returns on returns of the market portfolio. 
B)  In practice the S&P/TSX Composite Index is used as the market proxy in Canada and the S&P 500 is used in the United States. 
C)  From recent historical data from Statistics Canada, we can estimate the S&P/TSX Composite Index dividend yield to be about 2.4%. 
D)  When evaluating international stocks, it is common practice to use a specific country index or international market index.

Question 18

Assume that you have $100,000 to invest and you are interested in creating a value-weighted portfolio of these four stocks.The number of shares of Wal-Mart that you would hold in your portfolio is closest to:

Accepted Answer

A)  710 
B)  1,390 
C)  1,000 
D)  870 
A)  710 
B)  1,390 
C)  1,000 
D)  870

Question 19

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 project-based WACC,rwacc,for this project is closest to:

Accepted Answer

A)  10.5% 
B)  11.1% 
C)  9.6% 
D)  10.8% 
A)  10.5% 
B)  11.1% 
C)  9.6% 
D)  10.8%

Question 20

The cost of capital of any investment opportunity equals ________ of available investments with the same beta.

Accepted Answer

A)  the realized return 
B)  the expected return 
C)  the level of systematic risk 
D)  the volatility of return 
A)  the realized return 
B)  the expected return 
C)  the level of systematic risk 
D)  the volatility of return

Exam 12: Estimating the Cost of Capital

The yield to maturity of a bond is the ________ an investor will earn from holding the bond to maturity and receiving its promised payments.

If you are interested in creating a value-weighted portfolio of these four stocks,then the percentage amount that you would invest in Lowes is closest to:

Which of the following statements is false?

Use the table for the question(s) below. Consider the following stock price and shares outstanding data: -The total market capitalization for all four stocks is closest to:

Which of the following statements is false?

Which of the following statements is false?

Assume that you have $100,000 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?

It is ________ that determines the cost of capital.

Which of the following statements is false?

Which of the following statements is false?

Which of the following statements is false?

The Canadian S&P/TSX Composite Index is a ________ stock index.

Which of the following equations is incorrect?

Use the table for the question(s) below. Consider the following stock price and shares outstanding data: -The market capitalization for Wal-Mart is closest to:

Which of the following statements is false?

Assume that you have $100,000 to invest and you are interested in creating a value-weighted portfolio of these four stocks.The number of shares of Wal-Mart that you would hold in your portfolio is closest to:

The cost of capital of any investment opportunity equals ________ of available investments with the same beta.

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

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