Question 1

California Gold Mining's beta with the market is closest to:

Accepted Answer

A)  0.9 
B)  1.25 
C)  -0.9 
D)  -1.25 
A)  0.9 
B)  1.25 
C)  -0.9 
D)  -1.25

Question 2

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 1,then KT's project-based WACC,rwacc,for this project is closest to:

Accepted Answer

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

Question 3

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' beta with the market is closest to:

Accepted Answer

A)  1.3 
B)  1.0 
C)  0.6 
D)  0.8 
A)  1.3 
B)  1.0 
C)  0.6 
D)  0.8

Question 4

California Gold Mining's required return is closest to:

Accepted Answer

A)  -5% 
B)  13% 
C)  15% 
D)  5% 
A)  -5% 
B)  13% 
C)  15% 
D)  5%

Question 5

The capital market line (CML)represents the highest expected return available for ________ level of volatility.

Accepted Answer

A)  any 
B)  a zero 
C)  a high 
D)  a low 
A)  any 
B)  a zero 
C)  a high 
D)  a low

Question 6

Which of the following statements is false?

Accepted Answer

A)  The risk premium of a security is equal to the market risk premium (the amount by which the market's expected return exceeds the risk-free rate), divided by the amount of market risk present in the security's returns measured by its beta with the market. 
B)  We refer to the beta of a security with the market portfolio simply as the security's beta. 
C)  There is a linear relationship between a stock's beta and its expected return. 
D)  A security with a negative beta has a negative correlation with the market, which means that this security tends to perform well when the rest of the market is doing poorly. 
A)  The risk premium of a security is equal to the market risk premium (the amount by which the market's expected return exceeds the risk-free rate), divided by the amount of market risk present in the security's returns measured by its beta with the market. 
B)  We refer to the beta of a security with the market portfolio simply as the security's beta. 
C)  There is a linear relationship between a stock's beta and its expected return. 
D)  A security with a negative beta has a negative correlation with the market, which means that this security tends to perform well when the rest of the market is doing poorly.

Question 7

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 amount that Tom should invest in the market portfolio to maximize his expected return is closest to:

Accepted Answer

A)  72% 
B)  92% 
C)  110% 
D)  140% 
A)  72% 
B)  92% 
C)  110% 
D)  140%

Question 8

Use the information for the question(s) below.
The Aardvark Corporation is considering launching a new product and is trying to determine an appropriate discount rate for evaluating this new product. Aardvark has identified the following information for three single division firms that offer products similar to the one Aardvark is interested in launching:
  
-Based upon the three comparable firms,calculate that most appropriate unlevered cost of capital for Aardvark to use on this new product.

Accepted Answer

The answer of Use the information for the question(s) below.
The...

Question 9

Use the table for the question(s) below.
Consider the following three individuals' portfolios consisting of investments in four stocks:
  
-Assuming that the risk-free rate is 4% and the expected return on the market is 12%,then required return on Peter's portfolio is closest to:

Accepted Answer

A)  10% 
B)  12% 
C)  9% 
D)  8% 
A)  10% 
B)  12% 
C)  9% 
D)  8%

Question 10

Use the information for the question(s) below.
The Aardvark Corporation is considering launching a new product and is trying to determine an appropriate discount rate for evaluating this new product. Aardvark has identified the following information for three single division firms that offer products similar to the one Aardvark is interested in launching:
  
-The unlevered cost of capital for Anteater Enterprises is closest to:

Accepted Answer

A)  10.1% 
B)  9.5% 
C)  9.9% 
D)  10.3% 
A)  10.1% 
B)  9.5% 
C)  9.9% 
D)  10.3%

Question 11

Which of the following statements is false?

Accepted Answer

A)  The imperfections in the CAPM may be critical in the context of capital budgeting and corporate finance, where errors in estimating the cost of capital are likely to be far more important than small discrepancies in the project cash flows. 
B)  To estimate the expected market risk premium we can look at the historical average excess return of the market over the risk-free interest rate. 
C)  The highest beta stocks have tended to underperform what the CAPM predicts. 
D)  Given an assessment of an index's future cash flows, we can estimate the expected return of the market by solving for the discount rate that is consistent with the current level of the index. 
A)  The imperfections in the CAPM may be critical in the context of capital budgeting and corporate finance, where errors in estimating the cost of capital are likely to be far more important than small discrepancies in the project cash flows. 
B)  To estimate the expected market risk premium we can look at the historical average excess return of the market over the risk-free interest rate. 
C)  The highest beta stocks have tended to underperform what the CAPM predicts. 
D)  Given an assessment of an index's future cash flows, we can estimate the expected return of the market by solving for the discount rate that is consistent with the current level of the index.

Question 12

If there is a significant risk that the firm will default on its obligation,________ of the firm's debt,which is promised return,will ________ investors' expected return.

Accepted Answer

A)  the risk level; overstate 
B)  the yield to maturity; understate 
C)  the risk level; understate 
D)  the yield to maturity; overstate 
A)  the risk level; overstate 
B)  the yield to maturity; understate 
C)  the risk level; understate 
D)  the yield to maturity; overstate

Question 13

The ________ for a project will depend on the characteristics of both the project and the firm.

Accepted Answer

A)  maximum leverage 
B)  minimum leverage 
C)  nominal leverage 
D)  optimal leverage 
A)  maximum leverage 
B)  minimum leverage 
C)  nominal leverage 
D)  optimal leverage

Question 14

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 15

Which of the following statements is false?

Accepted Answer

A)  Many practitioners prefer to use average industry betas rather than individual stock betas. 
B)  When estimating beta by using past returns it is best to use the longest time horizon of returns available. 
C)  The CAPM predicts that a security's expected return depends on its beta with regard to the market portfolio of all risky investments available to investors. 
D)  If we use too short a time horizon when estimating beta, our estimate of beta will be unreliable. 
A)  Many practitioners prefer to use average industry betas rather than individual stock betas. 
B)  When estimating beta by using past returns it is best to use the longest time horizon of returns available. 
C)  The CAPM predicts that a security's expected return depends on its beta with regard to the market portfolio of all risky investments available to investors. 
D)  If we use too short a time horizon when estimating beta, our estimate of beta will be unreliable.

Question 16

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/TSX Composite Index is the standard portfolio used to represent "the market" when using the CAPM in practice. 
C)  Even though the S&P/TSX Composite Index includes only 244 Canadian stocks, it represents about 95% of the Canadian stock market in terms of market capitalization. 
D)  The S&P/TSX Composite Index is an equal-weighted portfolio of the largest Canadian stocks. 
A)  A market index reports the value of a particular portfolio of securities. 
B)  The S&P/TSX Composite Index is the standard portfolio used to represent "the market" when using the CAPM in practice. 
C)  Even though the S&P/TSX Composite Index includes only 244 Canadian stocks, it represents about 95% of the Canadian stock market in terms of market capitalization. 
D)  The S&P/TSX Composite Index is an equal-weighted portfolio of the largest Canadian stocks.

Question 17

Which of the following statements is false?

Accepted Answer

A)  The beta of a security is the ratio of its volatility due to market risk to the volatility of the market as a whole. 
B)  Under the CAPM assumptions, the market portfolio is efficient, so beta is the appropriate measure of risk to determine a security's risk premium. 
C)  Under the CAPM assumptions, we can identify the efficient portfolio: it is equal to the market portfolio. 
D)  We can determine the expected return for a security and the cost of capital of an investment opportunity by using the risk-free investment as a benchmark. 
A)  The beta of a security is the ratio of its volatility due to market risk to the volatility of the market as a whole. 
B)  Under the CAPM assumptions, the market portfolio is efficient, so beta is the appropriate measure of risk to determine a security's risk premium. 
C)  Under the CAPM assumptions, we can identify the efficient portfolio: it is equal to the market portfolio. 
D)  We can determine the expected return for a security and the cost of capital of an investment opportunity by using the risk-free investment as a benchmark.

Question 18

The beta for the market portfolio is closest to:

Accepted Answer

A)  1 
B)  0 
C)  Unable to answer this question without knowing the market's expected return. 
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 market's expected return. 
D)  Unable to answer this question without knowing the market's volatility.

Question 19

Which of the following statements is false?

Accepted Answer

A)  Because of the higher and uncompensated risk involved, no investor should choose a portfolio with a negative alpha. 
B)  Because the average portfolio of all investors is the market portfolio, the average alpha for all investors is zero. 
C)  The market portfolio can be inefficient if a significant number of investors misinterpret information and believe they are earning a positive alpha when they are actually earning a negative alpha. 
D)  If no investor earns a positive alpha, then no investor can earn a negative alpha, and the market portfolio must be efficient. 
A)  Because of the higher and uncompensated risk involved, no investor should choose a portfolio with a negative alpha. 
B)  Because the average portfolio of all investors is the market portfolio, the average alpha for all investors is zero. 
C)  The market portfolio can be inefficient if a significant number of investors misinterpret information and believe they are earning a positive alpha when they are actually earning a negative alpha. 
D)  If no investor earns a positive alpha, then no investor can earn a negative alpha, and the market portfolio must be efficient.

Question 20

Assume that the S&P/TSX Composite Index 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%

Exam 12: Estimating the Cost of Capital

California Gold Mining's beta with the market is closest to:

California Gold Mining's required return is closest to:

The capital market line (CML)represents the highest expected return available for ________ level of volatility.

Which of the following statements is false?

Use the table for the question(s) below. Consider the following three individuals' portfolios consisting of investments in four stocks: -Assuming that the risk-free rate is 4% and the expected return on the market is 12%,then required return on Peter's portfolio is closest to:

Which of the following statements is false?

If there is a significant risk that the firm will default on its obligation,________ of the firm's debt,which is promised return,will ________ investors' expected return.

The ________ for a project will depend on the characteristics of both the project and the firm.

Which of the following statements is false?

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 market portfolio is closest to:

Which of the following statements is false?

Assume that the S&P/TSX Composite Index 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:

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

If there is a significant risk that the firm will default on its obligation, of the firm's debt,which is promised return,will investors' expected return.