Chapter 9

Generally, for CAPM calculations, the value to use for the risk-free interest rate is the: A. short-term U.S. Treasury bill rate. B. long-term corporate bond rate. C. medium-term corporate bond rate. D. medium-term average rate on common stocks.

A. short-term U.S. Treasury bill rate.

Which of the following types of projects generally have the highest total risk? A. speculative ventures B. new products C. expansions of existing business D. cost improvements using known technology

A. speculative ventures

The hurdle rate for capital budgeting decisions is: A. the cost of capital. B. the cost of debt. C. the cost of equity. D. the risk-free rate.

A. the cost of capital.

An analyst computes a beta coefficient with a low standard error. This implies that: A. this particular beta is more reliable than most. B. this particular beta has little meaning. C. too few observations were used to compute this particular beta. D. this stock responds less to market changes than most stocks.

A. this particular beta is more reliable than most.

On a graph with common stock returns on the Y-axis and market returns on the X-axis, the slope of the regression line represents: A. alpha B. beta C. R-squared D. standard error

B. beta

Financial slang referring to the reduction of cash flows from a project's forecasted value to its certainty equivalent is a(n): A. deep discount. B. haircut for risk. C. arbitrage profit. D. speculative gain.

B. haircut for risk.

The cost of capital for a project depends on: A. the company's cost of capital. B. the use of the capital (the project). C. the industry cost of capital. D. the company's level of debt financing.

B. the use of the capital (the project).

If a firm uses the same company cost of capital for evaluating all projects, which situation(s) will likely occur? I) The firm will reject good low-risk projects; II) The firm will accept poor high-risk projects; III) The firm will correctly accept projects with average risk A. I only B. I and II only C. I, II, and III D. II only

C. I, II, and III

If a firm uses a project-specific cost of capital for evaluating all projects, which situation(s) will likely occur? I) The firm will accept poor low-risk projects. II) The firm will reject good high-risk projects. III) The firm will correctly accept projects with average risk. A. I only B. II only C. III only D. I, II, and III

C. III only

Using a company's cost of capital to evaluate a project is: I) always correct; II) always incorrect; III) correct for projects that have average risk compared to the firm's other assets A. I only B. II only C. III only D. I and III only

C. III only

The company cost of capital is the appropriate discount rate for a firm's: A. low-risk projects. B. high-risk projects. C. average-risk projects. D. risk-free projects.

C. average-risk projects.

The cost of capital is the same as the cost of equity for firms that are financed: A. entirely by debt. B. by both debt and equity. C. entirely by equity. D. by 50% equity and 50% debt.

C. entirely by equity.

Which of the following types of projects has average total risk? A. speculative ventures B. new products C. expansions of existing business D. cost improvements

C. expansions of existing business

The company cost of capital, when the firm has both debt and equity financing, is called the: A. cost of debt. B. cost of equity. C. the weighted average cost of capital (WACC). D. the return on equity (ROE).

C. the weighted average cost of capital (WACC).

A firm's cost of equity can be estimated using the: I) discounted cash-flow (DCF) approach; II) capital asset pricing model (CAPM); III) arbitrage pricing theory (APT) A. I and II B. I & III C. II & III D. I, II & III

D. I, II & III

A firm might categorize its projects into: I) cost improvements; II) expansion projects (existing business); III) new products; IV) speculative ventures A. III only B. I, II, and III only C. II and IV only D. I, II, III, and IV

D. I, II, III, and IV

Which of the following projects most likely has the lowest cost of capital? A. Construction of a new steel factory B. Investment in latest-technology, high-end television production C. Construction of a luxury resort D. Investment in a gold-mining operation

D. Investment in a gold-mining operation

Which of the following informational updates would prompt a financial manager to use a higher cost of capital to analyze a project? A. Sales estimates from the marketing department have been less accurate of late. B. The treasurer has recently indicated that the firm will increase its use of debt financing. C. The treasurer has recently indicated that the firm will decrease its use of debt financing. D. Recent estimates indicate the project has a greater percentage of fixed costs than previously thought.

D. Recent estimates indicate the project has a greater percentage of fixed costs than previously thought.

One calculates the after-tax weighted average cost of capital (WACC) using which of the following formulas: A. WACC = (rD) (D/V) + (rE) (E/V), where: V = D + E. B. WACC = (rD) (1 - TC) (D/V) + (rE) (1 - TC) (E/V), where: V = D + E. C. WACC = (rD) (D/E) + (rE) (E/D). D. WACC = (rD) (1 - TC) (D/V) + (rE) (E/V), where: V = D + E.

D. WACC = (rD) (1 - TC) (D/V) + (rE) (E/V), where: V = D + E.

A firm's cost of equity can be estimated using the: A. Fama-French three-factor model. B. capital asset pricing model (CAPM). C. arbitrage pricing theory (APT). D. all of the options.

D. all of the options.D. need more information.

Which of the following types of projects has the lowest unique risk? A. speculative ventures B. new products C. expansions of existing business D. cost improvements

D. cost improvements

Company A's historical returns for the past three years were: 6%, 15%, and 15%. Similarly, the market portfolio's returns were: 10%, 10%, and 16%. According to the security market line (SML), Stock A was: A. overpriced. B. underpriced. C. correctly priced. D. need more information.

D. need more information.

An example of diversifiable risk that a financial manager should ignore when analyzing a project's risk would include: A. commodity price changes B. labor costs C. overall stock price fluctuations D. risks of government nonapproval of the project

D. risks of government nonapproval of the project