FIN EXAM 4

Of the options listed below, which is the best example of unsystematic risk?

A national decrease in consumer spending on entertainment

Of the options listed below, which is the best example of systematic risk?

Investors panic causing security prices around the globe to fall precipitously.

Which of the following statements regarding a firm's pretax cost of debt is accurate?

It is based on the current yield to maturity of the company's outstanding bonds.

Which of the following statements is accurate regarding the dividend growth model?

It is only as reliable as the estimated rate of growth.

Which of the following statements regarding the weighted average cost of capital is accurate?

It is the return investors require on the total assets of the firm.

Which one of the following statements related to market efficiency tends to be supported by current evidence?

Markets tend to respond quickly to new information.

Which one of the following is defined by its mean and its standard deviation?

Normal distribution

Assume that last year T-bills returned 2.2 percent while your investment in large-company stocks earned an average of 8.1 percent. Which one of the following terms refers to the difference between these two rates of return?

Risk premium

Which one of the following categories of securities had the highest average annual return for the period 1926-2019?

Small-company stocks

Which of the following statements best describes the principle of diversification?

Spreading an investment across many diverse assets will eliminate some of the total risk.

________ measures total risk, and ________ measures systematic risk.

Standard deviation; beta

Vanessa purchased a stock one year ago and sold it today for $3.15 per share more than her purchase price. She received a total of $2.60 per share in dividends. Which one of the following statements is correct in relation to this investment?

The capital gains yield is positive.

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2019?

U.S. Treasury bills

Standard deviation is a measure of which one of the following?

Volatility

The return earned in an average year over a multiyear period is called the _____ average return

arithmetic

Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest rate is called the:

cost of debt.

Okonjo Economics has a debt-equity ratio of .38. All of the firm's outstanding shares were purchased by a small number of investors. The return these investors require is called the:

cost of equity.

A firm's aftertax cost of debt will increase if there is a(n):

decrease in the company's tax rate.

To convince investors to accept greater volatility, you must:

increase the risk premium.

Assume a firm has a debt-equity ratio of .36. The firm's cost of equity:

is affected by both a change in the firm's beta and the firm's projected rate of growth.

The market risk premium equals the:

market rate of return minus the risk-free rate of return.

If the market is efficient and securities are priced fairly, all securities will have the same:

reward-to-risk ratio.

For any given capital project proposal, the discount rate should be based on the:

risks associated with the use of the funds required by the project.

To determine a firm's cost of capital, one must include:

the returns currently required by both debtholders and stockholders.

An investor who owns a well-diversified portfolio would consider ________ to be irrelevant.

unsystematic risk

Assume Barnes' Boots has a debt-equity ratio of .52. The firm uses the capital asset pricing model to determine its cost of equity. Accordingly, the firm's estimated cost of equity:

is dependent upon a reliable estimate of the market risk premium.

Rafia owns stocks of 15 different companies. Together, the stocks have a value of $78,640. Twelve percent of that total value is from one company, Gambrell & Valdez. The twelve percent figure is called a(n):

portfolio weight.

Buchi owns several financial instruments: stocks issued by seven different companies, plus bonds issued by four different companies. Her investments are best described as a(n):

portfolio.

The ________ is a positively sloped linear function that plots securities' expected returns against their betas.

security market line

You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor often comments on the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best _____ form efficient

semistrong