FIN351 Final Exam

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 is the main advantage of using the dividend growth model to estimate a firm's cost of equity?

The simplicity of the model

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

The market risk premium equals the:

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

The excess return is computed as the:

return on a risky security minus the risk-free rate.

The security market line intercepts the vertical axis at the:

risk-free rate

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

the returns currently required by both debtholders and stockholders.

To convince investors to accept greater volatility, you must:

Increase the risk premium

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

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

Which of the following statements regarding unsystematic risk is accurate?

It can be effectively eliminated by portfolio diversification

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

U.S. Treasury bills

When calculating a firm's weighted average cost of capital, the capital structure weights:

are based on the market values of the outstanding securities.

FisherCo is intending to invest in a new project. The ________ is the minimum rate of return the firm will accept on this project.

cost of capital

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

The most important reason to diversify a portfolio is to:

eliminate asset-specific risk

While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 percent figure is called the:

expected return

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.

Given a well-diversified stock portfolio, the variance of the portfolio:

may be less than the variance of the least risky stock in the portfolio

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.

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

security market line

The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than _____ form efficient.

strong

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

Normal distribution

________ measures total risk, and ________ measures systematic risk.

Standard deviation; beta