Unit 3 - Milestone 3

The capital asset pricing model is useful for __________.

assessing the ratio between risk and return on an investment

If a portfolio regularly falls twice as much as a benchmark index rises, the portfolio's beta coefficient is __________.

-2.0%

Curtis purchased stock with an initial share price of $140, and sold it when the share price was $119. While he owned the stock, he earned $10 in dividends. What was his total percentage return on the investment?

-7.86%

Calculate a company's total leverage given the following information: Change in sales = 7% Change in earnings = 10%

1.43

One reason a company may choose to issue additional debt instead of equity when raising capital is that __________.

debt interest payments are tax-deductible

Using the following variables, calculate an organization's cost of debt on a $500,000 bond. Rf: 1% credit-risk rate: 5% t: 15%

$25,500

You invest $1,000 in a stock that has a 15% chance of a 1% return, a 60% chance of a 5% return and a 25% chance of a 7% return. What is your expected return after one year?

4.9%

You own a small manufacturing business that produces widgets. You have spent $100,000 acquiring the fixed assets you need to produce widgets. Each widget costs you $4 to make and they sell for $22 each, so your variable cost is 18.2% of the overall revenue. At your current level of operating leverage, how many widgets must you sell to break even?

5,556

Select the true statement about the bankruptcy process.

A Chapter 11 bankruptcy can be quite complicated and can take a long time to complete.

What is the benefit of choosing an exchange-traded fund over an individual stock?

An exchange-traded fund is diversified and therefore carries less risk than an individual stock.

Company A Market Value of Equity $250,000 Market Value of Debt $600,000 Cost of Equity 8% Cost of Debt 2% Tax Rate 35% Company B Market Value of Equity $200,000 Market Value of Debt $500,000 Cost of Equity 10% Cost of Debt 2% Tax Rate 30% Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 5%?

Both Company A and Company B

What is the combination of debt and equity used by a company to finance its activities known as?

Capital structure

A successful ride-sharing company has decided to raise money for its second phase of expansion by issuing shares of stock and becoming a publicly-traded company, so they create a prospectus for potential investors. What type of stock market transaction is taking place?

IPO

Which of the following is true of systematic risk?

It is the risk associated with a general downward turn of the market or a market segment.

As a securities dealer, Patrick is able to easily know and compare the prices of stocks, which are now consolidated in a national market system. Which federal regulation established this process?

Securities Act Amendments of 1975

Which of the following is a tenet of strong-form efficiency?

Share prices respond immediately to all information, whether public or private.

A security that falls above the security market line has __________.

a high expected return and a low price

The risk that a bank will receive less interest from a lending product than it originally anticipated is known as __________.

prepayment risk

A stock's beta, which can be affected by surprise news or announcements, is a measure of its __________ in relation to a benchmark like an index fund.

volatility