FIN 3414 - CH 12

Which of the following is generally true about firm betas and industry membership?

Betas are likely to change when a firm changes industries Betas can change even when a firm remains in the same industry.

Which of the following is not a factor that affects beta?

Changes in the market risk premium

The formula for the dividend discount model when the growth rate is zero is ___.

Div/P

what is the CAPM formula?

Expected return = RF + B(RM-RF) RF means risk free rate.B means betaRM means return on market

On what type of returns does the CAPM focus?

Expected returns

If the risk-free rate is 4 percent, the market risk premium is 6 percent, the industry beta is 1.5, and the firm beta is 3, the cost of equity will be ____ percent less if the industry beta is used instead of the firm beta.

Reason: (1.5 - 3) × 6% = -9%

Suppose a firm has a target debt-equity ratio of 2.5. What is the firm's target capital structure weight for common stock?

Reason: S/(S + B) = 1/3.5 = 28.57%

Which of the following variables do we need to compute the beta for a company's stock?

The covariance between the stock and the market index's returns. The variance of the market index's returns.

According to the CAPM, what is the expected return on a stock if its beta is equal to zero?

The risk-free rate

Which of the following are true about U.S. Treasury instruments?

They are not expected to default at this time. They have never defaulted.

True or false: The CAPM focuses on expected returns.

True

Which of the following is true?

Under US tax law, a corporation's interest payments are tax deductible.

The slope of the characteristic line of a firm's returns versus those of the market is the ___.

beta

The beta is calculated as the

covariance of a security with the market divided by the variance of the market.

U.S. Treasury securities considered to be risk-free because they have minimal, if any, ____ risk.

default

The rate used to discount project cash flows is known as the ___.

discount rate required return cost of capital

The difference between the expected return on the market portfolio and the riskless rate is known as the

market risk premium. expected excess market return.

The sales of cyclical firms are ______ sensitive to the business cycle than are the sales of non-cyclical firms.

more

A project should only be accepted if its return is above what is ___.

required by investors

The ____ of the characteristic line of a stock's returns versus those of the market measures the stock's systematic risk.

slope

The cost of capital is an appropriate name since a project must earn enough to pay those who ______ the capital.

supply Reason: The cost of capital is an appropriate name since a project must earn enough to pay those who supply the capital.