FIN

If a firm has low fixed costs relative to all other firms in the same industry, a large change in sales volume (either up or down) would have:

a smaller change in EBIT for the firm versus the other firms.

Two stock market based costs of liquidity that affects the cost of capital are the:

bid-ask spread and the market impact costs.

The CAPM

explicitly adjusts for risk; applies to companies that do not pay dividends; and applies to companies that have dividend growth that is hard to estimate.

Comparing two otherwise equal firms, the beta of the common stock of a levered firm is ____________ than the beta of the common stock of an unlevered firm.

greater

Firms whose revenues are strongly cyclical and whose operating leverage is high are likely to have:

high betas.

A firm with high operating leverage has:

high fixed costs in its production process.

The following are methods to estimate the market risk premium:

use historical data to estimate future risk premium and use the dividend discount model to estimate risk premium

The WACC is used to _______ the expected cash flows when the firm has _______.

A. discount; debt and equity in the capital structure

When valuing an entire firm with both debt and equity, the basic starting point in choosing a discount rate is:

B. CAPM.

Beta is useful in the calculation of the

B. company's discount rate.

The formula for calculating beta is given by the dividing the ___________ of the stock with the market portfolio by the ___________ of the market portfolio.

B. covariance; variance

If the CAPM is used to estimate the cost of equity capital, the expected excess market return is equal to the:

B. difference between the return on the market and the risk-free rate.

The present value of cash flows is important in

B. discounted cash flow analysis

Companies that have highly cyclical sales will have a:

B. high beta if sales are highly dependent on the market cycle.

Betas may vary substantially across an industry. The decision to use the industry or firm beta to estimate the cost of capital depends on:

B. how similar the firm's operations are to the operations of all other firms in the industry.

The weighted average cost of capital for a firm is the:

B. overall rate which the firm must earn on its existing assets to maintain the value of its stock.

If the risk of an investment project is different than the firm's risk then

B. you must adjust the discount rate for the project based on the project risk.

Regression analysis can be used to estimate

Beta

All else equal, a more liquid stock will have a lower ________.

Both beta and cost of capital.

An industry is likely to have a low beta if the:

Both stream of revenues is stable and less volatile than the market; and market for its goods is unaffected by the market cycle.

The use of WACC to select investments is acceptable when the:

C. risks of the projects are equal to the risk of the firm.

The beta of a firm is determined by which of the following firm characteristics?

D. All of these.

Using the CAPM to calculate the cost of capital for a risky project assumes that:

D. Both using the firm's beta is the same measure of risk as the project; and the firm is all-equity financed.

Beta measures depend highly on the:

D. covariance of the security with the market and how they are correlated.

The beta of a security provides an:

D. estimate of the systematic risk of the security.

When using the cost of debt, the relevant number is the:

D. post-tax cost of debt, since interest is tax deductible.

The problem of using the overall firm's beta in discounting projects of different risk is the:

E. Both firm would accept too many high-risk projects; and firm would reject too many low risk projects.

The weighted average of the firm's costs of equity, preferred stock, and after tax debt is the:

E. weighted average cost of capital (WACC).

The beta of a firm is more likely to be high under what two conditions?

High cyclical business activity and high operating leverage