FINAL EXAM FINANCE SPRING 22

Which of the following are tax-deductible to the firm? A.) Dividends paid on preferred stock. B.) Principal amounts paid on debt. C.) Dividends paid on common stock. D.) Coupon interest paid on bonds.

D.) Coupon interest paid on bonds.

The total dollar return is the sum of dividends and __________. A.) Overall market fluctuations. B.) Capital gains or losses. C.) Government payouts. D.) Percentage returns.

B.) Capital gains or losses.

The ____ coefficient is the amount of systematic risk present in a particular risky asset relative to that in an average asset.

beta

The _____ gains yield can be found by taking the difference between the ending stock price and the initial stock price and dividing it by the initial stock price.

Capital

What does WACC stand for? A.) Weighted average cost of capital. B.) Working amount of corporate cash. C.) Working amount of corporate cost. D.) Weighted average company cost.

A.) Weighted average cost of capital.

Finding a firm's overall cost of equity is ______ (straightforward/difficult).

difficult

The ____ risk principle argues that the market does not reward unnecessary risk that is taken on by the investor.

systematic

An efficient market is one in which any change in available information will be reflected in the company's stock price ___. A.) In a day. B.) In two days. C.) Immediately. D.) At least within a week.

C.) Immediately.

Geometric averages are ______ arithmetic averages. A.) The same as. B.) Larger than. C.) Smaller than.

C.) Smaller than.

A capital gain on a stock results from an increase in ______. A.) The dividend. B.) The coupon rate. C.) Stock price.

C.) Stock price.

The risk-free asset has a beta of _____. A.) 0.75 B.) 0.00 C.) 3.00 D.) 1.00

B.) 0.00

Based on average historical returns shown in the text, small-company stocks increased in value by _____ percent in a typical year. A.) 2. B.) 16. C.) 8. D.) 30.

B.) 16.

More volatility in returns produces ______ difference between the arithmetic and geometric averages. A.) A smaller. B.) A larger. C.) No change in the.

B.) A larger.

The market value cost of debt is often ____ the book value cost of debt. A.) Lower than. B.) Higher than. C.) Similar to.

C.) Similar to.

What is the expected return on a security with beta of 1? A.) 0% B.) The risk-free rate of return. C.) The expected return on the market. D.) 1%

C.) The expected return on the market.

Using the SML approach, what is the expected return on a stock if its beta is equal to zero? A.) The market-risk premium. B.) The return on the market minus the risk-free rate. C.) The risk-free rate. D.) Zero.

C.) The risk-free rate.

Finding a firm's overall cost of equity is difficult because _____. A.) It extensively requires the use of differential equations. B.) There is no way to estimate it. C.) There is no way of directly observing the return that the firm's equity investors require on their investment. D.) The federal government refuses to disclose equity costs unless the firm is in the real estate sector.

C.) There is no way of directly observing the return that the firm's equity investors require on their investment.

The SML approach requires estimates of the _____. - Cost of equity capital. - Market risk premium. - Beta coefficient. - Cost of debt capital.

- Market risk premium. - Beta coefficient.

The risk of owning an asset comes from: - Surprises. - Forecasts. - Unanticipated events. - Expectations.

- Unanticipated events. - Surprises.

The formula for the required return from the SML is: A.) RE = Rf + B(RM-Rf) B.) RE = Rf + B/(RM-Rf) C.) RE = Rf - B(RM-Rf)

A.) RE = Rf + B(RM-Rf)

Systematic risk will ____ when securities are added to a portfolio. A.) Increase. B.) Not change. C.) Decrease. D.) Be eliminated.

B.) Not change.

A project should only be accepted if its return is above what is ___. A.) Company policy. B.) Mandated by law. C.) Socially accpetable. D.) Required by investors.

D.) Required by investors.

The principle of diversification tells us that spreading an investment across a number of assets will eliminate _____ of the risk. A.) An insignificant portion. B.) All. C.) Almost none. D.) Some.

D.) Some.

The principle of diversification tells us that, to a diversified investor, the only type of risk that matters is _____ (systematic/unsystematic) risk.

Systematic

The dividend _____ is defined as the annual dividend amount divided by the beginning stock price.

Yield

A firm's overall cost of capital will include both its cost of ____ capital and equity capital.

debt

The cost of _____ can be observed because it is the interest rate the firm must pay on new loans.

debt

The ___ _ return is the return that an investor will probably earn on a risky asset in the future.e

expected

The ____ (greater/lower) the risk, the greater the required return.

greater

The first step to calculate the variances of the returns on two stocks is to determine the ____ deviations from the expected return.

square

Capital _____ weights can be interpreted just like portfolio weights.

structure

For a well-diversified portfolio, the ____ risk is negligible. - unsystematic. - market. - unique. - diversifiable. - systematic.

- Unsystematic. - Unique. - Diversifiable.

Place the steps in the computation of variance in the correct order from the first step to the last step. - Multiply each squared deviation by its probability. - Calculate the expected return. - The result is the variance. - Determine the squared deviation from the expected return.

1.) Calculate the expected return. 2.) Determine the squared deviation from the expected return. 3.) Multiply each squared deviation by its probability. 4.) The result is the variance.

The standard deviation is the ______ of the variance. A.) Square root. B.) Inverse. C.) Square. D.) Exponent.

A.) Square root.

The systematic risk principle argues that the market does not reward risks _____. A.) That are borne unnecessarily. B.) That are dangerous. C.) That are systematic. D.) In any circumstances.

A.) That are borne unnecessarily.

When a company declares a dividend, shareholders generally receive ______. A.) Store credit. B.) Cash. C.) Promissory notes. D.) Interest income.

B.) Cash

During the financial crisis of 2008, the S&P 500 Index fell by _____ percent. A.) 16. B.) 10. C.) 52. D.) 37.

D.) 37.

Asset A has an expected return of 17 percent and standard deviation of 5 percent. Asset B has an expected return of 15 percent and standard deviation of 5 percent. Which asset would a rational investor choose? A.) Neither A or B since they are both risky. B.) Asset A or B since they both are equally risky. C.) Asset B. D.) Asset A.

D.) Asset A.

If you buy a stock for $10 and later sell it for $16, you will have a ____. A.) Capital gain on $16. B.) Dividend of $6. C.) Capital loss of $6. D.) Capital gain of $6.

D.) Capital gain of $6.

Based on the historical returns shown in the text, the average ____ was 2.9 percent per year over the 94-year span depicted.

Inflation

The percentage of a portfolio's total value that is invested in a particular asset is the portfolio ___ .

Weight

The second lesson from capital market history is that there is a direct link between ______ and rewarded.

risk

In an efficient market: -It is easy to find stocks that are under- or over-valued. -All investments are zero NPV investments. -Assets are priced at the present value of their future cash flows.

-All investments are zero NPV investments. -Assets are priced at the present value of their future cash flows.

Which of the following are ways to make money by investing in stocks? (Select all that apply.) - Dividends. - Amortization. - Interest. - Capital gains.

-Capital gains -Dividends

Preferred stock ___. -Pays dividends in perpetuity. -Has a fixed maturity. -Does not pay dividends. -Pays a constant dividend.

-Pays dividends in perpetuity. -Pays a constant dividend.

Which type of risk is unaffected by adding securities to a portfolio? A.) Systematic risk. B.) Both systematic and unsystematic risk. C.) Unsystematic risk. D.) Neither systematic nor unsystematic risk.

A.) Systematic risk.

In an efficient market, firms should expect to receive ______ value for securities they sell. A.) Less than fair. B.) More than fair. C.) Fair.

C.) Fair.

The second lesson from studying capital market history is that risk is _____. A.) Handsomely rewarded. B.) Largely ignored. C.) Always detrimental to returns. D.) To be avoided altogether.

A.) Handsomely rewarded.

The capital gains yield can be found by finding the difference between the ending stock price and the initial stock price and dividing it by the ______. A.) Ending stock price. B.) Initial stock price. C.) Dividend yield. D.) Cost of capital.

B.) Initial stock price.

What is the definition of expected return? A.) It is the variation in return during the last period. B.) It is the return that an investor expects to earn on a risky asset in the future. C.) It is the expected variation in return on a risky asset. D.) It is the return that was earned in the past on a risky asset.

B.) It is the return that an investor expects to earn on a risky asset in the future.

The cost of capital is an appropriate name since a project must earn enough to pay those who ______ the capital. A.) Mandate. B.) Supply. C.) Use. D.) Oversee.

B.) Supply.

MNO preferred stock pays a dividend of $2 per year and has a price of $20. If MNO's tax rate is 21 percent, the required rate of return on its preferred stock is found by which formula? A.) $20-$2 B.) $2/.21 C.) $20/.21 D.) $2/$20

D.) $2/$20

If a security's expected return is equal to the expected return on the market, its beta must be ____. A.) -1 B.) 2 C.) 0 D.) 1

D.) 1

If a security's expected return is equal to the expected return on the market, its beta must be ____. A.) 2 B.) 0 C.) -1 D.) 1

D.) 1

True or false: The process to calculate a portfolio's beta is opposite of the process to calculate a portfolio's expected return. A.) True B.) False

B.) False

The total dollar return on a stock is the sum of the ____ and the _____. A.) Capital gains; interest payments B.) Interest payments; dividends C.) Dividends; capital gains

C.) Dividends; Capital gains

Which of the following are examples of unsystematic risk? -Changes in the federal tax code. -The expected rate of inflation next year. -Labor strikes. -Changes in management.

-Labor strikes. -Changes in management.

Which one of the following is true? A.) Under U.S. tax law, a corporation's interest payments are deductible for tax purposes. B.)Under U.S. tax law, all company interest payments are taxable to the company.

A.) Under U.S. tax law, a corporation's interest payments are deductible for tax purposes.

Kate Corporation has discovered a very secret new product, but hasn't yet announced the discovery to the public. If the stock price reacts before the announcement (assuming no corporate "leaks"), the market is _____ form efficient. A.) Strong. B.) Semistrong. C.) Weak.

A.) Strong.

The ___ is the squared standard deviation.

variance

The weighted average of the standard deviations of the assets in Portfolio C is 12.9%. Which of the following are possible values for the standard deviation of the portfolio? - 14.9% - 10.9% - 12.9%

- 10.9% - 12.9%

Which of the following are true? - Book values are often similar to market values for debt. - Ideally, we should use book values in the WACC. - Book values are often similar to market values for equity. - Ideally, we should use market values in the WACC.

- Book values are often similar to market values for debt. - Ideally, we should use market values in the WACC.

The rate used to discount project cash flows is known as the ___. - Market rate. - Cost of capital. - Discount rate. - Required return.

- Cost of capital. - Discount rate. - Required return.

Which of the following are components used in the construction of the WACC? - Cost of accounts payable. - Cost of debt. - Cost of preferred stock. - Cost of common stock.

- Cost of debt. - Cost of preferred stock. - Cost of common stock.

According to the CAPM, which of the following events would affect the return on a risky asset? -A change in the company's leadership. -Federal reserve actions that affect the economy. -A change in the yield on T-bills. -A fire in the company's plant. -A strengthening of the country's currency.

- Federal reserve actions that affect the economy. - A change in the yield on T-bills. - A strengthening of the country's currency.

Studying market history can reward us by demonstrating that _____ - on average, investors will earn a reward for bearing risk. -the greater the potential reward is, the lower the risk. -the stock market is nothing but a casino. -the greater the potential reward is, the greater the risk.

- on average, investors will earn a reward for bearing risk. - on average, investors will earn a reward for bearing risk.

What can we say about the dividends paid to common and preferred stockholders? -Dividends to preferred stockholders are fixed. -Dividends are guaranteed for both preferred and common stockholders. -Preferred stock dividends change every year based on the earnings of the firm. -Dividends to common stockholders are not fixed.

-Dividends to preferred stockholders are fixed. -Dividends to common stockholders are not fixed.

Which of the following are examples of a portfolio? -Holding $100,000 in cash to buy after five years 100 shares of the best performing stock on the NYSE. -Investing $100,000 in a combination of U.S. and Asian stocks. -Investing $100,000 in the stocks of 50 publicly traded corporations. -Holding $100,000 investment in a combination of stocks and bonds.

-Investing $100,000 in a combination of U.S. and Asian stocks. -Investing $100,000 in the stocks of 50 publicly traded corporations. -Holding $100,000 investment in a combination of stocks and bonds.

As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk? -It is likely to decrease. -It will not change. -It is likely to increase. -It may eventually be almost totally eliminated.

-It is likely to decrease. -It may eventually be almost totally eliminated.

Match the forms of market efficiency with their descriptions. 1.) Strong form efficiency 2.) Semi-strong form efficiency 3.) Weak from efficiency

1.) It implies that all information of every kind is reflected in stock prices. 2.) It is the most controversial, and all public information is reflected in the stock price. 3.) It suggests that, at a minimum, the current price of a stock reflects the stock's own past prices.

Arrange the following investments from highest to lowest return based on what our study of capital market history has revealed about risk premiums. -Small-company common stock -Long-term corporate bonds -U.S. Treasury bills

1.) Small-company common stock 2.) Long-term corporate bonds 3.) U.S. Treasury bills

Including preferred stock in the WACC adds the term: A.) (P/V) × RP B.) (V/P) × RP C.) [P/(E + D)] × RP

A.) (P/V) × RP

By definition, what is the beta of the average asset equal to? A.) 1 B.) 0 C.) 2 D.) Between 0 and 1.

A.) 1

A projected IRR on a risky investment in the _____ percent range is not unusual. A.) 10 to 20. B.) 25 to 35. C.) 20 to 25.

A.) 10 to 20.

The WACC is the weighted average of the cost of equity and the _____. A.) Aftertax cost of debt. B.) Inflation risk premium. C.) Beta multiplier. D.) Before-tax cost of debt.

A.) Aftertax cost of debt.

Dividends are the ______ component of the total return from investing in a stock. A.) Income. B.) Capital gains. C.) Price appreciation. D.) Amortization.

A.) Income.

Mona Corporation has a variance of returns of 343, while Scott Corporation has a variance of returns of 898. Which company's actual returns vary more from their mean return? A.) Scott Corporation. B.) Mona Corporation.

A.) Scott Corporation.

Assets A and B each have an expected return of 10 percent. Asset A has a standard deviation of 12 percent while Asset B has a standard deviation of 13 percent. Which asset would a rational investor choose? A.) Either Asset A or B since they both offer the same expected return. B.) Asset A. C.) Asset B. D.) Neither Asset A nor B since they are both risky.

B.) Asset A.

If you are forecasting a few decades in the future (as you might do for retirement planning) you should calculate the expected return using: A.) The geometric average. B.) Blume's formula. C.) The arithmetic average.

B.) Blume's formula.

WACC is used to discount ____. A.) News. B.) Cash flows. C.) Political unrest. D.) Common stock dividends.

B.) Cash flows.

The two potential ways to make money as a stockholder are through ______ and capital appreciation. A.) Coupon payments. B.) Dividends. C.) Bankruptcy distributions. D.) Interest payments.

B.) Dividends.

True or false: Systematic risk can be eliminated by diversification A.) True B.) False

B.) False

True or false: Based on capital market history, market efficiency shows us that it is relatively simple to identify stocks that are incorrectly priced. A.) True. B.) False.

B.) False.

The underlying key assumption, and oftentimes a key disadvantage, of the dividend growth model is that it assumes the dividend _____. A.) Grows at a stair-step rate. B.) Grows at a constant rate. C.) Is constant.

B.) Grows at a constant rate.

Stock prices fluctuate from day to day because of _____. A.) Conspiracies. B.) Information flow. C.) Manipulators. D.) Inefficiencies.

B.) Information flow.

Which of the following is true? A.) A company can deduct interest paid on debt when computing taxable income. B.) A company can deduct dividends paid to shareholders when computing taxable income. C.) A company can deduct interest paid on debt when computing taxable income.

C.) A company can deduct interest paid on debt when computing taxable income.

The calculation of a portfolio beta is similar to the calculation of _____. A.) A portfolio's standard deviation. B.) The value of a put option. C.) A portfolio's expected return. D.) A portfolio's variance

C.) A portfolio's expected return

Based on the capital asset pricing model (CAPM) there is generally ___ relationship between beta and the expected return on a security. A.) A negative. B.) No relationship. C.) A positive.

C.) A positive.

The dividend yield for a 1-year period is equal to the annual dividend amount divided by the ______. A.) Ending stock price. B.) Average of the beginning and ending stock prices. C.) Beginning stock price.

C.) Beginning stock price.

The two potential ways to make money as a stockholder are through ______ and capital appreciation. A.) Coupon payments. B.) Bankruptcy distributions. C.) Dividends. D.) Interest payments.

C.) Dividends

The expected return on the market will increase if the risk-free rate _________ or if the market risk premium _____. A.) Decreases; decreases. B.) Decreases; increases. C.) Increases; increases. D.) Increases; decreases.

C.) Increases; increases.

An efficient market is one that fully reflects all available ______. A.) Investments. B.) Redundancies. C.) Information. D.) Inefficiencies.

C.) Information.

What is unsystematic risk? A.) It is a risk that is always caused by external factors. B.) It is a risk that affects all the assets in a diversified portfolio. C.) It is a risk that affects a single asset or a small group of assets. D.) It is a risk that is unavoidable.

C.) It is a risk that affects a single asset or a small group of assets.

In general, the arithmetic average return is probably too _____ (low/high) for longer periods and the geometric average is probably too _____ (low/high) for shorter periods. A.) high; high. B.) low; high. C.) high; low. D.) low; low.

C.) high; low.

Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio _____. A.) Fluctuates randomly. B.) Increases. C.) Does not change. D.) Declines.

D.) Declines.

What does the security market line depict? A.) It depicts the relationship between systematic risk and unsystematic risk. B.) It depicts the relationship between the return on the S&P 500 and an individual security's return. C.) It depicts the relationship between expected return and the standard deviation of returns. D.) It is a graphical depiction of the capital asset pricing model. It shows the relationship between expected return and beta.

D.) It is a graphical depiction of the capital asset pricing model. It shows the relationship between expected return and beta.

What is the required return on a stock (RE), according to the constant dividend growth model, if the growth rate (g) is zero? A.) RE = P0/D1 B.) RE = D0 - P1 C.) RE = D0 + P1 D.) RE = D1/P0

D.) RE = D1/P0

What is the slope of the security market line (SML)? A.) The expected return on the market plus the risk-free rate of return. B.) The risk-free rate of return. C.) The expected return on market. D.) The market-risk premium.

D.) The market-risk premium.

According to the capital asset pricing model (CAPM), what is the expected return on a security with a beta of zero? A.) Zero. B.) The market risk premium. C.) The return on market. D.) The risk-free rate of return.

D.) The risk-free rate of return.

The true risk of any investment is the _____ portion. A.) Risk-free. B.) Anticipated. C.) Compounding. D.) Unanticipated.

D.) Unanticipated.

The efficient markets hypothesis contends that _____ capital markets such as the NASDAQ are efficient. A.) Monopolized. B.) Newer. C.) Foreign. D.) Well-organized.

D.) Well-organized.

If you wish to create a portfolio of stocks, what is the required minimum number of stocks? A.) You must invest in at least 2 stocks of 1 corporation. B.) You must invest in stocks of at least 10 corporations. C.) You must invest in the stocks of at least 30 corporations. D.) You must invest in stocks of more than one corporation.

D.) You must invest in stocks of more than one corporation.

The increase in the number of stocks in a portfolio results in a(n) ____ in the average standard deviation of annual portfolio returns.

decrease

Based on the historical returns shown in the text, the average _____ was 2.9 percent per year over the 94-year span depicted.

inflation / inflation rate

The variance of a portfolio _____ (is/isn't) generally a simple combination of the variances of the assets in the portfolio.

isn't

Greater return volatility produces a _____ (smaller/larger) difference between the arithmetic and geometric averages.

larger

Historically, there is a(n) ______ relationship between risk and expected return in the stock market. A.) Indirect. B.) Inverse. C.) Stagnant. D.) Direct.

D.) Direct.

Average returns can be calculated using _____ or arithmetic average.

Geometric

What is systematic risk? A.) It is a risk that pertains to a large number of assets. B.) It is a risk that increases in a systematic, gradual fashion. C.) It is a risk that affects only one or a few assets. D.) It is a risk that is caused by failure of the internal control system of a corporation.

A.) It is a risk that pertains to a large number of assets.

Which type of risk is unaffected by adding securities to a portfolio? A.) Systematic risk. B.) Unsystematic risk. C.) Both systematic and unsystematic risk. D.) Neither systematic nor unsystematic risk.

A.) Systematic risk.

The standard deviation is ___. A.) The square of the variance. B.) The square root of the variance. C.) Equal to the sum of deviations divided by the number of observations. D.) Equal to the sum of the deviations of actual returns from the average return.

A.) The square of the variance.

Average returns can be calculated _____. A.) Two different ways. B.) Only by the geometric average method. C.) Only by the arithmetic average method.

A.) Two different ways.

The risk that affects a single asset or a small group of assets is ______ risk. A.) Unsystematic. B.) Treasury. C.) Systematic. D.) Inflation.

A.) Unsystematic.

A firm is exposed to both systematic and unsystematic risks. Which of the following are examples of systematic risks? -A fire in a manufacturing plant. -An increase in the Federal funds rate. -Management turnover. -An increase in the corporate tax rate.

-An increase in the Federal funds rate. -An increase in the corporate tax rate.

If the market changes and stock prices instantly and fully reflect new information, which time path does such a change exhibit? A.) An efficient market reaction. B.) A delayed reaction. C.) An overreaction and correction.

A.) An efficient market reaction.

In terms of investments, the greater the potential risk, the _______ (lower/greater) should be the expected return.

greater

A firm faces many risks. Which of the following are examples of unsystematic risks faced by a firm? -An increase in the dividend tax rate. -A hostile takeover attempt by a competitor. -A change in the Federal Reserve's monetary policy. -The death of the CEO.

- A hostile takeover attempt by a competitor. - The death of the CEO.

What are the two components of the market risk premium? -Beta. -The expected return on the market. -The risk-free rate. -The default speed.

-The expected return on the market. -The risk-free rate.

Which of the following are examples of systematic risk? -Future rates of inflation. -Regulatory changes in tax rates. -An increase in competition in the industry. -Labour strikes.

-Future rates of inflation. -Regulatory changes in tax rates.

There is ______ correlation between the unsystematic risk of two companies from different industries. A.) No. B.) Significant negative. C.) Significant positive.

A.) No.

The arithmetic average rate of return measures the ____. A.) Return in an average year over a given period. B.) Compound return per year. C.) Compound return in an average year.

A.) Return in an average year over a given period.

True or false: The return an investor in a security receives is equal to the cost of the security to the company that issued it. A.) True. B.) False.

A.) True

What is the equation for the capital asset pricing model? A.) Expected return on security = Risk-free rate + Beta × Return on market. B.) Expected return on security = Beta ×(Return on market - Risk-free rate). C.) Expected return on security = Risk-free rate + Return on market. D.) Expected return on security = Risk-free rate + Beta × (Return on market - Risk-free rate)

D.) Expected return on security = Risk-free rate + Beta × (Return on market - Risk-free rate)

Preferred stock ___. -Pays dividends in perpetuity. -Has a fixed maturity. -Pays a constant dividend. -Does not pay dividends.

-Pays dividends in perpetuity. -Pays a constant dividend.

What are the two components of unexpected return (U) in the total return equation? -The expected return portion. -The expected risk portion. -The systematic portion. -The unsystematic portion.

-The systematic portion. -The unsystematic portion.

True or false: Systematic risk will impact all securities in every portfolio equally. A.) True B.) False

B.) False

True or false: The cost of debt on the market value basis is typically much higher than the cost of debt on the book value basis. A.) True. B.) False

B.) False

Dividends paid to common stockholders ______ be deducted from the payer's taxable income for tax purposes. A.) May. B.) Can. C.) Cannot. D.) Should.

C.) Cannot.

The formula for calculating the cost of equity capital that is based on the dividend discount model is: A.) RE = D0/P1+ g B.) RE = D1/P0 + g C.) RE = D1/P0 - g D.) RE = (D1/P0)/g

B.) RE = D1/P0 + g

When an investor is diversified only ________ risk matters. A.) Unnatural. B.) Systematic. C.) Unsystematic. D.) Diversifiable.

B.) Systematic.

Which type of risk does not change as we add more securities to a portfolio? A.) Unsystematic, or diversifiable, risk. B.) Company-specific risk. C.) Systematic, or market, risk D.) Idiosyncratic risk.

C.) Systematic, or market, risk

True or false: The existence of traders attempting to beat the market is a necessary precondition for markets to become efficient. A.) True B.) False

A.) True.

Which of the following is a conclusion that can be drawn regarding market efficiency from capital market history? A.) If mispriced stocks exist, there is an obvious way of identifying them. B.) Future market prices are hard to predict based on publicly available information. C.) Prices do not respond rapidly to new information. D.) The market response to new information is very different from what we would expect in an efficient market.

B.) Future market prices are hard to predict based on publicly available information.

Which of the following methods for calculating the cost of equity ignores risk? A.) The CAPM. B.) The dividend growth model. C.) Yield to maturity.

B.) The dividend growth model.

The portfolio weight is _____. A.) The square root of the standard deviation. B.) The percentage of the total value that is invested in an asset. C.) Always equal to 10. D.) The amount of return versus the overall market.

B.) The percentage of the total value that is invested in an asset.

What does the security market line depict? A.) It depicts the relationship between the return on the S&P 500 and an individual security's return. B.) It depicts the relationship between systematic risk and unsystematic risk. C.) It is a graphical depiction of the capital asset pricing model. It shows the relationship between expected return and beta. D.) It depicts the relationship between expected return and the standard deviation of returns.

C.) It is a graphical depiction of the capital asset pricing model. It shows the relationship between expected return and beta.

The most appropriate weights to use in the WACC are the ______ weights. A.) Government mandated. B.) Book value. C.) Market value. D.) Salvage value.

C.) Market value.

The year 2008 was _____. A.) One of the best years for stock market investors in U.S. history. B.) An average year for the stock market. C.) One of the worst years for stock market investors in U.S. history.

C.) One of the worst years for stock market investors in U.S. history.

The security market line (SML) shows that the relationship between a security's expected return and its beta is ______. A.) Negative. B.) Overrated. C.) Positive. D.) Insignificant.

C.) Positive.

What is the intercept of the security market line (SML)? A.) The market rate of return. B.) Beta. C.) The risk-free rate. D.) The market-risk premium.

C.) The risk-free rate.

One of the disadvantages of using historical returns to estimate the market risk premium is that the past may not be a good guide to the future _____. A.) When economic conditions are relatively stable. B.) Ever. C.) When economic conditions change quickly.

C.) When economic conditions change quickly.

B = the market value of a firm's debt S = the market value of that same firm's equity RB = the before-tax yield on the firm's debt TC = the corporate tax rate RS = the cost of equity Given the definitions above, the weighted average cost of capital formula can be written as: A.) [S/(S + B)] × RS + [B/(S + B)] × RB B.) [S/(S + B)] × RS × (1 − Tc) + [B/(S + B)] × RB C.) [S/(S + B)] × RS + [B/(S + B)] × RB × (1 − Tc)

C.) [S/(S + B)] × RS + [B/(S + B)] × RB × (1 − Tc)

True or false: A well-diversified portfolio will eliminate all risks. A.) True B.) False

B.) False

The return an investor in a security receives is ______ the cost of the security to the company that issued it. A.) Greater than. B.) Unrelated to. C.) Equal to. D.) Less thanl.

C.) Equal to.

A firm's cost of debt can be ___. -Calculated using the dividend growth model. -Estimated easier than its cost of equity. -Obtained by talking to investment bankers. -Obtained by checking yields on publicly traded bonds.

-Estimated easier than its cost of equity. -Obtained by talking to investment bankers. -Obtained by checking yields on publicly traded bonds.