Finance
True
"Capital" is sometimes defined as funds supplied to a firm by investors.
False
A basic rule in capital budgeting is that if a project's NPV exceeds its IRR, then the project should be accepted.
True
A firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions.
False
A firm should never accept a project if it's acceptance would lead to an increase in the firm's cost of capital (its WACC)
False
A stock with a beta equal to -1.0 has zero systematic (or market) risk.
False
A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firm's.
True
According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio.
False
An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.
True
Bad managerial judgements or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away.
True
Because of differences in the expected returns on different investments, the standard deviation is not always an adequate measure of risk. However, the coefficient of variation adjusts for differences in expected returns and thus allows investors to make better comparisons of investments' stand-alone risk.
True
Diversification will normally reduce the riskiness of a portfolio stocks
False
If investors become less averse to risk, the slope of the Security Market Line (SML) will increase
True
If the returns of two firms are negatively correlated, then one of them must have a negative beta.
True
It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm is negative.
False
Managers should under no conditions take actions that increase their firm's risk relative to the market, regardless of how much those actions would increase the firm's expected rate of return.
True
Market risk refers to the tendency of a stock to move with the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0.
True
Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets. The relevant risk of each asset should be measured in terms of its effect on the risk of the firm's stockholders.
True
One key conclusion of the Capital Asset Pricing Model is that the value of an asset should be measured by considering both the risk and the expected return of the asset, assuming that the asset is held in a well-diversified portfolio. The risk of the asset held in isolation is not relevant under the CAPM.
True
Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse
True
The NPV method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.
False
The before-tax cost of debt, which is lower than the after-tax cost, is used as the component cost of debt for purposes of developing the firm's WACC.
True
The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return
True
The component cost of capital are market-determined variables in the sense that they are based on investors' required returns
True
The cost of capital used in capital budgeting should reflect the average cost of the various sources of investor-supplied funds a firm used to acquire asset.
False
The cost of debt is equal to one minus the marginal tax rate multiplied by the average coupon rate on all outstanding debt.
True
The cost of debt is equal to one minus the marginal tax rate multiplied by the interest rate on new debt.
True
The internal rate of return is that discount rate that equates the present value of the cash outflows (or cost) with the present value of the cash inflows.
True
The slope of the SML is determined by investors' aversion to risk. The greater the average investors' risk aversion, the steeper the SML.
False
The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly
False
The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation