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Question 1.1. In the Capital Asset Pricing Model, the market risk premium is estimated over a long period of time because: (Points : 1)

  more data is always better than less.
  a longer holding period gives a more reliable estimate because it is, in effect, a larger sample size.
  almost all investors hold stocks for many years, so it matches their investment horizon.
  historical returns are the best indicators of future returns.

Question 2.2. Which of the following is beta is used for? (Points : 1)

  estimating a regression line
  estimating a firm’s total risk to be used in the WACC
  estimating a firm’s market risk and used with the CAPM
  estimating the amount of leverage used by the firm

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Question 3.3. Investors will make an investment if: (Points : 1)

  the historical rate of return exceeds the expected rate of return.
  the required rate of return exceeds the expected rate of return.
  the expected rate of return exceeds the actual rate of return.
  the expected rate of return exceeds the required rate of return.

Question 4.4. Which of the following is true of flotation costs? (Points : 1)

  They include expenses like investment banker fees and commissions.
  They include the underwriting spread.
  They tend to raise the cost of capital.
  all of the above

Question 5.5. One reason why we are not concerned with idiosyncratic risk (also called firm-specific risk) is that: (Points : 1)

  most risk is not firm-specific, so we can ignore it.
  through hedging and insurance, investors may now invest in stocks with almost no risk exposure of any kind.
  it is easy and almost costless to diversify one’s portfolio and eliminate idiosyncratic risk.
  investing in bonds can offset the idiosyncratic risks of shares of stock.

Question 6.6. The weighted average cost of capital is: (Points : 1)

  the average return for the company’s stock over the past several years.
  the average cost, including commissions, for raising capital for the firm.
  an average required return for each of the sources of capital used by the firm to finance its projects, weighted by the amount contributed by each source.
  interest payments and dividends, divided by the price of bonds and stock, respectively.

Question 7.7. Which of the following statements regarding the cost of equity is true? (Points : 1)

  It can be estimated in three different ways.
  It is always estimated using the present value of future dividends approach.
  It is estimated by solving for the discount rate for a perpetuity.
  It is generally lower than the cost of debt because equity holders are paid after taxes are paid.

Question 8.8. We assume investors are risk averse, and therefore they: (Points : 1)

  are equally concerned with upside potential and downside risk.
  expect a higher return for bearing more risk.
  will pay more for an investment with higher risk.
  have very high required rates of return.

Question 9.9. In order to find the cost of equity using the firm’s cost of debt, the rule of thumb is to: (Points : 1)

  multiply Kd by one plus the tax rate.
  multiply Kd by one minus the tax rate.
  add 3% to 6% to Kd.
  multiply Kd by the firm’s beta.

Question 10.10. Total risk is measured by: (Points : 1)

  the standard deviation of returns.
  the firm’s beta.
  Moody’s, Standard & Poor’s, and Fitch ratings.
  the variability of EBIT.

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