What does WACC stand for?
a: Working amount of corporate cash
b: Weighted average company cost
c: Weighted average cost of capital
d: Working amount of corporate costs correct answers c: Weighted average cost of capital
If the expected return of a project is below that of a financial asset o...
FIN6406 Exam 2 || 100% SOLVED SOLUTIONS.
What does WACC stand for?
a: Working amount of corporate cash
b: Weighted average company cost
c: Weighted average cost of capital
d: Working amount of corporate costs correct answers c: Weighted average cost of capital
If the expected return of a project is below that of a financial asset of comparable risk, the
firm should ______ the project.
a: Accept
b: Reject correct answers b: Reject
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 change quickly
b: when economic conditions are relatively stable correct answers a: when economic
conditions change quickly
U.S. Treasury securities are considered to be risk-free because they have minimal, if any,
______ risk.
a: price
b: default
c: inflation
d: interest rate correct answers b: default
The risk-free measure for the risk-free rate should be ______ the risk-free rate used for the
market risk premium.
a: greater than
b: less than
c: the same as correct answers c: the same as
Which of the following is true about the WACC (Select all that apply)?
a: The WACC will always increase if the level of debt in the capital structure increases.
b: The WACC does not change over time.
c: It represents the marginal cost of capital.
d: It is also referred to as the discount rate that is used to discount cash flows in capital
budgeting problems. correct answers c: It represents the marginal cost of capital.
d: It is also referred to as the discount rate that is used to discount cash flows in capital
budgeting problems.
A firm should only undertake a project if its expected return is ______ that of a financial
asset of comparable risk.
a: equal to or less than
b: equal to or greater than correct answers b: equal to or greater than
Which of the following variables do we need to compute the beta for a company's stock
(Select all that apply)?
a: the variance of the market index's returns.
b: the covariance between the stock and the market index's returns.
,c: the correlation between the stock's returns and the CPI index.
d: the covariance between the stock and the industry index's returns. correct answers Which
of the following variables do we need to compute the beta for a company's stock (Select all
that apply)?
a: the variance of the market index's returns.
b: the covariance between the stock and the market index's returns.
The ______ of the characteristic line of a stock's returns versus those of the market measures
the stock's systematic risk (Select all that apply).
a: slope
b: length
c: width
d: beta correct answers a: slope
d: beta
Which of the following are true about U.S. Treasury instruments (Select all that apply)?
a: They are completely free of the risk of default.
b: T-bills are perfectly risk free, but T-bonds are not.
c: They have never defaulted.
d: They are not expected to default at this time. correct answers c: They have never defaulted.
d: They are not expected to default at this time.
What do we know about the stability of a firm's beta (Select all that apply)?
a: Betas are more likely to change if the firm remains in the same industry.
b: Betas can change over time.
c: Betas are more likely to be stable if the firm remains in the same industry.
d: Betas do not change over time. correct answers b: Betas can change over time.
c: Betas are more likely to be stable if the firm remains in the same industry.
The difference between the expected return on the market portfolio and the risk-free rate is
the market risk __________. correct answers Premium
Changes in _______ leverage and _______ leverage will affect beta. correct answers
financial, operating
The covariance between the stock and the market index's returns divided by the variance of
the market index's returns represents the _______ for a company's stock. correct answers beta
The sales of cyclical firms are ______ sensitive to the business cycle than are the sales of
non-cyclical firms.
a: less
b: more correct answers b: more
The slope of the characteristic line of a firm's returns versus those of the market is the
______.
a: gamma
b: delta
c: beta
d: alpha correct answers c: beta
, Which of the following are true (Select all that apply)?
a: Fixed costs never change.
b: Fixed costs do not change as quantity changes.
c: Variable costs change with changes in quantity.
d: Variable costs never change. correct answers b: Fixed costs do not change as quantity
changes.
c: Variable costs change with changes in quantity.
Which of the following can cause a firm's beta to change over time (Select all that apply)?
a: changes in product line
b: changes in the betas of other companies
c: changes in technology
d: changes in leverage correct answers a: changes in product line
c: changes in technology
d: changes in leverage
An increase in ______ will increase beta (Select all that apply).
a: financial leverage
b: revenues
c: dividend payments
d: operating leverage correct answers a: financial leverage
d: operating leverage
Which of the following are factors that affect beta (Select all that apply)?
a: operating leverage
b: changes in the market risk premium
c: the cyclical nature of revenues
d: financial leverage correct answers a: operating leverage
c: the cyclical nature of revenues
d: financial leverage
A cyclical firm is one in which revenues go ______ in the contraction phase of the business
cycle.
a: all over
b: up
c: sideways
d: down correct answers d: down
To estimate the dividend yield of a particular stock, we can ______ (Select all that apply).
a: multiply last year's dividend by (1 + g)
b: use the average bank's annual CD rate
c: use the average market dividend yield
d: use security analysts' forecasts correct answers a: multiply last year's dividend by (1 + g)
d: use security analysts' forecasts
_______ costs do not change as the quantity sold changes, while _______ costs do change as
the quantity sold changes. correct answers fixed, variable
For both academics and practitioners, the pendulum has swung over to the ______ for
estimating the cost of equity capital.
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