1.Which of the following is true regarding market risk? (Points : 1)
It is measured by beta. It is also called nondiversifiable risk. It is also called systematic risk. all of the above
2.If an investor purchases a share of stock for $300, collects a dividend during the year equal to $35 a share, and sells the stock at the end of the year for $289, what is the investor’s return for the year? (Points : 1)
12.11% 8.30% 8.00% 15.33%
3.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.
4.Beta is estimated as the slope of a regression line fit to pairs of periodic returns, (rx, ry), where: (Points : 1)
rx is the return for a market index such as the S&P 500 Index. rxis the return for the stock being analyzed—for example, IBM’s return if we are estimating IBM’s beta. the slope measures the average return for the market portfolio for each percentage change in the value of the security of interest. ryis the return for the market index such as the S&P 500 Index.
5.The financing mix reflected in the WACC should: (Points : 1)
reflect the desired mix and not necessarily the mix being used to finance a specific project. vary from project to project, depending on how they are financed. always reflect the firm’s current capital structure. None of these answers is correct.
6.Which of the following best describes a pure-play? (Points : 1)
a private firm that is held in isolation in a one-company investment portfolio a publicly traded firm that is similar to the company or project being analyzed Both a and b are correct. Neither a nor b is correct.
7.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 marketrisk and used with the CAPM estimating the amount of leverage used by the firm
8.The Hamada Equation allows the firm to: (Points : 1)
solve for a company’s total risk. adjust the beta of a pure-play firm for its use of debt financing. estimate its asset beta. Both b and c are correct.
9.Which of the following statements regarding the cost of debt is true? (Points : 1)
The cost of debt for bonds equals the coupon rate of outstanding bonds. The cost of debt for bonds is found by dividing the price by the annual coupon. The cost of debt for bonds is found by calculating their yield to maturity. The cost of debt equals the flotation costs charged by investment bankers who advise the firm.
10.Chapter 9 discusses three different types of returns. Identify the item in the list below that is NOT one of those three types of returns. (Points : 1)
the actual rate of return the expected rate of return the risk-free rate of return the required rate of return
Solution: BUS 401 Finance Week 4