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.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller ProPerfomer. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $13.49. You're not tied to anything after your purchase.
