Bus 401 finance week 4

1. Which of the following is true regarding market risk? (Points : 1)

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      [removed] It is measured by beta.
      [removed] It is also called nondiversifiable risk.
      [removed] It is also called systematic risk.
      [removed] all of the above

[removed][removed][removed][removed]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)

      [removed] 12.11%
      [removed] 8.30%
      [removed] 8.00%
      [removed] 15.33%

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

      [removed]most risk is not firm-specific, so we can ignore it.
      [removed]through hedging and insurance, investors may now invest in stocks with almost no risk exposure of any kind.
      [removed]it is easy and almost costless to diversify one’s portfolio and eliminate idiosyncratic risk.
      [removed]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)

      [removed]rx is the return for a market index such as the S&P 500 Index.
      [removed]rxis the return for the stock being analyzed—for example, IBM’s return if we are estimating IBM’s beta.
      [removed]the slope measures the average return for the market portfolio for each percentage change in the value of the security of interest.
      [removed]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)

      [removed]reflect the desired mix and not necessarily the mix being used to finance a specific project.
      [removed]vary from project to project, depending on how they are financed.
      [removed]always reflect the firm’s current capital structure.
      [removed] None of these answers is correct.

6. Which of the following best describes a pure-play? (Points : 1)

      [removed]a private firm that is held in isolation in a one-company investment portfolio
      [removed] a publicly traded firm that is similar to the company or project being analyzed
      [removed] Both a and b are correct.
      [removed] Neither a nor b is correct.

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

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

8. The Hamada Equation allows the firm to: (Points : 1)

      [removed]solve for a company’s total risk.
      [removed]adjust the beta of a pure-play firm for its use of debt financing.
      [removed]estimate its asset beta.
      [removed] Both b and c are correct.

9. Which of the following statements regarding the cost of debt is true? (Points : 1)

      [removed] The cost of debt for bonds equals the coupon rate of outstanding bonds.
      [removed] The cost of debt for bonds is found by dividing the price by the annual coupon.
      [removed] The cost of debt for bonds is found by calculating their yield to maturity.
      [removed] 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)

      [removed] the actual rate of return
      [removed] the expected rate of return
      [removed] the risk-free rate of return
      [removed] the required rate of return

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