Bus 401 finance week 4
1. Which of the following is true regarding market risk? (Points : 1)
[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)
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