Question 1
The use of WACC to select investments is acceptable when the:
NPV is positive when discounted by the WACC.
correlations of all new projects are equal.
risks of the projects are equal to the risk of the firm.
firm is well diversified and the unsystematic risk is negligible.
None of these.
Question 2
The beta of a security provides an:
estimate of the slope of the Capital Market Line.
estimate of the slope of the Security Market Line.
None of these.
estimate of the market risk premium.
estimate of the systematic risk of the security.
Question 3
The following are methods to estimate the market risk premium:
use the bond valuation model to estimate growth in bond prices with different costs of capital.
use historical data to estimate future risk premium and use the dividend discount model to estimate risk premium.
use the dividend discount model to estimate risk premium.
use historical data to estimate future risk premium.
use historical data to estimate future risk premium and use the bond valuation model to estimate growth in bond prices with different costs of capital.
Question 4
If a firm has low fixed costs relative to all other firms in the same industry, a large change in sales volume (either up or down) would have:
a smaller change in EBIT for the firm versus the other firms.
no effect in any way on the firms, as volume does not affect fixed costs.
None of these.
a decreasing effect on the cyclical nature of the business.
a larger change in EBIT for the firm versus the other firms.
Question 5
For a multi-product firm, if a project's beta is different from that of the overall firm, then the:
CAPM can no longer be used.
project should be discounted using the overall firm's beta.
project should be discounted at the market rate.
project should be discounted at the T-bill rate.
project should be discounted at a rate commensurate with its own beta.
Question 6
Firms whose revenues are strongly cyclical and whose operating leverage is high are likely to have:
zero betas.
negative betas.
high betas.
None of these.
low betas.
Question 7
The present value of cash flows is important in
None of these
multiples analysis
time series analysis
growth projections
discounted cash flow analysis
Question 8
When using the cost of debt, the relevant number is the:
post-tax cost of debt, since dividends are tax deductible.
None of these.
pre-tax cost of debt, since it is the actual rate the firm is paying bondholders.
pre-tax cost of debt, since most corporations pay taxes at the same tax rate.
post-tax cost of debt, since interest is tax deductible.
Question 9
The beta of a firm is more likely to be high under what two conditions?
Low cyclical business activity and low operating leverage
High cyclical business activity and low operating leverage
High cyclical business activity and high operating leverage
Low cyclical business activity and low financial leverage
None of these.
Question 10
A firm with cyclical earnings is characterized by:
revenue patterns that vary with the business cycle.
high fixed costs.
high price per unit.
low contribution margins.
high levels of debt in its capital structure.
Question 11
If the project beta and IRR coordinates plot above the SML the project should be:
rejected.
It is impossible to tell.
None of these.
accepted.
It will depend on the NPV.
Question 12
The WACC is used to _______ the expected cash flows when the firm has _______.
discount; short term financing on the balance sheet
discount; debt and equity in the capital structure
increase; debt and equity in the capital structure
None of these.
decrease; short term financing on the balance sheet
Question 13
If the CAPM is used to estimate the cost of equity capital, the expected excess market return is equal to the:
return on the stock minus the risk-free rate.
market rate of return.
beta times the risk-free rate.
difference between the return on the market and the risk-free rate.
beta times the market risk premium.
Question 14
The weighted average cost of capital for a firm is the:
maximum rate which the firm should require on any projects it undertakes.
rate of return that the firm's preferred stockholders should expect to earn over the long term.
overall rate which the firm must earn on its existing assets to maintain the value of its stock.
discount rate which the firm should apply to all of the projects it undertakes.
rate the firm should expect to pay on its next bond issue.
Question 15
The beta of a firm is determined by which of the following firm characteristics?
Operating leverage
Financial leverage
Cycles in revenues
All of these.
None of these.