Reference no: EM133111081

1. In a risk-neutral world, the default premium to be expected on a loan

A) will be equal to zero.

B) will equal the promised return minus the time premium.

C) will be greater than the expected rate of return.

D) No correct answer.

2. When a firm with a high market-beta merges with a firm with a lower market-beta,

A) the cost of capital of the combined firm will be lower due to greater diversification.

B) investors will require a lower rate of return on the combined firm than they would have for each individual firm due to greater diversification.

C) the cost of capital of the combined furm will be a weighted average of the costs of capital for the individual firms.

D) No correct answer.

3. Which of the following statements about a firm with declining growth is true?

A) Its cost of capital will be less than its earnings-price yield.

B) Its cost of capital will be greater than its earnings-price yield.

C) Its cost of capital must equal its earnings-price yield.

D) None of the above is true. There is no firm relationship between a firm's cost of capital and its earnings-price yield.