Reference no: EM13822899

Question 1.Which of the following statements regarding the cost of equity is true? 

•   It can be estimated in three different ways.   
•   It is always estimated using the present value of future dividends approach.   
•   It is estimated by solving for the discount rate for a perpetuity.   
•   It is generally lower than the cost of debt because equity holders are paid after taxes are paid.

Question 2.In the Capital Asset Pricing Model, the risk-free rate: 

•   links the CAPM to current market conditions.   
•   is the historic long-term average rate of government bonds.   
•   can be approximated by using yields on high-rated corporate bonds.   
•   is always the current yield on 30-year US government Treasury bonds.   

Question 3.In the Capital Asset Pricing Model, the market risk premium is best approximated by: 

•   the most recent one-year return on the S&P 500 Index (or another market index).   
•   the long-term historic return on a stock market index such as the S&P 500 (or another market index).   
•   the long-term average spread of the S&P 500 (or another market index) over the yield of long-term government bonds.   
•   the return of the S&P 500 (or another market index) over the current yield of long-term government bonds.

Question 4.Investors will make an investment if:

•   the historical rate of return exceeds the expected rate of return.   
•   the required rate of return exceeds the expected rate of return.   
•   the expected rate of return exceeds the actual rate of return.   
•   the expected rate of return exceeds the required rate of return.

Question 5.If a firm just paid a dividend equal to $4.00 a share, then for the WACC, in order to find the cost of equity, $4 should be: 

•   divided by the current price of the stock, and the quotient should be added to the dividend growth rate.   
•   divided by the current price of the stock.   
•   multiplied by one minus the tax rate, and the difference divided by the current price of the stock.   
•   multiplied by the sum of one plus the growth rate, and then divided by the current price of the stock; this quotient should be added to the dividend growth rate.   

Question 6.Which of the following is true regarding market risk? 

•   It is measured by beta.   
•   It is also called nondiversifiable risk.   
•   It is also called systematic risk.   
•   all of the above   

Question 7.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. 

•   the actual rate of return   
•   the expected rate of return   
•   the risk-free rate of return   
•   the required rate of return    

Question 8.The discount rate used in project evaluation should: 

•   be based on the firm's overall risk.   
•   be based on each project's risk.   
•   be estimated using the WACC for all projects.   
•   All of the above are correct.   

Question 9.Which of the following statements regarding the cost of debt is true? 

•   The cost of debt for bonds equals the coupon rate of outstanding bonds.   
•   The cost of debt for bonds is found by dividing the price by the annual coupon.   
•   The cost of debt for bonds is found by calculating their yield to maturity.   
•   The cost of debt equals the flotation costs charged by investment bankers who advise the firm.

Question 10.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? 

•   12.11%   
•   8.30%   
•   8.00%   
•   15.33%