BUS 401 Finance Week 4

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

It is measured by beta.

It is also called nondiversifiable risk.

It is also called systematic risk.

all of the above

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)

12.11%

8.30%

8.00%

15.33%

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

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

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

reflect
the desired mix and not necessarily the mix being used to finance a specific
project.
vary
from project to project, depending on how they are financed.
always
reflect the firm’s current capital structure.

None of these answers is correct.

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

a
private firm that is held in isolation in a one-company investment portfolio

a publicly traded firm that is similar to the company or project being
analyzed

Both a and b are correct.

Neither a nor b is correct.

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

estimating a regression line

estimating a firm’s total risk to be used in the WACC

estimating a firm’s marketrisk and used with the CAPM

estimating the amount of leverage used by the firm

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

solve
for a company’s total risk.
adjust
the beta of a pure-play firm for its use of debt financing.
estimate
its asset beta.

Both b and c are correct.

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

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.

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)

the actual rate of return

the expected rate of return

the risk-free rate of return

the required rate of return