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FINA final quiz 9/10
Terms in this set (23)
If a stock portfolio is well diversified, then the portfolio variance:
may be less than the variance of the least risky stock in the portfolio.
Which of the following are examples of diversifiable risks?
I. the inflation rate spikes suddenly
II. terrorists strike the United States
III. the price of corn increases due to a nationwide drought
IV. taxes are increased on hotel room rentals
III and IV only
The principle of diversification tells us that:
spreading an investment across many diverse assets will eliminate some of the total risk.
The common stock of PDS has a beta of .98 and an expected return of 12.34 percent. The risk-free rate of return is 4.1 percent and the market rate of return is 11.65 percent. Which one of the following statements is true given this information?
PDS stock is underpriced.
E(r) = .041 + [.98 (.1165 .041) = .11499 = 11.50 percent;
PDS stock is underpriced as its actual expected return exceeds the expected return based on CAPM.
Total risk is measured by _____ and systematic risk is measured by _____.
standard deviation; beta
f the market is efficient and securities are priced fairly then the _____ will be constant for all securities.
reward to risk ratio
The percentage of a portfolio's total value invested in a particular asset is called that asset's:
According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the:
market risk premium and the amount of systematic risk inherent in the security.
he pre-tax cost of debt for a firm:
is based on the yield to maturity on the firm's outstanding bonds.
The flotation cost for a firm is computed as:
the weighted average of the flotation costs associated with each form of financing.
Which one of the following statements is correct concerning the weighted average cost of capital (WACC)?
The WACC may decrease as a firm's debt-equity ratio increases.
The aftertax cost of debt generally increases when:
I. a firm's bond rating increases.
II. the market rate of interest increases.
III. tax rates decrease.
IV. bond prices rise.
II and III only
The capital structure weights used in computing the weighted average cost of capital:
are based on the market value of the firm's debt and equity securities.
The weighted average cost of capital for a firm is dependent upon the firm's:
I. level of systematic risk.
II. debt-equity ratio.
III. preferred dividend amount.
IV. outstanding bonds' yield to maturity.
I, II, III, and IV
The return lenders require on loaned funds to a firm is called the:
cost of debt.
The weighted average cost of capital for a firm is the:
rate of return a firm must earn on its existing assets to maintain the current value of its stock.
The cost of equity for a firm is:
based on estimates derived from financial models.
Incorporating flotation costs into the initial cash flow of a project will:
increase the initial cash outflow of the project thereby lowering the project's net present value.
The return shareholders require on their investment in a firm is called the:
cost of equity.
The cost of preferred stock is computed the same as the:
return on a perpetuity.
DTK, Inc. uses both preferred and common stock as well as long-term debt to finance its operations. An increase in which one of the following will increase the capital structure weight of the debt, all else equal?
number of bonds outstanding
Which of the following statements are correct concerning the security market line (SML) approach to determining the cost of equity for a firm?
I. The SML approach considers the amount of unsystematic risk associated with a firm.
II. The SML approach can be applied to more firms than the dividend growth model can.
III. The SML approach considers only future information
.IV. The SML approach assumes the reward-to-risk ratio is constant.
II and IV only
All else constant, which one of the following will increase a firm's cost of equity if the firm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $2.10 a share and has a beta of 1.1.
an increase in the market rate of return
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