FIN303_Chap 13 (Review)

A company with a beta of 1.5 is considered

• Less volatile than the market

• As volatile as the market

• More volatile than the market

• Not correlated with the market

XYZ Corporation has 5 million shares outstanding at a current price of $20 per share. The book value of the shares is $12 per share. The firm also has $50 million in par value of bonds outstanding. The bonds are selling at a price equal to 105 percent of par. What is the market value of the firm?

• $100 mil

• $52.5 mil

• $152.5 mil

• $150 mil

Which of the following is true about the relationship between risk and cost of capital?

• Higher risk leads to a lower cost of capital.

• Lower risk leads to a higher cost of capital.

• Higher risk leads to a higher cost of capital.

• Risk and cost of capital are not related

A firm's overall cost of capital is

• equal to its cost debt.

• a weighted average of the costs of capital for the collection of individual projects that the firm is working on.

• best measured by the cost of capital of the riskiest projects that the firm is working on.

• the value of the cash flows claimed by both the equity and debt investors.

When estimating the cost of debt capital for the firm, we are primarily interested in

• the value of the cash flows claimed by the equity investors.

• the value of the cash flows claimed by the debt investors.

• the value of the cash flows claimed by both the equity and debt investors.

• the revenue produced by the firm.

The recommended model to estimate the cost of common equity for a firm is

• a one-stage constant growth model.

• a multistage growth model

• the CAPM.

• none of these.

How does an increase in the market risk premium affect the cost of equity?

• The cost of equity decreases.

• The cost of equity increases.

• The cost of equity remains the same.

• The cost of debt increases.

What does the beta coefficient in the CAPM formula measure?

• The total risk of a security.

• The systematic risk of a security relative to the market.

• The unsystematic risk of a security.

• The default risk of a security.

The beta for a firm can be estimated by

• adding up the betas of the individual projects of the firm.

• taking the weighted average of the beta for the individual projects of the firm.

• taking the simple average of the beta for the individual projects of the firm.

• None of these.

Which of the following would be considered an appropriate proxy for the risk-free rate in the CAPM?

• The return on a corporate bond.

• The return on a government bond.

• The return on the company’s stock.

• The average market return.