Finance Quiz

Which of the following statements is NOT true?

• Cost of capital is called the project's cost of capital.

• Cost of capital is also known as the firm's cost of capital.

• A firm's cost of capital is the return expected by investors from all the assets acquired and managed by the firm.

• All of the above statements are true.

Which of the following statements is true?

• Firms that exhibit the same risk characteristics as a project under consideration are called proxies or pure-plays.

• Debt holders bear more risk than shareholders.

• The return expected from holding debt is the same as the return expected from holding shares.

• The firm cost of capital is equal to the cost of raising debt.

Which of the following is true for identifying proxy or pure-play firms when the risk of a project is different from the risk of the firm that will undertake it?

• These are firms that have several lines of business, are in the same industry as the project, and compete in the same input but a different output market.

• These are firms that have several lines of business, are in the same industry as the project, and compete in the same output but a different input market.

• These are firms that have a single line of business, are in the same industry as the project, and compete in the same input and output market.

• These are firms that have a single line of business, are in the same industry as the project, and compete in the output market but a different input market.

Which of the following statements is true for bonds?

• The expected rate of return of a bond is also known as its market yield.

• The expected rate of return of a bond is also known as the yield to maturity.

• The expected rate of return of a bond is an estimate of the cost of debt.

• All of the above.

To estimate a firm's WACC, which of the following inputs is NOT necessary?

• The debt and equity ratios

• The cost of debt

• The cost of capital

• The total assets

Which of the following statements is true when calculating a firm's WACC?

• The WACC should be estimated with the market value of debt and book value of equity.

• The WACC should be estimated with the book value of debt and the market value of equity.

• The WACC should be estimated with the market values of debt and equity.

• The WACC should be estimated with the book values of debt and equity.

Which of the following statements is NOT true for beta?

• In the case of unlevered beta, the firm's owners face only business risk.

• Asset beta refers to the beta of a stock when the firm is all-equity financed, while equity beta refer to the beta of a stock when the firm has borrowed.

• In the case of levered beta, the firm's owners face both business risk and financial risk.

• In the case of market beta, the firm's owners face only financial risk.

Which of the following statements is true for the average annual rate of return?

• Common stocks have a higher rate of return than government bills, which in turn have a higher rate of return than government bonds.

• Common stocks have a higher rate of return than government bonds, which in turn have a higher rate of return than government bills.

• Government bonds have a higher rate of return than common stocks, which in turn have a higher rate of return than government bills.

• Government bonds have a higher rate of return than government bills, which in turn have a higher rate of return than common stocks.

Which of the following statements is NOT true for beta?

• A stock with a beta = 1 fluctuates, on average, the same as the market index against which its movement is measured.

• Each stock has its own beta, and they are constant.

• Stocks with beta > 1 are more sensitive to economy-wide events than the market index is.

• Stocks with beta < 1 are less sensitive to economy-wide events than the market index.

Both debt holders and shareholders are affected by the risk of a company's cash flows generated by its assets. Which of the following statement is true about these risks?

• Shareholders bear more risk than debt holders.

• Debt holders bear more risk than shareholders.

• Both bear the same risk.

• Shareholders and debt holders may share more or less risk, depending on the circumstances.