WorksheetsTCDN 2 C1 2
Total questions: 89
Worksheet time: 45mins
Name
Class
Date
1.
What is the formula for the expected return on stock under the CAPM?
a)
RS = RF + β × (RM − RF)
b)
RS = RF + α × (RM − RF)
c)
RS = RF + γ × (RM − RF)
d)
RS = RF + β × (RM + RF)
2.
In the CAPM formula, what does RF represent?
a)
Risk-free rate
b)
Market rate
c)
Stock rate
d)
Stock beta
3.
What does the term β represent in the CAPM formula?
a)
The market risk premium
b)
The number of units of market risk associated with the stock
c)
The risk-free rate
d)
The expected return on the stock
4.
Which of the following is required to estimate a firm's cost of equity capital using the CAPM?
a)
Risk-free rate, market risk premium, and stock beta
b)
Stock market value, stock price, and risk-free rate
c)
Risk-free rate, stock price, and stock dividend
d)
Market value of the firm, stock beta, and market risk premium
5.
According to the CAPM, the additional compensation for risk is equal to:
a)
The amount of market risk multiplied by the stock's price
b)
The amount of stock risk multiplied by the price of risk
c)
The expected return of the market
d)
The stock price multiplied by the risk-free rate
6.
Which of the following best describes the market risk premium in the CAPM formula?
a)
The difference between the expected return on the stock and the risk-free rate
b)
The difference between the expected return on the market portfolio and the risk-free rate
c)
The stock's volatility
d)
The expected return of the stock compared to its beta
7.
What is the main challenge when estimating the cost of equity capital, as discussed in the text?
a)
Stockholders do not directly tell the firm their required returns
b)
The risk-free rate is too volatile
c)
The beta is difficult to calculate
d)
The market risk premium is too low
8.
What is the risk-free rate, RF, in the CAPM equation?
a)
The return on any bond
b)
The current prevailing yield on a risk-free security with the same maturity as the cash flows of the investment
c)
The expected return on the stock
d)
The market risk premium
9.
Which of the following is true about the risk-free rate RF?
a)
It is always equal to the market rate
b)
U.S. Treasury bonds are considered risk-free instruments, but some foreign government bonds may not be
c)
The risk-free rate is typically calculated using the average yield of the stock market
d)
It must be calculated using the stock's beta
10.
When estimating the risk-free rate, which of the following is most important?
a)
Using the historical risk-free rate
b)
Matching the maturity of the risk-free bond to the maturity of the project's cash flows
c)
Using the market risk premium in the calculation
d)
Comparing bond yields of different countries
11.
What does the market risk premium RM − RF represent?
a)
The return investors expect on a government bond
b)
The difference between the expected return on the stock and the risk-free rate
c)
The difference between the expected return on the market portfolio and the risk-free rate
d)
The return on a stock that is considered to be risk-free
12.
What is the formula for estimating Beta β in the CAPM equation?
a)
β = Cov(Ri, RM) / Var(RM)
b)
β = Cov(RM, Ri) / Var(Ri)
c)
β = Cov(Ri, RF) / Var(RM)
d)
β = Cov(RF, RM) / Var(RF)
13.
How is Beta typically estimated in the real world?
a)
Using data from monthly stock returns over the last five years along with monthly total returns of the S&P 500 Index
b)
Using quarterly financial reports
c)
Using stock price changes over the last month
d)
Using historical dividends
14.
In estimating Beta, why is using five years of data recommended?
a)
It is the standard in the financial industry
b)
Data beyond five years provides irrelevant information
c)
It allows for capturing short-term market changes
d)
The accuracy of the calculation diminishes after five years
15.
What is a characteristic line in estimating Beta?
a)
It is the line showing the average return on stock
b)
It represents the stock's price movement over time
c)
It is the regression line that shows the relationship between stock returns and market returns
d)
It is the line representing the market's performance
16.
Which of the following is true about Beta stability?
a)
Beta remains constant over time and is not affected by external factors
b)
Beta changes over time as a firm’s business strategies evolve
c)
Beta can be estimated without data
d)
Beta is unaffected by the stock’s price
17.
What does it mean for a firm to have a high Beta?
a)
The firm is unaffected by market changes
b)
The firm’s returns are highly volatile compared to the market
c)
The firm is considered a risk-free investment
d)
The firm has a stable business strategy
18.
Why do firms in cyclical industries tend to have higher Betas?
a)
They perform better during recessions
b)
Their revenue changes more in response to market cycles
c)
Their revenue is less affected by market cycles
d)
They have more stable business strategies
19.
What factor increases a firm's Beta according to financial leverage?
a)
Decreasing the firm's equity
b)
Increasing the amount of debt in the firm's capital structure
c)
Reducing the number of assets
d)
Lowering the risk-free rate
20.
What effect does financial leverage have on Beta?
a)
It reduces Beta by lowering the firm’s risk
b)
It increases Beta by making the firm’s equity more sensitive to market fluctuations
c)
It has no effect on Beta
d)
It makes the firm’s operations risk-free
21.
What formula is used to calculate the expected return on an individual stock using the Dividend Discount Model (DDM)?
a)
RS = D1 / P0 + g
b)
RS = D1 / P0 - g
c)
RS = D1 × (1 + g) / P0
d)
RS = D1 / (P0 + g)
22.
What does P0 represent in the Dividend Discount Model (DDM)?
a)
The price per share of a stock
b)
The dividend yield
c)
The current price per share of a stock
d)
The expected return on the stock
23.
Which of the following is the correct formula for the Dividend Discount Model (DDM)?
a)
RS = D1 / P0 + g
b)
RS = D1 / P0 × g
c)
RS = P0 / D1 + g
d)
RS = D1 × P0 + g
24.
In the Dividend Discount Model (DDM), what does g represent?
a)
The growth rate of dividends
b)
The growth rate of the stock price
c)
The expected return of the stock
d)
The discount rate
25.
How can we estimate the growth rate of dividends g for a company?
a)
By using analysts’ earnings growth forecasts
b)
By calculating the historical growth rate of dividends
c)
By calculating the expected rate of return
d)
By applying the average market growth rate
26.
Which of the following methods is used to estimate the expected growth rate of dividends g?
a)
Using the dividend yield
b)
Using the retention ratio × ROE
c)
Using the stock’s beta
d)
Using the market risk premium
27.
According to the text, what is the advantage of using the Dividend Discount Model (DDM) over the Capital Asset Pricing Model (CAPM)?
a)
DDM explicitly adjusts for risk
b)
DDM applies to firms with no dividends or varying dividend growth rates
c)
DDM is simpler
d)
DDM works better for projects or divisions that differ from the firm as a whole
28.
Which of the following is a primary advantage of the Capital Asset Pricing Model (CAPM) over the Dividend Discount Model (DDM)?
a)
CAPM adjusts for risk
b)
CAPM is simpler to apply
c)
CAPM is only applicable to firms with steady dividends
d)
CAPM cannot be used for projects or divisions
29.
Why do academics generally favor CAPM over DDM for estimating the cost of equity capital?
a)
Because CAPM is more accurate and easier to apply
b)
Because CAPM is only suitable for firms with steady dividends
c)
Because DDM works better for estimating returns on individual stocks
d)
Because DDM applies only to companies that pay dividends
30.
What is a disadvantage of the Dividend Discount Model (DDM)?
a)
It explicitly adjusts for risk
b)
It can only be used for firms that pay steady dividends
c)
It works well for projects with differing risk from the firm
d)
It is more complex than CAPM
31.
What is one drawback of using the Dividend Discount Model (DDM) for estimating a firm’s cost of equity?
a)
It requires data from a firm’s income statement
b)
It does not account for risk
c)
It does not work for firms with fluctuating dividends
d)
It cannot be used for firms that pay dividends
32.
What is the interest rate used to calculate the cost of debt?
a)
The average interest rate on a company’s existing debt
b)
The interest rate required on new debt issuance
c)
The company’s equity rate
d)
The risk-free rate
33.
Which of the following must be adjusted for when calculating the cost of debt?
a)
The dividend payments on preferred stock
b)
The tax deductibility of interest expense
c)
The growth rate of dividends
d)
The equity risk premium
34.
Preferred stock is similar to bonds in that it:
a)
Pays a fixed dividend
b)
Has a maturity date
c)
Is junior to common stock
d)
Pays a variable interest rate
35.
What formula is used to calculate the cost of preferred stock?
a)
RP = D / P
b)
RP = P / D
c)
RP = D × P
d)
RP = D + P
36.
What is a key characteristic of preferred stock?
a)
It pays variable dividends
b)
It has no maturity date and pays fixed dividends
c)
It is senior to bonds
d)
It is tax-deductible
37.
Why is preferred stock often considered similar to debt?
a)
Because it matures like a bond
b)
Because it gives voting rights
c)
Because it pays a fixed stream of income
d)
Because it is secured by company assets
38.
What is the key drawback of preferred stock compared to common stock?
a)
It pays less than bonds
b)
It has no voting rights
c)
It cannot be traded
d)
It is not tax-exempt
39.
What is the nature of dividends on preferred stock?
a)
They are not legally required and can be skipped
b)
They are guaranteed by law
c)
They are taxed at the corporate level
d)
They increase with profits
40.
How are preferred stockholders prioritized in the case of liquidation?
a)
After common shareholders
b)
Before bondholders
c)
After all creditors
d)
Before common shareholders
41.
How is the cost of preferred stock RP calculated?
a)
RP = D / P
b)
RP = P / D
c)
RP = D × P
d)
RP = P × D
42.
What is a key characteristic of preferred stock?
a)
It pays a constant dividend in perpetuity
b)
It can fluctuate in price like common stock
c)
It has a fixed maturity date
d)
It pays no dividend until the firm is profitable
43.
What is the formula for the Weighted Average Cost of Capital (WACC)?
a)
RWACC = (S / (S + B)) × RS + (B / (S + B)) × RB × (1 - TC)
b)
RWACC = (S / (S + B)) × RB + (B / (S + B)) × RS × (1 - TC)
c)
RWACC = ((S + B) / S) × RS + (B / S) × RB × (1 - TC)
d)
RWACC = ((S + B) / B) × RB + (S / B) × RS × (1 - TC)
44.
What is the second step in determining the WACC?
a)
Estimate the market risk premium
b)
Estimate the cost of debt
c)
Calculate the WACC by weighting the costs of debt and equity appropriately
d)
Estimate the equity beta
45.
The WACC is used in which of the following?
a)
To find the total debt value
b)
To determine the present value of expected future cash flows
c)
To calculate dividends on preferred stock
d)
To calculate the firm’s stock price
46.
To find the equity value using WACC, we must:
a)
Add the value of debt to the firm value
b)
Subtract the value of debt from the firm value
c)
Add the value of dividends to the firm value
d)
Subtract the WACC from the firm value
47.
What do flotation costs represent?
a)
The ongoing cost of maintaining debt
b)
The expenses incurred when repurchasing shares
c)
The expenses incurred upon issuing new bonds or stocks
d)
The cost of paying dividends to preferred shareholders
48.
How do flotation costs affect a project's cash flows?
a)
They reduce the project's risk
b)
They increase the project's NPV
c)
They increase the initial project cost, reducing the NPV
d)
They do not impact project evaluation
49.
Which formula is used to determine the amount to be raised when flotation costs are involved?
a)
Amount Raised = Necessary Proceeds × (1 - flotation cost)
b)
Amount Raised = Necessary Proceeds × flotation cost
c)
Amount Raised = Necessary Proceeds / (1 - flotation cost)
d)
Amount Raised = Necessary Proceeds + flotation cost
50.
Which of the following represents the weighted average flotation cost formula?
a)
fA = (E / V) × fE + (D / V) × fD
b)
fA = (E + D) / V × fD
c)
fA = (E / V) × fD + (D / V) × fE
d)
fA = (V / D) × fE + (V / E) × fD
51.
Why do firms often assign a flotation cost of zero to equity?
a)
Because equity is cheaper than debt
b)
Because internally generated cash flow covers the equity portion of capital spending
c)
Because equity is risk-free
d)
Because equity is always raised externally
52.
Under the principle of "one share, one vote", what power do common shareholders hold?
a)
The right to vote only during liquidation
b)
The right to vote to elect directors
c)
The right to receive guaranteed dividends
d)
The right to redeem stock at any time
53.
What is the key difference between cumulative and straight voting?
a)
Straight voting gives each shareholder multiple votes
b)
Cumulative voting allows shareholders to concentrate votes on fewer candidates
c)
Straight voting favors minority shareholders
d)
Cumulative voting requires owning all shares of a company
54.
What percentage of stock is needed to guarantee one seat in a cumulative voting system when there are 4 seats available?
a)
0.5
b)
0.25
c)
0.2
d)
0.1
55.
Why can straight voting “freeze out” minority shareholders?
a)
Because all votes must be approved by the board
b)
Because only one vote is allowed per shareholder
c)
Because majority shareholders can elect all directors one by one
d)
Because straight voting limits dividend rights
56.
What is one function of a staggered board?
a)
To ensure all directors are elected yearly
b)
To increase liquidity in common stock
c)
To make it harder for a minority to elect a director
d)
To reduce corporate memory
57.
What is a preemptive right?
a)
The right to elect all directors
b)
The right to receive dividends before anyone else
c)
The right to vote against mergers
d)
The right to maintain proportional ownership by buying new stock before it's offered to the public
58.
Which of the following is true about dividends?
a)
They are considered liabilities of the firm
b)
They are paid from pre-tax income
c)
They are paid from after-tax income and are not tax deductible
d)
They are required to be paid annually
59.
Why can’t corporations go bankrupt for not paying dividends?
a)
Because dividends are not taxed
b)
Because unpaid dividends are not considered a corporate liability
c)
Because dividends are always cumulative
d)
Because dividends can be delayed without consequence
60.
Which of the following statements is true regarding preferred stock?
a)
Preferred stockholders usually have voting rights
b)
Preferred stock dividends are variable like common stock
c)
Preferred stock typically pays fixed dividends in perpetuity
d)
Preferred stock cannot default
61.
What does the term “stated value” of preferred stock refer to?
a)
Its market value
b)
Its face value used to calculate dividends
c)
The book value of the stock
d)
The amount guaranteed by the government
62.
What happens if cumulative preferred dividends are not paid in a given year?
a)
The company must pay them immediately
b)
The unpaid dividends are lost
c)
They accumulate and must be paid before any common dividends
d)
The company enters default
63.
Why is preferred stock often considered similar to debt?
a)
Because it must be paid back like a loan
b)
Because it typically has a maturity date
c)
Because it pays a fixed dividend, like bond interest
d)
Because it gives voting rights
64.
Which of the following is included in the contract between a company and its bondholders?
a)
Tax rate schedule
b)
Stockholder voting rights
c)
Call provisions and sinking fund terms
d)
Quarterly earnings report
65.
What is a debenture?
a)
A bond secured by land or buildings
b)
A secured note backed by financial securities
c)
An unsecured bond
d)
A bond with variable interest
66.
What is the difference between registered and bearer bonds?
a)
Registered bonds are not taxed
b)
Bearer bonds are tracked through company records
c)
Registered bonds track ownership; bearer bonds do not
d)
Bearer bonds are secured while registered bonds are not
67.
Which of the following types of debt is unsecured and typically has a maturity less than 10 years?
a)
Mortgage bond
b)
Collateralized loan
c)
Note
d)
Debenture
68.
Which type of bond will typically have a higher coupon rate, all else equal?
a)
Secured debt
b)
Debenture
c)
Senior debt
d)
Bond with a sinking fund
69.
What defines a zero-coupon bond?
a)
It pays interest monthly
b)
It pays no periodic interest and sells at a discount
c)
It pays variable interest tied to inflation
d)
It matures in less than one year
70.
Why can a zero-coupon bond never sell for more than par value?
a)
Because it has a floating interest rate
b)
Because it has no value at maturity
c)
Because its yield comes entirely from the discount
d)
Because it is secured by real property
71.
What is a floating rate bond?
a)
A bond that pays no interest
b)
A bond whose coupon rate changes based on an index
c)
A bond that matures early
d)
A bond with no risk of default
72.
What does a “collar” on a floating rate bond do?
a)
Guarantees the bond will float with inflation
b)
Limits the range of interest rates
c)
Eliminates credit risk
d)
Prevents early redemption
73.
Which of the following bonds pays interest only if the issuer earns enough income?
a)
Zero coupon bond
b)
Put bond
c)
Income bond
d)
Floating rate bond
74.
What feature makes convertible bonds attractive to investors?
a)
Fixed maturity
b)
Ability to swap the bond for shares of stock
c)
Higher coupon rate
d)
Full repayment before maturity
75.
What do put bonds allow bondholders to do?
a)
Delay interest payments
b)
Convert bonds into equity
c)
Force the issuer to buy back the bond at a stated price
d)
Float the interest rate
76.
What is a Eurobond?
a)
A bond issued in Europe and denominated in local currency
b)
A bond issued in a foreign market in the currency of that country
c)
A bond issued in one currency but sold in multiple countries
d)
A bond issued by the European Central Bank
77.
What defines a foreign bond?
a)
Issued domestically and sold internationally
b)
Issued by a foreign entity in a country, using that country’s currency
c)
Issued in multiple currencies
d)
Issued with no backing or security
78.
What is a syndicated loan?
a)
A loan funded by a single regional bank
b)
A government-backed loan to large corporations
c)
A large loan arranged by a lead bank and sold to other banks
d)
A revolving line of credit for consumers
79.
According to MM Proposition I (No Taxes), what is the relationship between firm value and leverage?
a)
Leveraged firms are always more valuable
b)
Firm value is not affected by leverage
c)
More leverage leads to bankruptcy risk
d)
Leveraged firms have higher cost of capital
80.
What is the MM Proposition I (No Taxes) formula?
a)
V_L = V_U
b)
V_L = V_U + T_C × B
c)
R_S = R_0 + (B / S) × (R_0 - R_B)
d)
R_B = R_S - R_0
81.
Which of the following best describes homemade leverage?
a)
Borrowing to invest in multiple leveraged firms
b)
Replicating corporate leverage using personal borrowing
c)
Avoiding all debt in investment
d)
Using corporate profits to buy equity
82.
Under MM Proposition II (No Taxes), what happens to the cost of equity as leverage increases?
a)
It stays constant
b)
It decreases
c)
It increases
d)
It becomes equal to the cost of debt
83.
What is the formula for MM Proposition II (No Taxes)?
a)
R_S = R_0 + (B / S) × (R_0 - R_B)
b)
R_S = R_0 - (B / S) × (R_B - R_0)
c)
R_S = R_0 + R_B - B / S
d)
R_S = R_0 × (1 - T_C)
84.
What is the main assumption underlying MM Propositions I and II?
a)
Corporate taxes are high
b)
Investors have different risk expectations
c)
There are no taxes, transaction costs, or bankruptcy costs
d)
Leverage is preferred by all investors
85.
Which of the following assumptions is not part of the MM Model (No Taxes)?
a)
No transaction costs
b)
Perfect competition
c)
Taxes are deducted from all income
d)
Equal access to information
86.
In MM Proposition I (with Taxes), how is firm value affected by leverage?
a)
It stays constant
b)
It decreases
c)
It increases due to the tax shield
d)
It depends solely on risk
87.
What is the formula for MM Proposition I (with Corporate Taxes)?
a)
V_L = V_U + T_C × B
b)
V_L = V_U × T_C × B
c)
V_L = V_U - T_C × B
d)
V_L = V_U / (1 - T_C)
88.
Under MM Proposition II (with Taxes), what adjustment is made to account for the tax shield?
a)
Debt is removed from the formula
b)
A (1 - T_C) term is included
c)
Equity cost is replaced by debt cost
d)
Leverage is ignored
89.
What is the formula for MM Proposition II (with Taxes)?
a)
R_S = R_0 + (B / S) × (1 - T_C) × (R_0 - R_B)
b)
R_S = R_0 + (B / S) × (R_0 - R_B)
c)
R_S = R_0 - T_C × R_B
d)
R_S = R_0 + R_B - T_C
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