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The best fit line of a pairwise plot of the returns of the security
against the market index returns is called the:
Security Market Line.
Capital Market Line.
characteristic line.
risk line.
None of these.
C
If the project beta and IRR coordinates plot above the SML the
project should be:
accepted.
rejected.
It is impossible to tell.
It will depend on the NPV.
None of these.
A
When valuing an entire firm with both debt and equity, the
basic starting point in choosing a discount rate is:
WACC.
CAPM.
pre-tax cost of debt.
after-tax cost of debt.
None of these.
MC Qu. 17
Betas may vary substantially across an industry. The decision to
use the industry or firm beta to estimate the cost of capital
depends on:
how small the estimation errors are of all betas across
industries.
how similar the firm's operations are to the operations of all
other firms in the industry.
whether the company is a leader or follower.
the size of the company's public float.
None of these.
B
Both firm would accept too many high-risk projects; and firm
would reject too many low risk projects.
E
When valuing a firm with debt and equity, the cash flows during
the non-constant growth period should be:
multiplied by the WACC
multiplied by the cost of equity.
divided by (1 + WACC)^n.
divided by (1 + CAPM)^n.
divided by (r - g).
C
Cycles in revenues
Operating leverage
Financial leverage
All of these.
None of these.
D
If a firm has low fixed costs relative to all other firms in the
same industry, a large change in sales volume (either up or
down) would have:
a smaller change in EBIT for the firm versus the other firms.
no effect in any way on the firms, as volume does not affect
fixed costs.
a decreasing effect on the cyclical nature of the business.
a larger change in EBIT for the firm versus the other firms.
None of these.
A
cash value
non-constant value
estimated value
horizon value
E
For the levered firm the equity beta is __________ the asset
beta.
greater than
less than
equal to
sometimes greater than and sometimes less than
None of these.
A
All else equal, a more liquid stock will have a lower ________.
beta
market premium
cost of capital
Both beta and market premium.
Both beta and cost of capital.
E
Two stock market based costs of liquidity that affects the cost of
capital are the:
bid-ask spread and the specialist spread.
The CAPM:
explicitly adjusts for risk.
applies to companies that do not pay dividends.
applies to companies that have dividend growth that is hard to
estimate.
None of these.
D
9.14%
9.45%
D
6.9%
7.2%
D
1.00
1.17
1.20
2.50
It is impossible to calculate with the information given.
B
1,215,650
1,328,141
1,461,409
1,575,941
None of these
C
The net cash flows of Advantage Leasing for the next 3 years are
$42,000, $49,000 and $64,000 respectively, after which the
growth rate will be a constant 2% with a WACC of 8%. What is
the present value of the terminal value?
51,822
55,967
59,259
60,444
None of these
B
The Norris Co. has an improved version of its hotel stand. The
investment cost is expected to be $72 million and will return
$13.5 million for 5 years in net cash flows. The ratio of debt to
equity is 1 to 1. The cost of equity is 13%, the cost of debt is 9%,
and the tax rate is 34%. The appropriate discount rate,
assuming average risk, is:
8.65%
9%
9.47%
10.5%
13%
C
8.5%
9%
11.3%
12%
D
1.67.
B