LORMA COLLEGES

College of and Accountancy

City of San Fernando, La Union

BAFM 11 (Capital Market)

Midterm Examination

MULTIPLE CHOICE. Choose the best answer

1. The capital asset pricing model assumes

A. all investors are price takers.
B. all investors have the same holding period.
C. investors have homogeneous expectations.
D. both A and B are true

2.According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function
of
A. beta risk
B. unsystematic risk
C. unique risk.
D. reinvestment risk.

3.The risk premium on the market portfolio will be proportional to

A. the average degree of risk aversion of the investor population.
B. the risk of the market portfolio as measured by its variance.
C. the risk of the market portfolio as measured by its beta.
D. both A and B are true.

4. Which of the following actions are likely to reduce agency conflicts between stockholders and managers?
a. Paying managers a large fixed salary.
b. Increasing the threat of corporate takeover.
c. Placing restrictive covenants in debt agreements.
d. All of the statements above are correct.
e. Statements b and c are correct

5. A decrease in the debt ratio will generally have no effect on __________.

a. Financial risk.
b. Total risk.
c. Business risk.
d. Market risk.

6. Which of the following factors is likely to encourage a corporation to increase the proportion of debt in its capital
structure?
a. An increase in the corporate tax rate.
b. An increase in the personal tax rate.
c. An increase in the company's degree of operating leverage.
d. The company's assets become less liquid.
e. An increase in expected bankruptcy costs.

7. Trenton Publishing follows a strict residual dividend policy. All else being equal, which of the following factors
are likely to cause an increase in the firm's per-share dividend?
a. An increase in its net income.
b. The company increases the proportion of equity financing in its target capital
structure.
c. An increase in the number of profitable projects that it wants to fund this year.
d. Statements a and b are correct.
e. All of the statements above are correct.

8. Which of the following are reasons why companies move into international operations?
a. To take advantage of lower production costs in regions of inexpensive labor.
b. To develop new markets for their finished products.
c. To better serve their primary customers.
d. Because important raw materials are located abroad.
e. All of the statements above are correct.

9. Multinational financial management requires that

a. The effects of changing currency values be included in financial analyses.
b. Legal and economic differences be considered in financial decisions.
c. Political risk be excluded from multinational corporate financial analyses.
d. Statements a and b are correct.
e. All of the statements above are correct.
10. The primary goal of a publicly-owned firm interested in serving its stockholders should be to
a. Maximize expected total corporate profit.
b. Maximize expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share.
e. Maximize expected net income.

II. COMPUTATION. At the project's WACC of 10 percent, the project has an NPV
of $124.78. What is the project's internal rate of return?

A project has the following net cash flows:

Year Project Cash Flow

0 -$ X
1 150
2 200
3 250
4 400
5 100

III. ESSAY. Answer briefly but substantially

1. Explain why it is very unlikely that one can beat the stock market.
2. Explain the relation between the interest rate paid by a security and expected inflation

Prepared by:

JUAN PAOLO C. ESPIRITU

Reviewed and Approved by:

NINO ROMYR H. SAAVEDRA, MBA

Dean