BUS 401 Week 4 Quiz
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<strong>BUS</strong> <strong>401</strong> <strong>Week</strong> 4 <strong>Quiz</strong><br />
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m/<strong>BUS</strong>-<strong>401</strong>-NEW/<strong>BUS</strong>-<strong>401</strong>-<strong>Week</strong>-4-<br />
<strong>Quiz</strong><br />
1.) Investors will make an investment if:<br />
the historical rate of return exceeds the expected rate of<br />
return.<br />
the required rate of return exceeds the expected rate of<br />
return.<br />
the expected rate of return exceeds the actual rate of<br />
return.<br />
the expected rate of return exceeds the required rate of<br />
return.<br />
2.) Which of the following is true regarding market risk?<br />
It is measured by beta.<br />
It is also called nondiversifiable risk.<br />
It is also called systematic risk.<br />
all of the above
3.) Which of the following statements regarding the cost<br />
of equity is true?<br />
It can be estimated in three different ways.<br />
It is always estimated using the present value of future<br />
dividends approach.<br />
It is estimated by solving for the discount rate for a<br />
perpetuity.<br />
It is generally lower than the cost of debt because equity<br />
holders are paid after taxes are paid.<br />
4.) The weighted average cost of capital is:<br />
the average return for the company’s stock over the past<br />
several years.<br />
the average cost, including commissions, for raising<br />
capital for the firm.<br />
an average required return for each of the sources of<br />
capital used by the firm to finance its projects, weighted<br />
by the amount contributed by each source.<br />
interest payments and dividends, divided by the price of<br />
bonds and stock, respectively.<br />
5.) In the Capital Asset Pricing Model, the risk-free rate:<br />
links the CAPM to current market conditions.<br />
is the historic long-term average rate of government<br />
bonds.<br />
can be approximated by using yields on high-rated<br />
corporate bonds.<br />
is always the current yield on 30-year US government<br />
Treasury bonds.
6.) In the Capital Asset Pricing Model, the market risk<br />
premium can be thought of as:<br />
the return investors expect to earn for each unit of risk as<br />
measured by beta.<br />
the risk premium that any asset must pay above the riskfree<br />
rate.<br />
the expected return on the market portfolio (or a broad<br />
market index).<br />
a measure of risk of an asset.<br />
7.) A bond pays semiannual coupon payments of $30 each.<br />
It matures in 20 years and is selling for $1,200. What is<br />
the firm’s cost of debt if the bond’s par value is $1,000?<br />
(Don’t forget this is a semiannual coupon.)<br />
2.23%<br />
4.48%<br />
1.80%<br />
3.60%<br />
8.) Which of the following is beta is used for?<br />
estimating a regression line<br />
estimating a firm’s total risk to be used in the WACC<br />
estimating a firm’s market risk and used with the CAPM<br />
estimating the amount of leverage used by the firm
9.) The discount rate used in project evaluation should:<br />
be based on the firm’s overall risk.<br />
be based on each project’s risk.<br />
be estimated using the WACC for all projects.<br />
All of the above are correct.<br />
10.) The financing mix reflected in the WACC should:<br />
reflect the desired mix and not necessarily the mix being<br />
used to finance a specific project.<br />
vary from project to project, depending on how they are<br />
financed.<br />
always reflect the firm’s current capital structure.<br />
None of these answers is correct.<br />
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