1. Beta is estimated as the slope of a regression line fit to pairs of periodic returns, (rx, ry), where: (Points : 1)
rx is the return for a market index such as the S&P 500 Index. rx is the return for the stock being analyzed—for example, IBM’s return if we are estimating IBM’s beta. the slope measures the average return for the market portfolio for each percentage change in the value of the security of interest. ry is the return for the market index such as the S&P 500 Index.
Question 2. 2. Weights used in calculating the WACC should: (Points : 1)
sum to 1.00. always include Wd. be based on the book value of each source of financing. be calculated according to the price of each security—so if the price of a bond is $1,000, and the price of common stock is $50, then the weight of debt would be .20.
Question 3. 3. Which of the following statements regarding the cost of preferred stock is true? (Points : 1)
It is typically found by solving for an annuity’s discount rate. It is typically found by solving for an annuity due’s discount rate. It is found similarly to a perpetuity’s discount rate but with irregular spacing of the dividends. It is typically found by solving for a perpetuity’s discount rate.
Question 4. 4. In the Capital Asset Pricing Model, the market risk premium is best approximated by: (Points : 1)
the most recent one-year return on the S&P 500 Index (or another market index). the long-term historic return on a stock market index such as the S&P 500 (or another market index). the long-term average spread of the S&P 500 (or another market index) over the yield of long-term government bonds. the return of the S&P 500 (or another market index) over the current yield of long-term government bonds.
Question 5. 5. In the Capital Asset Pricing Model, the risk-free rate: (Points : 1)
links the CAPM to current market conditions. is the historic long-term average rate of government bonds. can be approximated by using yields on high-rated corporate bonds. is always the current yield on 30-year US government Treasury bonds.
Question 6. 6. Total risk is measured by: (Points : 1)
the standard deviation of returns. the firm’s beta. Moody’s, Standard & Poor’s, and Fitch ratings. the variability of EBIT.
Question 7. 7. The Hamada Equation allows the firm to: (Points : 1)
solve for a company’s total risk. adjust the beta of a pure-play firm for its use of debt financing. estimate its asset beta. Both b and c are correct.
Question 8. 8. Using the Capital Asset Pricing Model, estimate the required rate of return for Caterpillar Incorporated stock if the company’s beta is 1.87 (as of February 1, 2013). Use a risk-free rate of 3% and a market risk premium of 6%. (Points : 1)
8.61% 11.22% 14.22% 16.83%
Question 9. 9. The financing mix reflected in the WACC should: (Points : 1)
reflect the desired mix and not necessarily the mix being used to finance a specific project. vary from project to project, depending on how they are financed. always reflect the firm’s current capital structure. None of these answers is correct.
Question 10. 10. Chapter 9 discusses three different types of returns. Identify the item in the list below that is NOT one of those three types of returns. (Points : 1)
the actual rate of return the expected rate of return the risk-free rate of return the required rate of return