Cost of E

If the risk of an investment project differs from the overall firm's risk then the:

• A. market rate of return should be used as the project's discount rate.

• B. project's discount rate must be adjusted based on the risks of the project's cash flows.

• C. project's discount rate must be adjusted based on the sources of project financing.

• D. average rate used for all prior projects should be used as the new project's discount rate.

The beta of the stock of an individual firm is primarily affected by:

• A. the operating and financial leverage of the firm as well as the cyclical nature of the firm’s revenues

• B. the overall direction of the market's movements.

• C. variance of the market and the stock, but not their co-movement.

• D. the growth rate and changes of the firm's revenues and profits.

The beta of a security is calculated as: (_____ of a security's return with the return on the market portfolio / _______).

• A. Variance; Covariance of the market return

• B. Covariance; Variance of the market return

• C. Covariance; Standard deviation of the market return

• D. Variance; Covariance of the security return

Companies will generally have a:

• A. low beta if their sales are directly related to the market cycle.

• B. high beta if their sales are highly dependent on the market cycle.

• C. high beta if sales are independent of the market cycle.

• D. high beta if their sales are highly variable but unrelated to the market cycle.

For a multi-product firm, if a project's level of risk differs from that of the overall firm, then the:

• A. CAPM can no longer be used to estimate the cost of equity as beta no longer applies.

• B. project should be discounted using the overall firm's beta.

• C. project should be discounted using a beta commensurate with the project's risks.

• D. project should be discounted at the market rate.

The problem that results from using the overall firm's beta in discounting projects of differing risk levels is the:

• A. acceptance of too many high-risk projects.

• B. rejection of too many low risk projects.

• C. rejection of too many high-risk projects.

• D. acceptance of too many low risk projects.

When valuing a firm financed with debt and equity, the cash flows should be discounted using:

• A. the market rate of return.

• B. the average of the DDM and CAPM costs of equity.

• C. (1 + WACC)T.

• D. (1 + CAPM)T.

Comparing two otherwise equivalent firms, the beta of the common stock of a levered firm is _______ the beta of the common stock of an unlevered firm.

• A. roughly equivalent to

• B. significantly less

• C. slightly less

• D. greater than

The beta of a firm is more likely to be high under which two conditions?

• A. high cyclical business activity and low operating leverage

• B. high cyclical business activity and high operating leverage

• C. low cyclical business activity and low financial leverage

• D. low cyclical business activity and low operating leverage

A firm with cyclical earnings is characterized by:

• A. revenue patterns that vary with the business cycle.

• B. high levels of debt in its capital structure.

• C. high fixed costs.

• D. high costs per unit.