Question
Question 1
2 / 2 pts
The use of WACC to select investments is acceptable when the:
NPV is positive when discounted by the WACC.
correlations of all new projects are equal.
risks of the projects are equal to the risk of the firm.
firm is well diversified and the unsystematic risk is negligible.
None of these.
Question 2
2 / 2 pts
The beta of a security provides an:
estimate of the slope of the Capital Market Line.
estimate of the slope of the Security Market Line.
None of these.
estimate of the market risk premium.
estimate of the systematic risk of the security.
Question 3
2 / 2 pts
The following are methods to estimate the market risk premium:
use the bond valuation model to estimate growth in bond prices with different costs of capital.
use historical data to estimate future risk premium and use the dividend discount model to estimate risk premium.
use the dividend discount model to estimate risk premium.
use historical data to estimate future risk premium.
use historical data to estimate future risk premium and use the bond valuation model to estimate growth in bond prices with different costs of capital.
Question 4
2 / 2 pts
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.
None of these.
a decreasing effect on the cyclical nature of the business.
a larger change in EBIT for the firm versus the other firms.
Question 5
2 / 2 pts
For a multi-product firm, if a project’s beta is different from that of the overall firm, then the:
CAPM can no longer be used.
project should be discounted using the overall firm’s beta.
project should be discounted at the market rate.
project should be discounted at the T-bill rate.
project should be discounted at a rate commensurate with its own beta.
Question 6
2 / 2 pts
Firms whose revenues are strongly cyclical and whose operating leverage is high are likely to have:
zero betas.
negative betas.
high betas.
None of these.
low betas.
Question 7
2 / 2 pts
The present value of cash flows is important in
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