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linda_us, Master's Degree
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1. Using the Capital Asset Pricing Model, estimate the required

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1. 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)

2. In order to find the cost of equity using the firm’s cost of debt, the rule of thumb is to: (Points : 1)
multiply Kd by one plus the tax rate.
multiply Kd by one minus the tax rate.
add 3% to 6% to Kd.
multiply Kd by the firm’s beta.

3. 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.

4. Which of the following statements regarding business risk, financial risk, and investors’ risk, is true? (Points : 1)
Business risk is very similar to the risk of bankruptcy and is closely linked to the amount of debt in a firm’s financing mix.
Financial risk is associated with the returns earned by equity investors.
Business risk is often measured by the variability of earnings before depreciation and taxes and is closely associated with the risk inherent in the goods and services a business is selling.
Investment risk is the uncertainty associated with a firm’s investment projects. It can be thought of as the likelihood that the expected IRR or NPV from an investment project will not materialize.

5. 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.

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.

7. Which of the following is true of flotation costs? (Points : 1)
They include expenses like investment banker fees and commissions.
They include the underwriting spread.
They tend to raise the cost of capital.
all of the above

8. Which of the following is true regarding market risk? (Points : 1)
It is measured by beta.
It is also called nondiversifiable risk.
It is also called systematic risk.
all of the above

9. We assume investors are risk averse, and therefore they: (Points : 1)
are equally concerned with upside potential and downside risk.
expect a higher return for bearing more risk.
will pay more for an investment with higher risk.
have very high required rates of return.

10. One reason why we are not concerned with idiosyncratic risk (also called firm-specific risk) is that: (Points : 1)
most risk is not firm-specific, so we can ignore it.
through hedging and insurance, investors may now invest in stocks with almost no risk exposure of any kind.
it is easy and almost costless to diversify one’s portfolio and eliminate idiosyncratic risk.
investing in bonds can offset the idiosyncratic risks of shares of stock.
Submitted: 3 years ago.
Category: Multiple Problems
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