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# BUS 401 Week 4 Quiz (NEW)

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1.

Question :

Investors will make an investment if:

the historical rate of return exceeds the expected rate of return.

the required rate of return exceeds the expected rate of return.

the expected rate of return exceeds the actual rate of return.

the expected rate of return exceeds the required rate of return.

Instructor Explanation:

The answer can be found in Section 9.1: The Building Blocks of the Required Return.

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2.

Question :

Which of the following is true regarding market risk?

It is measured by beta.

It is also called nondiversifiable risk.

It is also called systematic risk.

all of the above

Instructor Explanation:

The answer can be found in Section 9.2: Risk and Return.

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3.

Question :

Which of the following statements regarding the cost of equity is true?

It can be estimated in three different ways.

It is always estimated using the present value of future dividends approach.

It is estimated by solving for the discount rate for a perpetuity.

It is generally lower than the cost of debt because equity holders are paid after taxes are paid.

Instructor Explanation:

The answer can be found in Section 10.2: The Weighted Cost of Capital.

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4.

Question :

The weighted average cost of capital is:

the average return for the company’s stock over the past several years.

the average cost, including commissions, for raising capital for the firm.

an average required return for each of the sources of capital used by the firm to finance its projects, weighted by the amount contributed by each source.

interest payments and dividends, divided by the price of bonds and stock, respectively.

Instructor Explanation:

The answer can be found in Section 10.2: The Weighted Cost of Capital.

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5.

Question :

In the Capital Asset Pricing Model, the risk-free rate:

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.

Instructor Explanation:

The answer can be found in Section 9.2: Risk and Return.

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6.

Question :

In the Capital Asset Pricing Model, the market risk premium can be thought of as:

the return investors expect to earn for each unit of risk as measured by beta.

the risk premium that any asset must pay above the risk-free rate.

the expected return on the market portfolio (or a broad market index).

a measure of risk of an asset.

Instructor Explanation:

The answer can be found in Section 9.2: Risk and Return.

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7.

Question :

A bond pays semiannual coupon payments of \$30 each. It matures in 20 years and is selling for \$1,200. What is the firm’s cost of debt if the bond’s par value is \$1,000? (Don’t forget this is a semiannual coupon.)

2.23%

4.48%

1.80%

3.60%

Instructor Explanation:

The answer can be found in Section 10.2: The Weighted Average Cost of Capital.

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8.

Question :

Which of the following is beta is used for?

estimating a regression line

estimating a firm’s total risk to be used in the WACC

estimating a firm’s market risk and used with the CAPM

estimating the amount of leverage used by the firm

Instructor Explanation:

The answer can be found in Section 10.2: The Weighted Cost of Capital.

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9.

Question :

The discount rate used in project evaluation should:

be based on the firm’s overall risk.

be based on each project’s risk.

be estimated using the WACC for all projects.

All of the above are correct.

Instructor Explanation:

The answer can be found in Section 10.3: Estimating the Discount Rate for Individual Projects.

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10.

Question :

The financing mix reflected in the WACC should:

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.

Instructor Explanation:

The answer can be found in Section 10.2: The Weighted Cost of Capital.

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