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Financial Management 2017 - Quiz and Case Study Guides - Corporate Finance, 4e (Berk / DeMarzo) - Quiz - Chapter 12

Financial Management 2016 - 2017

FINANCIAL MANAGEMENT 2017 - QUIZ AND CASE STUDY GUIDES

Corporate Finance, 4e (Berk / DeMarzo)

Chapter 12   Estimating the Cost of Capital

 

 

Corporate Finance, 4e (Berk / DeMarzo)

Chapter 12   Estimating the Cost of Capital

 

12.1   The Equity Cost of Capital

 

Use the following information to answer the question(s) below.

 

 

Beta

Volatility

"Eenie"

0.45

20%

"Meenie"

0.75

18%

"Miney"

1.05

35%

"Moe"

1.20

25%

 

Assume that the risk-free rate of interest is 3% and you estimate the market's expected return to be 9%.

 

1) Which firm has the most total risk?

  1. A) Eenie
  2. B) Meenie
  3. C) Miney
  4. D) Moe

Answer:  C

Explanation:  C) Total risk is measured using volatility and Miney has the highest volatility, hence the most total risk.

Diff: 1

Section:  12.1 The Equity Cost of Capital

Skill:  Analytical

 

2) Which firm has the least market risk?

  1. A) Eenie
  2. B) Meenie
  3. C) Miney
  4. D) Moe

Answer:  A

Explanation:  A) Market risk is measured using beta and Eenie has the lowest beta, hence the lowest market risk.

Diff: 1

Section:  12.1 The Equity Cost of Capital

Skill:  Analytical

 

 

3) Which firm has the highest cost of equity capital?

  1. A) Eenie
  2. B) Meenie
  3. C) Miney
  4. D) Moe

Answer:  D

Explanation:  D) Cost of capital is measured using the CAPM and is a linear function of beta.  Therefore the firm with the highest beta (Moe) has the highest cost of equity capital.

Diff: 1

Section:  12.1 The Equity Cost of Capital

Skill:  Analytical

4) The equity cost of capital for "Miney" is closest to:

  1. A) 6.30%
  2. B) 7.50%
  3. C) 9.30%
  4. D) 9.75%

Answer:  C

Explanation:  C) rMiney = 3% + 1.05(9% - 3%) = 9.3%

Diff: 1

Section:  12.1 The Equity Cost of Capital

Skill:  Analytical

 

5) The equity cost of capital for "Meenie" is closest to:

  1. A) 4.50%
  2. B) 7.50%
  3. C) 9.30%
  4. D) 9.75%

Answer:  B

Explanation:  B) rMeenie = 3% + 0.75(9% - 3%) = 7.5%

Diff: 1

Section:  12.1 The Equity Cost of Capital

Skill:  Analytical

 

 

6) The risk premium for "Meenie" is closest to:

  1. A) 4.50%
  2. B) 7.50%
  3. C) 9.30%
  4. D) 9.75%

Answer:  A

Explanation:  A) risk premiumMeenie = 0.75(9% - 3%) = 4.5%

Diff: 2

Section:  12.1 The Equity Cost of Capital

Skill:  Analytical

 

12.2   The Market Portfolio

 

Use the following information to answer the question(s) below.

 

Suppose all possible investment opportunities in the world are limited to the four stocks list in the table below:

 

Stock

Price per

Share

Number of Shares

Outstanding (Millions)

Taggart Transcontinental

$15.60

25

Rearden Metal

$13.00

45

Wyatt Oil

$29.25

10

Nielson Motors

$26.25

26

 

1) The weight on Taggart Transcontinental stock in the market portfolio is closest to:

  1. A) 15%
  2. B) 20%
  3. C) 25%
  4. D) 30%

Answer:  B

Explanation:  B) 

Calculations

 

 

 B × C

 D/1950

Stock

Price per

Share

Number of Shares

Outstanding

(Millions)

Market

Cap

Weight

Taggart Transcontinental

$15.60

25

$390.00

0.2

Rearden Metal

$13.00

45

$585.00

0.3

Wyatt Oil

$29.25

10

$292.50

0.15

Nielson Motors

$26.25

26

$682.50

0.35

Total

 

 

$1950.00

 

Diff: 1

Section:  12.2 The Market Portfolio

Skill:  Analytical

 

2) The weight on Wyatt Oil stock in the market portfolio is closest to:

  1. A) 15%
  2. B) 20%
  3. C) 25%
  4. D) 30%

Answer:  A

Explanation:  A) 

Calculations

 

 

 B × C

 D/1950

Stock

Price per

Share

Number of Shares

Outstanding

(Millions)

Market

Cap

Weight

Taggart Transcontinental

$15.60

25

$390.00

0.2

Rearden Metal

$13.00

45

$585.00

0.3

Wyatt Oil

$29.25

10

$292.50

0.15

Nielson Motors

$26.25

26

$682.50

0.35

Total

 

 

$1950.00

 

Diff: 1

Section:  12.2 The Market Portfolio

Skill:  Analytical

 

3) Suppose that you are holding a market portfolio and you have invested $9000 in Rearden Metal.  The amount that you have invested in Nielson Motors is closest to:

  1. A) $6000
  2. B) $7715
  3. C) $9000
  4. D) $10,500

Answer:  D

Explanation:  D) 

Calculations

 

 

 B × C

 D/1950

Stock

Price per

Share

Number of Shares

Outstanding

(Millions)

Market

Cap

Weight

Taggart Transcontinental

$15.60

25

$390.00

0.2

Rearden Metal

$13.00

45

$585.00

0.3

Wyatt Oil

$29.25

10

$292.50

0.15

Nielson Motors

$26.25

26

$682.50

0.35

Total

 

 

$1950.00

 

 

AmountNielson =  × AmountRearden =  × $9000 = $10,500

Diff: 2

Section:  12.2 The Market Portfolio

Skill:  Analytical

 

4) Suppose that you are holding a market portfolio and you have invested $9000 in Rearden Metal.  The amount that you have invested in Taggart Transcontinental is closest to:

  1. A) $4500
  2. B) $6000
  3. C) $7715
  4. D) $9000

Answer:  B

Explanation:  B) 

Calculations

 

 

 B × C

 D/1950

Stock

Price per

Share

Number of Shares

Outstanding

(Millions)

Market

Cap

Weight

Taggart Transcontinental

$15.60

25

$390.00

0.2

Rearden Metal

$13.00

45

$585.00

0.3

Wyatt Oil

$29.25

10

$292.50

0.15

Nielson Motors

$26.25

26

$682.50

0.35

Total

 

 

$1950.00

 

 

AmountNielson =  × AmountRearden =  × $9000 = $6000

Diff: 2

Section:  12.2 The Market Portfolio

Skill:  Analytical

 

5) Suppose that you have invested $30,000 invested in the market portfolio.  Then the amount that you have invested in Wyatt Oil is closest to:

  1. A) $4500
  2. B) $6000
  3. C) $7715
  4. D) $9000

Answer:  A

Explanation:  A) 

Calculations

 

 

 B × C

 D/1950

Stock

Price per

Share

Number of Shares

Outstanding

(Millions)

Market

Cap

Weight

Taggart Transcontinental

$15.60

25

$390.00

0.2

Rearden Metal

$13.00

45

$585.00

0.3

Wyatt Oil

$29.25

10

$292.50

0.15

Nielson Motors

$26.25

26

$682.50

0.35

Total

 

 

$1950.00

 

 

AmountWO = WeightWO × AmountMarket = .15 × $30,000 = $4500

Diff: 2

Section:  12.2 The Market Portfolio

Skill:  Analytical

6) Suppose that you have invested $30,000 in the market portfolio.  Then the number of shares of Rearden Metal that you hold is closest to:

  1. A) 450 shares
  2. B) 700 shares
  3. C) 1400 shares
  4. D) 2300 shares

Answer:  B

Explanation:  B) 

Calculations

 

 

 B × C

 D/1950

Stock

Price per

Share

Number of Shares

Outstanding

(Millions)

Market

Cap

Weight

Taggart Transcontinental

$15.60

25

$390.00

0.2

Rearden Metal

$13.00

45

$585.00

0.3

Wyatt Oil

$29.25

10

$292.50

0.15

Nielson Motors

$26.25

26

$682.50

0.35

Total

 

 

$1950.00

 

 

SharesRM =  =  = 692.31 shares

Diff: 2

Section:  12.2 The Market Portfolio

Skill:  Analytical

 

 

7) Suppose that you have invested $30,000 in the market portfolio.  Then the number of shares of Wyatt Oil that you hold is closest to:

  1. A) 150 shares
  2. B) 300 shares
  3. C) 350 shares
  4. D) 450 shares

Answer:  A

Explanation:  A) 

Calculations

 

 

 B × C

 D/1950

Stock

Price per

Share

Number of Shares

Outstanding

(Millions)

Market

Cap

Weight

Taggart Transcontinental

$15.60

25

$390.00

0.2

Rearden Metal

$13.00

45

$585.00

0.3

Wyatt Oil

$29.25

10

$292.50

0.15

Nielson Motors

$26.25

26

$682.50

0.35

Total

 

 

$1950.00

 

 

SharesWO =  =  = 153.85 shares

Diff: 2

Section:  12.2 The Market Portfolio

Skill:  Analytical

 

8) Suppose that you are holding a market portfolio and you have invested $18,000 in Taggart Transcontinental.  The number of shares of Wyatt Oil that you hold is closest to:

  1. A) 90 shares
  2. B) 460 shares
  3. C) 615 shares
  4. D) 770 shares

Answer:  B

Explanation:  B) 

Calculations

 

 

 B × C

 D/1950

Stock

Price per

Share

Number of Shares

Outstanding

(Millions)

Market

Cap

Weight

Taggart Transcontinental

$15.60

25

$390.00

0.2

Rearden Metal

$13.00

45

$585.00

0.3

Wyatt Oil

$29.25

10

$292.50

0.15

Nielson Motors

$26.25

26

$682.50

0.35

Total

 

 

$1950.00

 

 

 =  = 461.54 shares

Diff: 2

Section:  12.2 The Market Portfolio

Skill:  Analytical

 

 

9) Suppose that you are holding a market portfolio and you have invested $18,000 in Taggart Transcontinental.  The number of shares of Rearden Metal that you hold is closest to:

  1. A) 780 shares
  2. B) 925 shares
  3. C) 1730 shares
  4. D) 2075 shares

Answer:  B

Explanation:  B) 

Calculations

 

 

 B × C

 D/1950

Stock

Price per

Share

Number of Shares

Outstanding

(Millions)

Market

Cap

Weight

Taggart Transcontinental

$15.60

25

$390.00

0.2

Rearden Metal

$13.00

45

$585.00

0.3

Wyatt Oil

$29.25

10

$292.50

0.15

Nielson Motors

$26.25

26

$682.50

0.35

Total

 

 

$1950.00

 

 

 =  = 2076.92 shares

Diff: 2

Section:  12.2 The Market Portfolio

Skill:  Analytical

10) Suppose that you have $100,000 invested in the market portfolio and that the stock price of Taggart Transcontinental suddenly drops to $7.80 per share.  Which of the following trades would you need to make in order to maintain your investment in the market portfolio:

  1. Buy approximately 1140 shares of Taggart Transcontinental
  2. Sell approximately 256 shares of Rearden Metal
  3. Sell approximately 57 shares of Wyatt Oil
  4. Sell approximately 148 shares of Nielson Motors
  5. A) 1 only
  6. B) 2 only
  7. C) 2, 3, and 4 only
  8. D) 1, 2, 3, and 4
  9. E) None of the above

Answer:  E

Explanation:  E) There is no need to rebalance your portfolio.  As an investor, you still hold the market portfolio and therefore there are no trades needed.

Diff: 3

Section:  12.2 The Market Portfolio

Skill:  Analytical

 


Use the following information to answer the question(s) below.

 

Suppose the market consists only of Merck (MRK) and Boeing (BA).  Merck stock is trading for $36.70 per share with 2.11 billion shares outstanding while Boeing has 697.5 million shares outstanding and a market capitalization of $38.223 billion.  Assume that you hold the market portfolio.

 

11) Boeing's stock price is closest to:

  1. A) $18.25
  2. B) $36.70
  3. C) $54.80
  4. D) $63.40

Answer:  C

Explanation:  C)

PriceBA =  =  = $54.80

Diff: 1

Section:  12.2 The Market Portfolio

Skill:  Analytical

 

12) Merck's market capitalization is closest to:

  1. A) $38.2 billion
  2. B) $77.4 billion
  3. C) $89.4 billion
  4. D) $115.6 billion

Answer:  B

Explanation:  B) Market Cap = Price × shares outstanding = $36.70 × 2110 = $77,437 million

Diff: 1

Section:  12.2 The Market Portfolio

Skill:  Analytical

13) If you hold 1000 shares of Merck, then the number of shares of Boeing that you hold is closest to:

  1. A) 240 shares
  2. B) 330 shares
  3. C) 510 shares
  4. D) 780 shares

Answer:  B

Explanation:  B)

SharesBA =  

 

                  =  = 330.57 shares

Diff: 3

Section:  12.2 The Market Portfolio

Skill:  Analytical

 

14) Which of the following statements is FALSE?

  1. A) All investors should demand the same efficient portfolio of securities in the same proportions.
  2. B) The Capital Asset Pricing Model (CAPM) allows corporate executives to identify the efficient portfolio (of risky assets) by using knowledge of the expected return of each security.
  3. C) If investors hold the efficient portfolio, then the cost of capital for any investment project is equal to its required return calculated using its beta with the efficient portfolio.
  4. D) The CAPM identifies the market portfolio as the efficient portfolio.

Answer:  B

Diff: 1

Section:  12.2 The Market Portfolio

Skill:  Conceptual

 

15) Which of the following statements is FALSE?

  1. A) If investors have homogeneous expectations, then each investor will identify the same portfolio as having the highest Sharpe ratio in the economy.
  2. B) Homogeneous expectations are when all investors have the same estimates concerning future investments and returns.
  3. C) There are many investors in the world, and each must have identical estimates of the volatilities, correlations, and expected returns of the available securities.
  4. D) The combined portfolio of risky securities of all investors must equal the efficient portfolio.

Answer:  C

Diff: 1

Section:  12.2 The Market Portfolio

Skill:  Conceptual

16) Which of the following statements is FALSE?

  1. A) If some security were not part of the efficient portfolio, then every investor would want to own it, and demand for this security would increase causing its expected return to fall until it is no longer an attractive investment.
  2. B) The efficient portfolio, the portfolio that all investors should hold, must be the same portfolio as the market portfolio of all risky securities.
  3. C) Because every security is owned by someone, the sum of all investors' portfolios must equal the portfolio of all risky securities available in the market.
  4. D) If all investors demand the efficient portfolio, and since the supply of securities is the market portfolio, then two portfolios must coincide.

Answer:  A

Diff: 2

Section:  12.2 The Market Portfolio

Skill:  Conceptual

 

17) Which of the following statements is FALSE?

  1. A) The market portfolio contains more of the smallest stocks and less of the larger stocks.
  2. B) For the market portfolio, the investment in each security is proportional to its market capitalization.
  3. C) Because the market portfolio is defined as the total supply of securities, the proportions should correspond exactly to the proportion of the total market that each security represents.
  4. D) Market capitalization is the total market value of the outstanding shares of a firm.

Answer:  A

Diff: 1

Section:  12.2 The Market Portfolio

Skill:  Conceptual

 

18) Which of the following statements is FALSE?

  1. A) A value-weighted portfolio is an equal-ownership portfolio: We hold an equal fraction of the total number of shares outstanding of each security in the portfolio.
  2. B) When buying a value-weighted portfolio, we end up purchasing the same percentage of shares of each firm.
  3. C) To maintain a value-weighted portfolio, we do not need to trade securities and rebalance the portfolio unless the number of shares outstanding of some security changes.
  4. D) In a value weighted portfolio the fraction of money invested in any security corresponds to its share of the total number of shares outstanding of all securities in the portfolio.

Answer:  D

Diff: 1

Section:  12.2 The Market Portfolio

Skill:  Conceptual

19) Which of the following statements is FALSE?

  1. A) The most familiar stock index in the United States is the Dow Jones Industrial Average (DJIA).
  2. B) A portfolio in which each security is held in proportion to its market capitalization is called a price-weighted portfolio.
  3. C) The Dow Jones Industrial Average (DJIA) consists of a portfolio of 30 large industrial stocks.
  4. D) The Dow Jones Industrial Average (DJIA) is a price-weighted portfolio.

Answer:  B

Explanation:  B) A portfolio in which each security is held in proportion to its market capitalization is called a value-weighted portfolio.

Diff: 2

Section:  12.2 The Market Portfolio

Skill:  Conceptual

 

20) Which of the following statements is FALSE?

  1. A) Because very little trading is required to maintain it, an equal-weighted portfolio is called a passive portfolio.
  2. B) If the number of shares in a value weighted portfolio does not change, but only the prices change, the portfolio will remain value weighted.
  3. C) The CAPM says that individual investors should hold the market portfolio, a value-weighted portfolio of all risky securities in the market.
  4. D) A price weighted portfolio holds an equal number of shares of each stock, independent of their size.

Answer:  A

Explanation:  A) Because very little trading is required to maintain it, a value-weighted portfolio is called a passive portfolio.

Diff: 3

Section:  12.2 The Market Portfolio

Skill:  Conceptual

 

 

21) Which of the following statements is FALSE?

  1. A) A market index reports the value of a particular portfolio of securities.
  2. B) The S&P 500 is the standard portfolio used to represent "the market" when using the CAPM in practice.
  3. C) Even though the S&P 500 includes only 500 of the more than 7,000 individual U.S. Stocks in existence, it represents more than 70% of the U.S. stock market in terms of market capitalization.
  4. D) The S&P 500 is an equal-weighted portfolio of 500 of the largest U.S. stocks.

Answer:  D

Explanation:  D) The S&P 500 is a value-weighted portfolio of 500 of the largest U.S. stocks.

Diff: 2

Section:  12.2 The Market Portfolio

Skill:  Conceptual

22) Which of the following statements is FALSE?

  1. A) The S&P 500 and the Wilshire 5000 indexes are both well-diversified indexes that roughly correspond to the market of U.S. stocks.
  2. B) Practitioners commonly use the S&P 500 as the market portfolio in the CAPM because they believe that this index is actually the market portfolio.
  3. C) Standard & Poor's Depository Receipts (SPDR, nicknamed "spider") trade on the American Stock Exchange and represent ownership in the S&P 500.
  4. D) The S&P 500 was the first widely publicized value weighted index and it has become a benchmark for professional investors.

Answer:  B

Diff: 2

Section:  12.2 The Market Portfolio

Skill:  Conceptual

 

23) In practice which market index is most widely used as a proxy for the market portfolio in the CAPM?

  1. A) Dow Jones Industrial Average
  2. B) Wilshire 5000
  3. C) S&P 500
  4. D) U.S. Treasury Bill

Answer:  C

Diff: 1

Section:  12.2 The Market Portfolio

Skill:  Conceptual

 

24) In practice which market index would best be used as a proxy for the market portfolio in the CAPM?

  1. A) S&P 500
  2. B) Dow Jones Industrial Average
  3. C) U.S. Treasury Bill
  4. D) Wilshire 5000

Answer:  D

Diff: 1

Section:  12.2 The Market Portfolio

Skill:  Conceptual


Use the table for the question(s) below.

 

Consider the following stock price and shares outstanding data:

 

Stock Name

Price per Share

Shares Outstanding (Billions)

Lowes

$28.80

1.53

Wal-Mart

$47.90

4.17

Intel

$19.60

5.77

Boeing

$75.00

0.79

 

25) The market capitalization for Wal-Mart is closest to:

  1. A) $415 Billion
  2. B) $276 Billion
  3. C) $479 Billion
  4. D) $200 Billion

Answer:  D

Explanation:  D)

Stock Name

Price per Share

Shares Outstanding (Billions)

Market Capitalization (Billions)

Lowes

$28.80

1.53

$44.06

Wal-Mart

$47.90

4.17

$199.74

Intel

$19.60

5.77

$113.09

Boeing

$75.00

0.79

$59.25

 

 

Total

$416.15

Diff: 1

Section:  12.2 The Market Portfolio

Skill:  Analytical

 

 

26) The total market capitalization for all four stocks is closest to:

  1. A) $479 Billion
  2. B) $415 Billion
  3. C) $2100 Billion
  4. D) $200 Billion

Answer:  B

Explanation:  B)

Stock Name

Price per Share

Shares Outstanding (Billions)

Market Capitalization (Billions)

Lowes

$28.80

1.53

$44.06

Wal-Mart

$47.90

4.17

$199.74

Intel

$19.60

5.77

$113.09

Boeing

$75.00

0.79

$59.25

 

 

Total

$416.15

Diff: 1

Section:  12.2 The Market Portfolio

Skill:  Analytical

27) If you are interested in creating a value-weighted portfolio of these four stocks, then the percentage amount that you would invest in Lowes is closest to:

  1. A) 25%
  2. B) 11%
  3. C) 20.0%
  4. D) 12%

Answer:  B

Explanation:  B)

Stock Name

Price per Share

Shares Outstanding (Billions)

Market Capitalization (Billions)

Percent of Total

Lowes

$28.80

1.53

$44.06

10.6%

Wal-Mart

$47.90

4.17

$199.74

48.0%

Intel

$19.60

5.77

$113.09

27.2%

Boeing

$75.00

0.79

$59.25

14.2%

 

 

Total

$416.15

 

Diff: 2

Section:  12.2 The Market Portfolio

Skill:  Analytical

 

 

28) Assume that you have $100,000 to invest and you are interested in creating a value-weighted portfolio of these four stocks.  The number of shares of Wal-Mart that you would hold in your portfolio is closest to:

  1. A) 710
  2. B) 1390
  3. C) 1000
  4. D) 870

Answer:  C

Explanation:  C)

Stock Name

Price per Share

Shares Outstanding (Billions)

Market Capitalization (Billions)

Percent

of Total

Number of Shares

Lowes

$28.80

1.53

$44.06

10.6%

368

Wal-Mart

$47.90

4.17

$199.74

48.0%

1002

Intel

$19.60

5.77

$113.09

27.2%

1387

Boeing

$75.00

0.79

$59.25

14.2%

190

 

 

Total

$416.15

 

 

 

Number of shares =

Diff: 2

Section:  12.2 The Market Portfolio

Skill:  Analytical

29) Assume that you have $100,000 to invest and you are interested in creating a value-weighted portfolio of these four stocks.  The percentage of the shares outstanding of Boeing that you would hold in your portfolio is closest to:

  1. A) .000018%
  2. B) .000020%
  3. C) .000024%
  4. D) .000031%

Answer:  C

Explanation:  C)

Stock Name

Price per Share

Shares Outstanding (Billions)

Market Capitalization (Billions)

Percent

of Total

Number of Shares

Lowes

$28.80

1.53

$44.06

10.6%

368

Wal-Mart

$47.90

4.17

$199.74

48.0%

1002

Intel

$19.60

5.77

$113.09

27.2%

1387

Boeing

$75.00

0.79

$59.25

14.2%

190

 

 

Total

$416.15

 

 

 

Number of shares =

percentage shares outstanding = 190/790000000 = .000024%

Diff: 2

Section:  12.2 The Market Portfolio

Skill:  Analytical

 

30) Assume that you have $250,000 to invest and you are interested in creating a value-weighted portfolio of these four stocks.  How many shares of each of the four stocks will you hold?  What percentage of the shares outstanding of each stock will you hold?

Answer: 

Stock Name

Price per Share

Shares Outstanding (Billions)

Market Capitalization (Billions)

Percent

of Total

Number of Shares

Lowes

$28.80

1.53

$44.06

10.6%

368

Wal-Mart

$47.90

4.17

$199.74

48.0%

1002

Intel

$19.60

5.77

$113.09

27.2%

1387

Boeing

$75.00

0.79

$59.25

14.2%

190

 

 

Total

$416.15

 

 

 

 

% of Shares

0.000060%

 

 

 

Number of shares =

In a value weighted portfolio, the percentage of shares of every stock will be the same.

Diff: 3

Section:  12.2 The Market Portfolio

Skill:  Analytical

 

12.3   Beta Estimation

 

Use the following information to answer the question(s) below.

 

Year

Risk-free

Return

Market

Return

Wyatt Oil

Return

Market

Excess

Return

Wyatt Oil

Excess

Return

Beta

2007

3.0%

6.0%

5.5%

3.0%

2.5%

0.833

2008

1.5%

-38.5%

-32.6%

.40%

-34.1%

0.853

2009

1.0%

22.5%

19.6%

21.5%

18.6%

0.865

 

1) Wyatt Oil's average historical return is closest to:

  1. A) -2.50%
  2. B) -3.33%
  3. C) -4.33%
  4. D) -5.17%

Answer:  A

Explanation:  A) raverage =

Year

Risk-free

Return

Market

Return

Wyatt Oil

Return

Market

Excess

Return

Wyatt  Oil

Excess

Return

2007

3.0%

6.0%

5.5%

3.0%

2.5%

2008

1.5%

-38.5%

-32.6%

-40.0%

-34.1%

2009

1.0%

22.5%

19.6%

21.5%

18.6%

Average

1.83%

-3.33%

-2.50%

-5.17%

-4.33%

Diff: 1

Section:  12.3 Beta Estimation

Skill:  Analytical

 

2) The Market's average historical return is closest to:

  1. A) -2.50%
  2. B) -3.33%
  3. C) -4.33%
  4. D) -5.17%

Answer:  B

Explanation:  B) raverage =

Year

Risk-free

Return

Market

Return

Wyatt Oil

Return

Market

Excess

Return

Wyatt  Oil

Excess

Return

2007

3.0%

6.0%

5.5%

3.0%

2.5%

2008

1.5%

-38.5%

-32.6%

-40.0%

-34.1%

2009

1.0%

22.5%

19.6%

21.5%

18.6%

Average

1.83%

-3.33%

-2.50%

-5.17%

-4.33%

Diff: 1

Section:  12.3 Beta Estimation

Skill:  Analytical

3) Wyatt Oil's average historical excess return is closest to:

  1. A) -2.50%
  2. B) -3.33%
  3. C) -4.33%
  4. D) -5.17%

Answer:  C

Explanation:  C) excess returnaverage =

Year

Risk-free

Return

Market

Return

Wyatt Oil

Return

Market

Excess

Return

Wyatt  Oil

Excess

Return

2007

3.0%

6.0%

5.5%

3.0%

2.5%

2008

1.5%

-38.5%

-32.6%

-40.0%

-34.1%

2009

1.0%

22.5%

19.6%

21.5%

18.6%

Average

1.83%

-3.33%

-2.50%

-5.17%

-4.33%

Diff: 2

Section:  12.3 Beta Estimation

Skill:  Analytical

 

4) The Market's average historical excess return is closest to:

  1. A) -2.50%
  2. B) -3.33%
  3. C) -4.33%
  4. D) -5.17%

Answer:  D

Explanation:  D) excess returnaverage =

Year

Risk-free

Return

Market

Return

Wyatt Oil

Return

Market

Excess

Return

Wyatt  Oil

Excess

Return

2007

3.0%

6.0%

5.5%

3.0%

2.5%

2008

1.5%

-38.5%

-32.6%

-40.0%

-34.1%

2009

1.0%

22.5%

19.6%

21.5%

18.6%

Average

1.83%

-3.33%

-2.50%

-5.17%

-4.33%

Diff: 2

Section:  12.3 Beta Estimation

Skill:  Analytical

 

5) Wyatt Oil's excess return for 2009 is closest to:

  1. A) 18.6%
  2. B) 19.6%
  3. C) 20.0%
  4. D) 21.5%

Answer:  A

Explanation:  A) excess returne = (rWO - rrf)2009

 

Year

Risk-free

Return

Market

Return

Wyatt Oil

Return

Market

Excess

Return

Wyatt  Oil

Excess

Return

2007

3.0%

6.0%

5.5%

3.0%

2.5%

2008

1.5%

-38.5%

-32.6%

-40.0%

-34.1%

2009

1.0%

22.5%

19.6%

21.5%

18.6%

Average

1.83%

-3.33%

-2.50%

-5.17%

-4.33%

Diff: 1

Section:  12.3 Beta Estimation

Skill:  Analytical

 

6) The Market's excess return for 2008 is closest to:

  1. A) -40.0%
  2. B) -38.5%
  3. C) -37.0%
  4. D) -34.1%

Answer:  A

Explanation:  A) excess returne = (rWO - rrf)2009

 

Year

Risk-free

Return

Market

Return

Wyatt Oil

Return

Market

Excess

Return

Wyatt  Oil

Excess

Return

2007

3.0%

6.0%

5.5%

3.0%

2.5%

2008

1.5%

-38.5%

-32.6%

-40.0%

-34.1%

2009

1.0%

22.5%

19.6%

21.5%

18.6%

Average

1.83%

-3.33%

-2.50%

-5.17%

-4.33%

Diff: 1

Section:  12.3 Beta Estimation

Skill:  Analytical

 

7) Using the average historical excess returns for both Wyatt Oil and the Market portfolio, your estimate of Wyatt Oil's Beta is closest to:

  1. A) 0.75
  2. B) 0.84
  3. C) 1.00
  4. D) 1.19

Answer:  B

Explanation:  B) excess returnaverage =

excess returnaverage =

Year

Risk-free

Return

Market

Return

Wyatt Oil

Return

Market

Excess

Return

Wyatt  Oil

Excess

Return

2007

3.0%

6.0%

5.5%

3.0%

2.5%

2008

1.5%

-38.5%

-32.6%

-40.0%

-34.1%

2009

1.0%

22.5%

19.6%

21.5%

18.6%

Average

1.83%

-3.33%

-2.50%

-5.17%

-4.33%

 

 βWO=  =  = .8375

Diff: 3

Section:  12.3 Beta Estimation

Skill:  Analytical

 

8) Using the average historical excess returns for both Wyatt Oil and the Market portfolio estimate of Wyatt Oil's Beta.  When using this beta, the alpha for Wyatt oil in 2007 is closest to:

  1. A) -0.5000%
  2. B) -0.0250%
  3. C) -0.0125%
  4. D) +0.0250%

Answer:  C

Explanation:  C) excess returnaverage =

excess returnaverage =

Year

Risk-free

Return

Market

Return

Wyatt Oil

Return

Market

Excess

Return

Wyatt  Oil

Excess

Return

2007

3.0%

6.0%

5.5%

3.0%

2.5%

2008

1.5%

-38.5%

-32.6%

-40.0%

-34.1%

2009

1.0%

22.5%

19.6%

21.5%

18.6%

Average

1.83%

-3.33%

-2.50%

-5.17%

-4.33%

 

 βWO =  =  = .8375

α   = actual return - expected return for CAPM

     = 5.5% - [3% + .8375(6% - 3%)] = -.0125%

Diff: 3

Section:  12.3 Beta Estimation

Skill:  Analytical

 

9) Using just the return data for 2009, your estimate of Wyatt Oil's Beta is closest to:

  1. A) 0.84
  2. B) 0.87
  3. C) 1.00
  4. D) 1.16

Answer:  B

Explanation:  B)

Year

Risk-free

Return

Market

Return

Wyatt Oil

Return

Market

Excess

Return

Wyatt  Oil

Excess

Return

2007

3.0%

6.0%

5.5%

3.0%

2.5%

2008

1.5%

-38.5%

-32.6%

-40.0%

-34.1%

2009

1.0%

22.5%

19.6%

21.5%

18.6%

Average

1.83%

-3.33%

-2.50%

-5.17%

-4.33%

 

 βWO =  =  = .8651

Diff: 2

Section:  12.3 Beta Estimation

Skill:  Analytical

10) Using just the return data for 2008, your estimate of Wyatt Oil's Beta is closest to:

  1. A) 0.85
  2. B) 0.87
  3. C) 1.00
  4. D) 1.17

Answer:  A

Explanation:  A)

Year

Risk-free

Return

Market

Return

Wyatt Oil

Return

Market

Excess

Return

Wyatt  Oil

Excess

Return

2007

3.0%

6.0%

5.5%

3.0%

2.5%

2008

1.5%

-38.5%

-32.6%

-40.0%

-34.1%

2009

1.0%

22.5%

19.6%

21.5%

18.6%

Average

1.83%

-3.33%

-2.50%

-5.17%

-4.33%

 

 βWO =  -  = .8525

Diff: 2

Section:  12.3 Beta Estimation

Skill:  Analytical

 

11) Which of the following statements is FALSE?

  1. A) Beta is the expected percent change in the excess return of the security for a 1% change in the excess return of the market portfolio.
  2. B) Beta represents the amount by which risks that affect the overall market are amplified for a given stock or investment.
  3. C) It is common practice to estimate beta based on the historical correlation and volatilities.
  4. D) Beta measures the diversifiable risk of a security, as opposed to its market risk, and is the appropriate measure of the risk of a security for an investor holding the market portfolio.

Answer:  D

Explanation:  D) Beta measures the nondiversifiable risk of a security.

Diff: 1

Section:  12.3 Beta Estimation

Skill:  Conceptual

 

12) Which of the following statements is FALSE?

  1. A) One difficulty when trying to estimate beta for a security is that beta depends on the correlation and volatilities of the security's and market's returns in the future.
  2. B) It is common practice to estimate beta based on the expectations of future correlations and volatilities.
  3. C) One difficulty when trying to estimate beta for a security is that beta depends on investors' expectations of the correlation and volatilities of the security's and market's returns.
  4. D) Securities that tend to move less than the market have betas below 1.

Answer:  B

Explanation:  B) Beta is measured using past information.

Diff: 1

Section:  12.3 Beta Estimation

Skill:  Conceptual

13) Which of the following statements is FALSE?

  1. A) Securities that tend to move more than the market have betas lower than 0.
  2. B) Securities whose returns tend to move in tandem with the market on average have a beta of 1.
  3. C) Beta corresponds to the slope of the best fitting line in the plot of the securities excess returns versus the market excess return.
  4. D) The statistical technique that identifies the bets-fitting line through a set of points is called linear regression.

Answer:  A

Diff: 2

Section:  12.3 Beta Estimation

Skill:  Conceptual

 

Use the equation for the question(s) below.

 

Consider the following linear regression model:

 

(Ri - rf) = ai + bi(RMkt - rf) + ei

 

14) The bi in the regression:

  1. A) measures the sensitivity of the security to market risk.
  2. B) measures the historical performance of the security relative to the expected return predicted by the SML.
  3. C) measures the deviation from the best fitting line and is zero on average.
  4. D) measures the diversifiable risk in returns.

Answer:  A

Diff: 2

Section:  12.3 Beta Estimation

Skill:  Conceptual

 

15) The ai in the regression:

  1. A) measures the sensitivity of the security to market risk.
  2. B) measures the deviation from the best fitting line and is zero on average.
  3. C) measures the diversifiable risk in returns.
  4. D) measures the historical performance of the security relative to the expected return predicted by the SML.

Answer:  D

Diff: 2

Section:  12.3 Beta Estimation

Skill:  Conceptual

 

 

16) The ei in the regression:

  1. A) measures the market risk in returns.
  2. B) measures the deviation from the best fitting line and is zero on average.
  3. C) measures the sensitivity of the security to market risk.
  4. D) measures the historical performance of the security relative to the expected return predicted by the SML.

Answer:  B

Diff: 2

Section:  12.3 Beta Estimation

Skill:  Conceptual

12.4   The Debt Cost of Capital

 

Use the following information to answer the question(s) below.

 

Consider the following information regarding corporate bonds:

 

Rating

AAA

AA

A

BBB

BB

B

CCC

Average Default Rate

0.0%

0.1%

0.2%

0.5%

2.2%

5.5%

12.2%

Recession Default Rate

0.0%

1.0%

3.0%

3.0%

8.0%

16.0%

48.0%

Average Beta

0.05

0.05

0.05

0.10

0.17

0.26

0.31

 

1) Wyatt Oil has a bond issue outstanding with seven years to maturity, a yield to maturity of 7.0%, and a BBB rating.  The corresponding risk-free rate is 3% and the market risk premium is 5%.  Assuming a normal economy, the expected return on Wyatt Oil's debt is closest to:

  1. A) 3.0%
  2. B) 3.5%
  3. C) 4.9%
  4. D) 5.5%

Answer:  B

Explanation:  B) rd = rrf + β(rm - rrf) = 3% + 0.1(5%) = 3.5%

Diff: 1

Section:  12.4 The Debt Cost of Capital

Skill:  Analytical

 

2) Wyatt Oil has a bond issue outstanding with seven years to maturity, a yield to maturity of 7.0%, and a BBB rating. The bondholders' expected loss rate in the event of default is 70%.  Assuming a normal economy the expected return on Wyatt Oil's debt is closest to:

  1. A) 3.0%
  2. B) 3.5%
  3. C) 4.9%
  4. D) 6.7%

Answer:  D

Explanation:  D) rd = ytm - prob(default) × loss rate = 7% - 0.4%(70%) = 6.72%

Diff: 2

Section:  12.4 The Debt Cost of Capital

Skill:  Analytical

 

 

3) Wyatt Oil has a bond issue outstanding with seven years to maturity, a yield to maturity of 7.0%, and a BBB rating. The bondholders' expected loss rate in the event of default is 70%.  Assuming the economy is in recession, then the expected return on Wyatt Oil's debt is closest to:

  1. A) 3.5%
  2. B) 4.9%
  3. C) 5.5%
  4. D) 7.0%

Answer:  B

Explanation:  B) rd = ytm - prob(default) × loss rate = 7% - 3.0%(70%) = 4.9%

Diff: 2

Section:  12.4 The Debt Cost of Capital

Skill:  Analytical

4) Rearden Metal has a bond issue outstanding with ten years to maturity, a yield to maturity of 8.6%, and a B rating.  The corresponding risk-free rate is 3% and the market risk premium is 6%.  Assuming a normal economy, the expected return on Rearden Metal's debt is closest to:

  1. A) 0.6%
  2. B) 1.6%
  3. C) 4.6%
  4. D) 6.0%

Answer:  C

Explanation:  C) rd = rrf + β(rm - rrf) = 3% + 0.26(6%) = 4.56%

Diff: 1

Section:  12.4 The Debt Cost of Capital

Skill:  Analytical

 

5) Rearden Metal has a bond issue outstanding with ten years to maturity, a yield to maturity of 8.6%, and a B rating.  The bondholders expected loss rate in the event of default is 50%.  Assuming a normal economy the expected return on Rearden Metal's debt is closest to:

  1. A) 0.6%
  2. B) 1.6%
  3. C) 4.6%
  4. D) 6.0%

Answer:  D

Explanation:  D) rd = ytm - prob(default) × loss rate = 8.6% - 5.2%(50%) = 6.00%

Diff: 2

Section:  12.4 The Debt Cost of Capital

Skill:  Analytical

 

 

6) Rearden Metal has a bond issue outstanding with ten years to maturity, a yield to maturity of 8.6%, and a B rating.  The bondholders expected loss rate in the event of default is 50%.  Assuming the economy is in recession, then the expected return on Rearden Metal's debt is closest to:

  1. A) 0.6%
  2. B) 1.6%
  3. C) 4.6%
  4. D) 6.0%

Answer:  A

Explanation:  A) rd = ytm - prob(default) × loss rate = 8.6% - 16.0%(50%) = 0.6%

Diff: 2

Section:  12.4 The Debt Cost of Capital

Skill:  Analytical

7) Nielson Motors plans to issue 10-year bonds that it believes will have an BBB rating.  Suppose AAA bonds with the same maturity have a 3.5% yield.  Assume that the market risk premium is 5% and the expected loss rate in the event of default on the bonds is 60%.  The yield that these bonds will have to pay during average economic times is closest to:

  1. A) 3.50%
  2. B) 3.75%
  3. C) 4.00%
  4. D) 5.50%

Answer:  C

Explanation:  C) For AAA            rd = rrf + β(rm - rrf) = rrf + 0.05(5%) = 3.5% → rrf = 3.25%

For BBB       rd = rrf + β(rm - rrf) = 3.25% + 0.10(5%) = 3.75%

rd = ytm - prob(default) × loss rate → 3.75% = ytm - 0.4%(60%) → ytm = 3.99%

Diff: 3

Section:  12.4 The Debt Cost of Capital

Skill:  Analytical

 

8) Nielson Motors plans to issue 10-year bonds that it believes will have an BBB rating.  Suppose AAA bonds with the same maturity have a 3.5% yield.  Assume that the market risk premium is 5% and the expected loss rate in the event of default on the bonds is 60%.  The yield that these bonds will have to pay during a recession is closest to:

  1. A) 3.50%
  2. B) 3.75%
  3. C) 4.00%
  4. D) 5.50%

Answer:  D

Explanation:  D) For AAA           rd = rrf + β(rm - rrf) = rrf + 0.05(5%) = 3.5% → rrf = 3.25%

For BBB       rd = rrf + β(rm - rrf) = 3.25% + 0.10(5%) = 3.75%

rd = ytm - prob(default) × loss rate → 3.75% = ytm - 3.0%(60%) → ytm = 5.55%

Diff: 3

Section:  12.4 The Debt Cost of Capital

Skill:  Analytical

 

12.5   A Project's Cost of Capital

 

Use the following information to answer the question(s) below.

 

Consider the following information regarding corporate bonds:

 

Rating

AAA

AA

A

BBB

BB

B

CCC

Average Default Rate

0.0%

0.1%

0.2%

0.45%

2.2%

5.5%

12.2%

Recession Default Rate

0.0%

1.0%

3.0%

3.0%

8.0%

16.0%

48.0%

Average Beta

0.05

0.05

0.05

0.10

0.17

0.26

0.31

 

Company

Market

Capitalization

($mm)

Total

Enterprise

Value ($mm)

Equity

Beta

Debt

Rating

Taggart Transcontinental

$4500

8000

1.1

BBB

Rearden Metal

$3800

7200

1.3

AAA

Wyatt Oil

$2400

3800

0.9

A

Nielson Motors

$1500

4400

1.75

BB

 

1) Your estimate of the debt beta for Taggart Transcontinental would be:

  1. A) 0.05
  2. B) 0.10
  3. C) 0.17
  4. D) 1.00

Answer:  B

Explanation:  B) Since Taggart has a rating of BBB, the appropriate debt beta from the table is 0.10.

Diff: 1

Section:  12.5 A Project's Cost of Capital

Skill:  Analytical

 

2) Your estimate of the debt beta for Nielson Motors would be:

  1. A) 0.10
  2. B) 0.17
  3. C) 1.00
  4. D) 1.68

Answer:  B

Explanation:  B) Since Nielson has a rating of BB, the appropriate debt beta from the table is 0.17.

Diff: 1

Section:  12.5 A Project's Cost of Capital

Skill:  Analytical

 

3) Your estimate of the asset beta for Taggart Transcontinental is closest to:

  1. A) 0.42
  2. B) 0.59
  3. C) 0.66
  4. D) 0.71

Answer:  C

Explanation:  C) Since Taggart has a rating of BBB, the appropriate debt beta from the table is 0.10.

βU = βE + βD =  × 1.1 +  × 0.10 = 0.6625

Diff: 2

Section:  12.5 A Project's Cost of Capital

Skill:  Analytical

 

4) Your estimate of the asset beta for Rearden Metal is closest to:

  1. A) 0.42
  2. B) 0.59
  3. C) 0.66
  4. D) 0.71

Answer:  D

Explanation:  D) Since Rearden has a rating of AAA, the appropriate debt beta from the table is 0.05.

βU = βE + βD =  × 1.3 +  × 0.05 = 0.709722

Diff: 2

Section:  12.5 A Project's Cost of Capital

Skill:  Analytical

 

5) Your estimate of the asset beta for Wyatt Oil is closest to:

  1. A) 0.59
  2. B) 0.66
  3. C) 0.71
  4. D) 0.90

 

Answer:  A

Explanation:  A) Since Wyatt has a rating of A, the appropriate debt beta from the table is 0.05.

βU = βE + βD =  × 0.9 +  × 0.05 = 0.586842

Diff: 2

Section:  12.5 A Project's Cost of Capital

Skill:  Analytical

 

6) Your estimate of the asset beta for Nielson Motors is closest to:

  1. A) 0.59
  2. B) 0.66
  3. C) 0.71
  4. D) 1.75

Answer:  C

Explanation:  C) Since Nielson has a rating of BB, the appropriate debt beta from the table is 0.17.

βU = βE + βD =  × 1.75 +  × 0.17 = 0.708636

Diff: 2

Section:  12.5 A Project's Cost of Capital

Skill:  Analytical

 

7) Suppose that because of the large need for steel in building railroad infrastructure, Taggart Transcontinental and Rearden Metal decide to form into one large conglomerate.  Your estimate of the asset beta for this new conglomerate is closest to:

  1. A) 0.42
  2. B) 0.59
  3. C) 0.66
  4. D) 0.68

Answer:  D

Explanation:  D) Since Taggart has a rating of BBB, the appropriate debt beta from the table is 0.10.

βU = βE + βD =  × 1.1 +  × 0.10 = 0.6625

Since Rearden has a rating of AAA, the appropriate debt beta from the table is 0.05.

βU = βE + βD =  × 1.3 +  × 0.05 = 0.709722

 

 = WTT  + WRM  

              =  (0.6625) +  (0.709722) = 0.684868

Diff: 2

Section:  12.5 A Project's Cost of Capital

Skill:  Analytical


Use the following information to answer the question(s) below.

 

Consider the following information regarding corporate bonds:

 

Rating

AAA

AA

A

BBB

BB

B

CCC

Average Default Rate

0.0%

0.1%

0.2%

0.5%

2.2%

5.5%

12.2%

Recession Default Rate

0.0%

1.0%

3.0%

3.0%

8.0%

16.0%

48.0%

Average Beta

0.05

0.05

0.05

0.10

0.17

0.26

0.31

 

8) Galt Industries has a market capitalization of $50 billion, $30 billion in BBB rated debt, and $8 billion in cash.  If Galt's equity beta is 1.15, then Galt's underlying asset beta is closest to:

  1. A) 0.83
  2. B) 0.92
  3. C) 1.00
  4. D) 1.15

Answer:  A

Explanation:  A) We can think of Galt's business assets as a portfolio of equity, plus debt, and less cash.  Assuming the beta of cash investments is zero:

βU = βE + βD + β

              =  × 1.15 +  × 0.10 - × 0.0

              = 0.84

Alternatively, we estimate Galt's asset beta based on its net debt of 30 - 8 = 22 m.  Using net debt:

βU = βE + βD

              =  × 1.15 +  × 0.10 

              = 0.829

Note that both answers are quite similar.  The second approach presumes that Galt's cash reduces the average market risk of its debt (as thought Galt used its cash to repay its senior debt).

Diff: 2

Section:  12.5 A Project's Cost of Capital

Skill:  Analytical

 

9) Trucks R' Us has a market capitalization of $142 billion, $78 billion in BB rated debt, and $10 billion in cash. If Trucks R' Us' equity beta is 1.68, then their underlying asset beta is closest to:

  1. A) 1.00
  2. B) 1.20
  3. C) 1.32
  4. D) 1.48

Answer:  B

Explanation:  B) We can think of Trucks R' Us business assets as a portfolio of equity, plus debt, and less cash.  Assuming the beta of cash investments is zero:

βU = βE + βD + β

              =  × 1.68 +  × 0.17 -  × 0.0

              = 1.199

Alternatively, we estimate asset beta based on its net debt of 78-10=68 m.  Using net debt:

βU = βE + βD

              =  × 1.15 +  × 0.17

              = 1.191

Note that both answers are quite similar.  The second approach presumes that TRU's cash reduces the average market risk of its debt (as thought TRU used its cash to repay its senior debt).

Diff: 2

Section:  12.5 A Project's Cost of Capital

Skill:  Analytical

 

10) Luther Industries has a market capitalization of $23 billion, no debt, and $4 billion in cash.  If Luther's estimated equity beta is 1.32, then the beta of Luther's underlying business enterprise is closest to:

  1. A) 1.09
  2. B) 1.32
  3. C) 1.48
  4. D) 1.60

Answer:  D

Explanation:  D) βU = βE + βD =  × 1.32 +  × 0 = 1.597895

Diff: 2

Section:  12.5 A Project's Cost of Capital

Skill:  Analytical

 

11) Your firm is planning to invest in a new power generation system.  Galt Industries is an all equity firm that specializes in this business.  Suppose Galt's equity beta is 0.75, the risk-free rate is 3%, and the market risk premium is 6%.  If your firm's project is all equity financed, then your estimate of your cost of capital is closest to:

  1. A) 5.25%
  2. B) 6.00%
  3. C) 6.75%
  4. D) 7.50%

Answer:  D

Explanation:  D) ri = rrf + β(rm - rrf) = .03 + .75(.06) = .075 or 7.5%

Diff: 1

Section:  12.5 A Project's Cost of Capital

Skill:  Analytical

 

12) Your firm is planning to invest in a new electrostatic power generation system.  Electrostat Inc is a firm that specializes in this business.  Electrostat has a stock price of $25 per share with 16 million shares outstanding.  Electrostat's equity beta is 1.18.  It also has $220 million in debt outstanding with a debt beta of 0.08.  Your estimate of the asset beta for electrostatic power generators is closest to:

  1. A) 0.76
  2. B) 0.79
  3. C) 0.93
  4. D) 1.10

Answer:  B

Explanation:  B) βU = βE + βD =  × 1.18 +  × 0.08 = 0.789677

Diff: 2

Section:  12.5 A Project's Cost of Capital

Skill:  Analytical

 

13) Your firm is planning to invest in a new electrostatic power generation system.  Electrostat Inc is a firm that specializes in this business.  Electrostat has a stock price of $25 per share with 16 million shares outstanding.  Electrostat's equity beta is 1.18.  It also has $220 million in debt outstanding with a debt beta of 0.08.  If the risk-free rate is 3%, and the market risk premium is 6%, then your estimate of your cost of capital for electrostatic power generators is closest to:

  1. A) 7.50%
  2. B) 7.75%
  3. C) 9.50%
  4. D) 10.10%

Answer:  B

Explanation:  D) βU = βE + βD =  × 1.18 +  × 0.08 = 0.789677

ri = rrf + β(rm - rrf) = .03 + .789677(.06) = .07738 or 7.74%

Diff: 3

Section:  12.5 A Project's Cost of Capital

Skill:  Analytical

 

14) The firm's unlevered (asset) beta is:

  1. A) the weighted average of the equity beta and the debt beta.
  2. B) the weighted average of the levered beta and the equity beta.
  3. C) the debt beta minus the equity beta.
  4. D) the unlevered beta minus the cost of capital.

Answer:  A

Diff: 1

Section:  12.5 A Project's Cost of Capital

Skill:  Definition

 

15) The firm's unlevered (asset) cost of capital is:

  1. A) the weighted average of the equity cost of capital and the debt cost of capital.
  2. B) the weighted average of the levered cost of capital and the equity cost of capital.
  3. C) the debt cost of capital minus the equity cost of capital.
  4. D) the unlevered beta minus the cost of capital.

Answer:  A

Diff: 1

Section:  12.5 A Project's Cost of Capital

Skill:  Definition

 

16) If a firm's excess cash holdings are greater than its debt, using net debt as the measure of leverage will result in:

  1. A) its unlevered beta and cost of capital equalling zero.
  2. B) its unlevered beta and cost of capital being greater than its equity beta and cost of capital.
  3. C) the risk of the firm's equity being increased by its cash holdings in excess of its operating needs.
  4. D) the risk of the firm's debt being increased by its cash holdings in excess of its operating needs.

Answer:  B

Diff: 1

Section:  12.5 A Project's Cost of Capital

Skill:  Definition

 

17) Which of the following is true of asset betas?

  1. A) Asset betas are expected to vary greatly within firms in the same industry.
  2. B) Businesses that are less sensitive to market and economic conditions tend to have higher asset betas than more cyclical industries.
  3. C) Businesses that are less sensitive to market and economic conditions tend to have lower asset betas than more cyclical industries.
  4. D) A and B are correct.

Answer:  C

Diff: 1

Section:  12.5 A Project's Cost of Capital

Skill:  Definition

 

12.6   Project Risk Characteristics and Financing

 

Use the following information to answer the question(s) below.

 

Division

Asset

Beta

Next Period's Expected Free Cash

Flow ($mm)

Expected

Growth

Rate

Oil Exploration

1.4

450

4.0%

Oil Refining

1.1

525

2.5%

Gas & Convenience Stores

0.8

600

3.0%

 

The risk-free rate of interest is 3% and the market risk premium is 5%.

 

1) The cost of capital for the oil exploration division is closest to:

  1. A) 6.0%
  2. B) 7.0%
  3. C) 8.5%
  4. D) 10.0%

Answer:  D

Explanation:  D) ri = rrf + β(rm - rrf) = .03 + 1.4(.05) = .10 or 10.0%

Diff: 1

Section:  12.6 Project Risk Characteristics and Financing

Skill:  Analytical

 

2) The cost of capital for the oil refining division is closest to:

  1. A) 6.5%
  2. B) 7.0%
  3. C) 8.5%
  4. D) 10.0%

Answer:  C

Explanation:  C) ri = rrf + β(rm - rrf) = .03 + 1.1(.05) = .085 or 8.5%

Diff: 1

Section:  12.6 Project Risk Characteristics and Financing

Skill:  Analytical

 

3) The value of the oil exploration division is closest to:

  1. A) $4500
  2. B) $7500
  3. C) $8750
  4. D) $10,000

Answer:  B

Explanation:  B) ri = rrf + β(rm - rrf) = .03 + 1.4(.05) = .10 or 10.0%

V =  =  = $7500

Diff: 2

Section:  12.6 Project Risk Characteristics and Financing

Skill:  Analytical

4) The value of the gas and convenience store division is closest to:

  1. A) $4500
  2. B) $6000
  3. C) $8600
  4. D) $15,000

Answer:  D

Explanation:  D) ri = rrf + β(rm - rrf) = .03 + 0.8(.05) = .07 or 7.0%

V =  =  = $15,000

Diff: 2

Section:  12.6 Project Risk Characteristics and Financing

Skill:  Analytical

 

5) The overall value of Wyatt Oil (in $ millions) is closest to:

  1. A) $25,000
  2. B) $18,846
  3. C) $31,250
  4. D) $15,000

Answer:  C

Explanation:  C) Oil Exploration Division:

ri = rrf + β(rm - rrf) = .03 + 1.4(.05) = .10 or 10.0%

V =  =  = $7500

Oil Refining:

ri = rrf + β(rm - rrf) = .03 + 1.1(.05) = .085 or 8.5%

V =  =  = $8750

Convenience Store;

ri = rrf + β(rm - rrf) = .03 + 0.8(.05) = .07 or 7.0%

V =  =  = $15,000

Total Value = 7500 + 8750 + 15,000 = $31,250

Diff: 3

Section:  12.6 Project Risk Characteristics and Financing

Skill:  Analytical

 

6) The overall asset beta for Wyatt Oil is closest to:

  1. A) 0.95
  2. B) 1.05
  3. C) 1.15
  4. D) 1.25

Answer:  B

Explanation:  B) Oil Exploration Division:

ri = rrf + β(rm - rrf) = .03 + 1.4(.05) = .10 or 10.0%

V =  =  = $7500

Oil Refining:

ri = rrf + β(rm - rrf) = .03 + 1.1(.05) = .085 or 8.5%

V =  =  = $8750

Convenience Store:

ri = rrf + β(rm - rrf) = .03 + 0.8(.05) = .07 or 7.0%

V =  =  = $15,000

Total Value = 7500 + 8750 + 15,000 = $31,250

 

βWO = wOE βOE+ wOR βOR + wCS βCS

              = (1.4) + (1.1) +

(0.8) = 1.028

Diff: 3

Section:  12.6 Project Risk Characteristics and Financing

Skill:  Analytical

 

7) The overall cost of capital for Wyatt Oil is closest to:

  1. A) 8.1%
  2. B) 8.5%
  3. C) 8.8%
  4. D) 9.3%

Answer:  A

Explanation:  A) Oil Exploration Division:

ri = rrf + β(rm - rrf) = .03 + 1.4(.05) = .10 or 10.0%

V =  =  = $7500

Oil Refining:

ri = rrf + β(rm - rrf) = .03 + 1.1(.05) = .085 or 8.5%

V =  =  = $8750

Convenience Store:

ri = rrf + β(rm - rrf) = .03 + 0.8(.05) = .07 or 7.0%

V =  =  = $15,000

Total Value = 7500 + 8750 + 15,000 = $31,250

 

rWO = wOE rOE+ wOR rOR + wCS rCS

              = (.10) + (.085) + (.07) = .0814

Diff: 3

Section:  12.6 Project Risk Characteristics and Financing

Skill:  Analytical

 

8) Firms should adjust for execution risk by:

  1. A) assigning a higher cost of capital to new projects.
  2. B) ignoring execution risk since it is diversifiable.
  3. C) capturing this risk in the expected cash flows generated by the project.
  4. D) noticing missteps in the firm's execution of new projects.

Answer:  C

Diff: 1

Section:  12.6 Project Risk Characteristics and Financing

Skill:  Definition

 

9) One factor that can affect the market risk of a project is its degree of operating leverage, which is:

  1. A) the relative proportion of operating assets versus non-operating assets.
  2. B) the relative proportion of operating assets versus equity.
  3. C) the relative proportion of operating expenses versus non-operating expenses.
  4. D) the relative proportion of fixed versus variable costs.

Answer:  D

Diff: 1

Section:  12.6 Project Risk Characteristics and Financing

Skill:  Conceptual

 

10) If a project has a higher proportion of fixed to variable costs, holding the risk of its revenues constant:

  1. A) its beta will be lower, hence its cost of capital will be lower.
  2. B) its beta will be higher, hence its cost of capital will be higher.
  3. C) its beta will be unaffected, since beta does not measure the sensitivity of the project's cash flows to market risk.
  4. D) its financial leverage will be higher.

Answer:  B

Diff: 1

Section:  12.6 Project Risk Characteristics and Financing

Skill:  Conceptual

 

11) The difference between the weighted-average cost of capital (WACC) and the pre-tax (unlevered) WACC is:

  1. A) the weighted-average cost of capital is based on the after-tax cost of equity and the pre-tax WACC is based on the after-tax cost of debt.
  2. B) the weighted-average cost of capital multiplies the cost of equity and the cost of debt by (1-tax rate) and the pre-tax WACC does not.
  3. C) the weighted-average cost of capital multiplies the cost of debt by (1-tax rate) and the pre-tax WACC does not.
  4. D) the weighted-average cost of capital multiplies the component costs of equity and debt by their weight in the capital structure, and the pre-tax WACC does not.

Answer:  C

Diff: 1

Section:  12.6 Project Risk Characteristics and Financing

Skill:  Definition

 

12) In a world with taxes, which of the following is the rate we should use to evaluate an all-equity financed project with the same risk as the firm?

  1. A) The weighted-average cost of capital
  2. B) The pre-tax WACC
  3. C) The cost of equity
  4. D) The cost of debt

Answer:  B

Diff: 1

Section:  12.6 Project Risk Characteristics and Financing

Skill:  Definition

 

13) In a world with taxes, which of the following is the rate we should use to evaluate a project with the same risk and the same financing as the firm itself?

  1. A) The weighted-average cost of capital
  2. B) The pre-tax WACC
  3. C) The cost of equity
  4. D) The cost of debt

Answer:  A

Diff: 1

Section:  12.6 Project Risk Characteristics and Financing

Skill:  Definition


Use the following information to answer the question(s) below.

 

Luther Industries has 25 million shares outstanding trading at $18 per share. In addition, Luther has $150 million in outstanding debt. Suppose Luther's equity cost of capital is 13%, its debt cost of capital is 7%, and the corporate tax rate is 40%.

 

14) Luther's unlevered cost of capital is closest to:

  1. A) 7.0%
  2. B) 9.8%
  3. C) 10.8%
  4. D) 11.5%

Answer:  D

Explanation:  D) rU = rE + rD = (13%) + (7%) = 11.5%

Diff: 1

Section:  12.6 Project Risk Characteristics and Financing

Skill:  Analytical

 

15) Luther's after-tax debt cost of capital is closest to:

  1. A) 4.2%
  2. B) 5.4%
  3. C) 7.0%
  4. D) 9.8%

Answer:  A

Explanation:  A) Effective after-tax interest rate = r(1 - Tc) = .07(1 - .40) = .042 or 4.2%

Diff: 1

Section:  12.6 Project Risk Characteristics and Financing

Skill:  Analytical

 

16) Luther's weighted average cost of capital is closest to:

  1. A) 9.8%
  2. B) 10.8%
  3. C) 11.5%
  4. D) 13.0%

Answer:  B

Explanation:  B) rU = rE + (1 - Tc)

              = (13%) + (7%)(1 - .4) = 10.8%

Diff: 1

Section:  12.6 Project Risk Characteristics and Financing

Skill:  Analytical

 

12.7   Final Thoughts on Using the CAPM

 

1) Which of the following is NOT considered a difficulty with regards to the CAPM?

  1. A) Betas are not observed.
  2. B) Expected returns are not observed.
  3. C) The market proxy is not correct.
  4. D) Investors risk preferences are not observed.

Answer:  D

Diff: 2

Section:  12.7 Final Thoughts on Using the CAPM

Skill:  Conceptual

 

2) Which of the following is NOT considered to be an important choice when estimating beta?

  1. A) The choice of the time horizon to use for estimation
  2. B) The choice of method used to extrapolate beta
  3. C) The choice between weekly and monthly returns
  4. D) The choice of index used as the market portfolio

Answer:  C

Diff: 1

Section:  12.7 Final Thoughts on Using the CAPM

Skill:  Conceptual

 

3) Which of the following statements is FALSE?

  1. A) Many practitioners prefer to use average industry betas rather than individual stock betas.
  2. B) When estimating beta by using past returns it is best to use the longest time horizon of returns available.
  3. C) The CAPM predicts that a security's expected return depends on its beta with regard to the market portfolio of all risky investments available to investors.
  4. D) If we use too short a time horizon when estimating beta, our estimate of beta will be unreliable.

Answer:  B

Diff: 1

Section:  12.7 Final Thoughts on Using the CAPM

Skill:  Conceptual

 

4) Which of the following statements is FALSE?

  1. A) We should be suspicious of beta estimates that are extreme relative to industry norms.
  2. B) When using historical data, there is always the possibility of estimation error.
  3. C) Evidence suggests that betas tend to revert toward zero over time.
  4. D) For stocks, common practice is to use at least two years of weekly return data or five years of monthly return data when estimating beta.

Answer:  C

Diff: 2

Section:  12.7 Final Thoughts on Using the CAPM

Skill:  Conceptual

 

5) Which of the following statements is FALSE?

  1. A) There may be reasons to exclude certain historical data as anomalous when estimating beta.
  2. B) Many practitioners use adjusted betas, which are calculated by averaging the estimated beta with 1.0.
  3. C) The beta estimated from linear regression can be very sensitive to outliers, which are returns of unusually small magnitude.
  4. D) If we use very old data to when estimating beta, they data may be unrepresentative of the current market risk of the security.

Answer:  C

Diff: 2

Section:  12.7 Final Thoughts on Using the CAPM

Skill:  Conceptual

 

6) Which of the following statements is FALSE?

  1. A) Many practitioners analyze other financial characteristics of a firm, when they forecast betas.
  2. B) U.S. Treasuries are never subject to interest rate risk unless we select a maturity equal to our investment horizon.
  3. C) If a firm where to change industries, using its historical beta would be inferior to using the beta of other firms in the new industry.
  4. D) When using historical returns to forecast future betas, we must be mindful of changes in the environment that might cause the future to differ from the past.

Answer:  B

Diff: 2

Section:  12.7 Final Thoughts on Using the CAPM

Skill:  Conceptual

 

7) Which of the following statements is FALSE?

  1. A) The CAPM states that we should use the risk-free interest rate corresponding to the investment horizon of the firm's investors.
  2. B) To determine the risk premium for a stock using the security market line, we need an estimate of the market risk premium.
  3. C) When surveyed, the vast majority of large firms and financial analysts reported using the yields of Treasury Bills to determine the risk-free rate.
  4. D) The risk-free interest rate is generally determined using the yields of U.S. Treasury securities, which are free from default risk.

Answer:  C

Diff: 3

Section:  12.7 Final Thoughts on Using the CAPM

Skill:  Conceptual

8) Which of the following statements is FALSE?

  1. A) The CAPM remains the predominant model used in practice to determine the equity cost of capital.
  2. B) Low beta stocks have tended to perform somewhat better than the CAPM predicts.
  3. C) The empirically estimated security market line is somewhat steeper than that predicted by the CAPM.
  4. D) Some evidence suggests that the market risk premium has declined over time.

Answer:  C

Diff: 3

Section:  12.7 Final Thoughts on Using the CAPM

Skill:  Conceptual

 

9) Which of the following statements is FALSE?

  1. A) The imperfections in the CAPM may be critical in the context of capital budgeting and corporate finance, where errors in estimating the cost of capital are likely to be far more important than small discrepancies in the project cash flows.
  2. B) To estimate the expected market risk premium we can look at the historical average excess return of the market over the risk free interest rate.
  3. C) The highest beta stocks have tended to under perform what the CAPM predicts.
  4. D) Given an assessment of an index's future cash flows, we can estimate the expected return of the market by solving for the discount rate that is consistent with the current level of the index.

Answer:  A

Diff: 3

Section:  12.7 Final Thoughts on Using the CAPM

Skill:  Conceptual

 

10) Assume that the S&P 500 currently has a dividend yield of 3% and that on average, the dividends of S&P 500 firms have increased by about 5% per year.  If the risk-free interest rate is 4%, then your estimate for the future market risk premium is:

  1. A) 7%
  2. B) 8%
  3. C) 6%
  4. D) 4%

Answer:  D

Explanation:  D) r = d1/p0 + g = dividend yield + g = .03 + .05 = .08

Risk premium = expected return on market - risk free rate = .08 - .04 = .04

Diff: 2

Section:  12.7 Final Thoughts on Using the CAPM

Skill:  Analytical

11) Assume that the Wilshire 5000 currently has a dividend yield of 2% and that on average, the dividends of Wilshire 5000 firms have increased by about 7% per year.  If the risk-free interest rate is 4%, then your estimate for the future market risk premium is:

  1. A) 4%
  2. B) 7%
  3. C) 8%
  4. D) 5%

Answer:  D

Explanation:  D) r = d1/p0 + g = dividend yield + g = .02 + .07 = .09

Risk premium = expected return on market - risk free rate = .09 - .04 = .05

Diff: 2

Section:  12.7 Final Thoughts on Using the CAPM

Skill:  Analytical

 

 

 

 

 

 

 

 

 

 -----

Key Contents: Financial Management and Corporate Finance
------
Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University
Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business, University of Western Ontario
Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown
International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick, Columbia University
------
Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Corporate Finance: The Core, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Excel Modeling in Corporate Finance, 5th Edition, 2015, Craig W. Holden, Indiana University
Fundamentals of Corporate Finance, 3rd Edition, 2015, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University, Jarrad Harford, University of Washington

-----

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017
Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016
Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University
Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown, Virginia Polytechnic Instit. and State University
Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin
Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter
------
Part 1: Fundamental Concepts and Basic Tools of Finance
1. Financial Management
2. Financial Statements
3. The Time Value of Money (Part 1)
4. The Time Value of Money (Part 2)
5. Interest Rates
Part 2: Valuing Stocks and Bonds and Understanding Risk and Return
6. Financial Management Bonds and Bond Valuation
7. Stocks and Stock Valuation
8. Risk and Return
Part 3: Capital Budgeting
9: Capital Budgeting Decision Models
10: Cash Flow Estimation
11: The Cost of Capital
Part 4: Financial Planning and Evaluating Performance
12. Forecasting and Short-Term Financial Planning
13. Working Capital Management
14. Financial Ratios and Firm Performance
Part 5: Other Selected Finance Topics
15. Raising Capital
16. Capital Structure
17. Dividends, Dividend Policy, and Stock Splits
18. International Financial Management
Appendix 1 Future Value Interest Factors
Appendix 2 Present Value Interest Factors
Appendix 3 Future Value Interest Factors of an Annuity
Appendix 4 Present Value Interest Factors of an Annuity
Appendix 5 Answers to Prepping for Exam Questions
------
1. Overview of Financial Management
2. Sizing Up a Business: A Non-Financial Perspective
3. Understanding Financial Statements
4. Measuring Financial Performance
5. Managing Day-To-Day Cash Flow
6. Projecting Financial Requirements and Managing Growth
7. Time Value of Money Basics and Applications
8. Making Investment Decisions
9. Overview of Capital Markets: Long-Term Financing Instruments
10. Assessing the Cost of Capital: What Investors Require
11. Understanding Financing and Payout Decisions
12. Designing an Optimal Capital Structure
13. Measuring and Creating Value
14. Comprehensive Case Study: Wal-Mart Stores, Inc.

1. Overview of Financial Management
• 1.1: Financial Management and the Cash Flow Cycle
• 1.2: The Role of Financial Managers
• 1.3: A Non-Financial Perspective of Financial Management
• 1.4: Financial Management’s Relationship with Accounting and Other Disciplines
• 1.5: Types of Firms
• 1.6: A Financial Management Framework
• 1.7: Relevance for Managers
• 1.8: Summary
• 1.9: Additional Readings
• 1.10: End of Chapter Problems
2. Sizing Up a Business: A Non-Financial Perspective
• 2.1: Sizing Up The Overall Economy
o 2.1.1: GDP Components
o 2.1.2: Sector-Related Fluctuations
o 2.1.3: Inflation and Interest Rates
o 2.1.4: Capital Markets
o 2.1.5: Economic Size-Up Checklist
• 2.2: Sizing Up the Industry
o 2.2.1: Industry Life Cycles
o 2.2.2: The Competitive Environment
o 2.2.3: Opportunities and Risks
o 2.2.4: Industry Size-up Checklist
• 2.3: Sizing Up Operations Management and Supply Risk
• 2.4: Sizing Up Marketing Management and Demand Risk
• 2.5: Sizing Up Human Resource Management and Strategy
• 2.6: Sizing Up Home Depot: An Example
• 2.7: Relevance for Managers
• 2.8 Summary
• 2.9: Additional Readings and Information
• 2.10: End of Chapter Problems
3. Understanding Financial Statements
• 3.1: Understanding Balance Sheets
o 3.1.1: Understanding Assets
o 3.1.2: Understanding Liabilities
o 3.1.3: Understanding Equity
• 3.2: Understanding Income Statements
o 3.2.1: Understanding Revenues, Costs, Expenses, and Profits
o 3.2.2: Connecting a Firm’s Income Statement and Balance Sheet
• 3.3: Understanding Cash Flow Statements
o 3.3.1: Cash Flows Related to Operating Activities
o 3.3.2: Cash Flows from Investing Activities
o 3.3.3: Cash Flows from Financing Activities
• 3.4: Relevance for Managers
• 3.5: Summary
• 3.6: Additional Readings and Sources of Information
• 3.7: End of Chapter Problems
4. Measuring Financial Performance
• 4.1: Performance Measures
o 4.1.1: Return on Equity
o 4.1.2: Profitability Measures
o 4.1.3: Resource Management Measures
o 4.1.4: Liquidity Measures
o 4.1.5: Leverage Measures
o 4.1.6: Application: Home Depot
• 4.2: Reading Annual Reports
• 4.3: Relevance for Managers
• 4.4: Summary
• 4.5: Additional Readings and Sources of Information
• 4.6: End of Chapter Problems
5. Managing Day-To-Day Cash Flow
• 5.1: Cash Flow Cycles
• 5.2: Working Capital Management
o 5.2.1: Managing Inventory
o 5.2.2: Managing Accounts Receivable
o 5.2.3: Managing Accounts Payable
o 5.2.4: Application: Home Depot
• 5.2.4.1: Orange Computers and Little Orange Computers
• 5.2.4.2: Home Depot
• 5.3: Short-Term Financing
o 5.3.1: Bank Loans
o 5.3.2: Commercial Paper
o 5.3.3: Banker’s Acceptance
• 5.4: Relevance for Managers
• 5.5: Summary
• 5.6: Additional Readings
• 5.7: End of Chapter Problems

6. Projecting Financial Requirements and Managing Growth
• 6.1: Generating Pro Forma Income Statements
o 6.1.1: Establishing the Cost of Goods Sold and Gross Profit
o 6.1.2: Establishing Expenses
o 6.1.3: Establishing Earnings
• 6.2: Generating Pro Forma Balance Sheets
o 6.2.1: Establishing Assets
o 6.2.2: Establishing Liabilities and Equity
• 6.3: Generating Pro Forma Cash Budgets
o 6.3.1: Establishing Cash Inflows
o 6.3.2: Establishing Cash Outflows
o 6.3.3: Establishing Net Cash Flows
• 6.4: Performing Sensitivity Analysis
o 6.4.1: Sales Sensitivity
o 6.4.1: Interest Rate Sensitivity
o 6.4.3: Working Capital Sensitivity
• 6.5: Understanding Sustainable Growth and Managing Growth
• 6.6: Relevance for Managers
• 6.7: Summary
• 6.8: Additional Readings and Resources
• 6.9: Problems

7. Time Value of Money Basics and Applications
• 7.1: Exploring Time Value of Money Concepts
o 7.1.1: Future Values
o 7.1.2: Present Values
o 7.1.3: Annuities
o 7.1.4: Perpetuities
• 7.2: Applying Time Value of Money Concepts to Financial Securities
o 7.2.1: Bonds
o 7.2.2: Preferred Shares
o 7.2.3: Common Equity
• 7.3: Relevance for Managers
• 7.4: Summary
• 7.5: Additional Readings
• 7.6: End of Chapter Problems

8. Making Investment Decisions
• 8.1: Understanding the Decision-Making Process
• 8.2: Capital Budgeting Techniques
o 8.2.1: Payback
• 8.2.1.1: Strengths and Weaknesses of the Payback Method
o 8.2.2: Net Present Value
• 8.2.2.1: Strengths and Weaknesses of the Net Present Value Method
o 8.2.3: Internal Rate of Return
• 8.2.3.1: Strengths and Weaknesses of the Internal Rate of Return Method
• 8.2.3.2: Modified Internal Rate of Return
• 8.3: Capital Budgeting Extensions
o 8.3.1: Profitability Index
o 8.3.2: Equivalent Annual Cost and Project Lengths
o 8.3.3: Mutually Exclusive Projects and Capital Rationing
• 8.4: Relevance for Managers
• 8.5: Summary
• 8.6: Additional Readings
• 8.7: End of Chapter Problems

9. Overview of Capital Markets: Long-Term Financing Instruments
• 9.1: Bonds
o 9.1.1: Changing Bond Yields
o 9.1.2: Bond Features
o 9.1.3: Bond Ratings
• 9.2: Preferred Shares
• 9.3: Common Shares
o 9.3.1: Historical Returns
• 9.4: Capital Markets Overview
o 9.4.1: Private versus Public Markets
o 9.4.2: Venture Capital and Private Equity
o 9.4.3: Initial Offerings versus Seasoned Issues
o 9.4.4: Organized Exchanges versus Over-The-Counter Markets
o 9.4.5: Role of Intermediaries
• 9.5: Market Efficiency
o 9.5.1: Weak Form
o 9.5.2: Semi-strong Form
o 9.5.3: Strong Form
o 9.5.4: U.S. Stock Market Efficiency
• 9.6: Relevance for Managers
• Appendix: Understanding Bond and Stock Investment Information
• 9.7: Summary
• 9.8: Additional Readings
• 9.9: End of Chapter Problems

10. Assessing the Cost of Capital: What Investors Require
• 10.1: Understanding the Cost of Capital: An Example
• 10.2: Understanding the Implications of the Cost of Capital
• 10.3: Defining Risk
• 10.4: Estimating the Cost of Debt
• 10.5: Estimating the Cost of Preferred Shares
• 10.6: Estimating the Cost of Equity
o 10.6.1: Dividend Model Approach
o 10.6.2: Capital Asset Pricing Model
• 10.6.2.1: Risk-Free Rate
• 10.6.2.2: Market Risk Premium
• 10.6.2.3: Beta
• 10.7: Estimating Component Weights
• 10.8: Home Depot Application
• 10.9: Hurdle Rates
• 10.10: Relevance for Managers
• 10.11: Summary
• 10.12: Additional Readings
• 10.13: Problems
11. Understanding Financing and Payout Decisions
• 11.1: Capital Structure Overview
• 11.2: Understanding the Modigliani-Miller Argument: Why Capital Structure Does Not Matter
• 11.3: Relaxing the Assumptions: Why Capital Structure Does Matter
o 11.3.1: Understanding the Impact of Corporate Taxes
o 11.3.2: Understanding the Impact of Financial Distress
o 11.3.3: Combining Corporate Taxes and Financial Distress Costs
o 11.3.4: Impact of Asymmetric Information
• 11.4: Understanding Payout Policies
o 11.4.1: Paying Dividends
o 11.4.2: Repurchasing Shares
o 11.4.3: Do Dividend Policies Matter?
• 11.5: Relevance for Managers
• 11.6: Summary
• 11.7: Additional Resources
• 11.8: End of Chapter Problems
• Appendix: Why Dividend Policy Doesn’t Matter: Example

12. Designing an Optimal Capital Structure
• 12.1: Factor Affecting Financing Decisions: The FIRST Approach
o 12.1.1: Maximizing Flexibility
o 12.1.2: Impact on EPS: Minimizing Cost
• 12.1.2.1: A Simple Valuation Model
• 12.1.2.2: Earnings before Interest and Taxes Break-Even: What Leverage Really Means
• 12.1.2.3: Does Issuing Equity Dilute the Value of Existing Shares?
o 12.1.3: Minimizing Risk
o 12.1.4: Maintaining Shareholder Control
o 12.1.5: Optimal Training
• 12.2: Tradeoff Assessment: Evaluating FIRST Criteria
• 12.3: Relevance for Managers
• 12.4: Summary
• 12.5: Additional Resource
• 12.6: End of Chapter Problems

13. Measuring and Creating Value
• 13.1: An Overview of Measuring and Creating Value
• 13.2: Measuring Value: The Book Value Plus Adjustments Method
o 13.2.1: Pros and Cons of the Book Value of Equity Plus Adjustments Method
• 13.3: Measuring Value: The Discount Cash Flow Analysis Method
o 13.3.1: Estimating Free Cash Flows
o 13.3.2: Estimating the Cost of Capital
o 13.3.3: Estimating the Present Value of Free Cash Flows
o 13.3.4: Estimating the Terminal Value
o 13.3.5: Estimating the Value of Equity
o 13.3.6: Pros and Cons of the Free Cash Flow to the Firm Approach
• 13.4: Measuring Value: Relative Valuations and Comparable Analysis
o 13.4.1: The Price-Earnings Method
• 13.4.1.1: Pros and Cons of the Price-Earnings Approach
o 13.4.2: The Enterprise Value-to-EBITDA Method
• 13.4.2.1: Pros and Cons of the EV/EBITDA Approach
• 13.5: Creating Value and Value-Based Management
• 13.6: Valuing Mergers and Acquisitions
o 13.6.1: Valuing Comparable M&A Transactions
• 13.7: Relevance for Managers
• 13.8: Summary
• 13.9: Additional Readings
• 13.10: End of Chapter Problems

14. Comprehensive Case Study: Wal-Mart Stores, Inc.
• 14.1: Sizing Up Wal-Mart
o 14.1.1: Analyzing the Economy
o 14.1.2: Analyzing the Industry
o 14.1.3: Analyzing Walmart’s Strengths and Weaknesses in Operations, Marketing, Management, and Strategy
• 14.1.3.1: Analyzing Walmart’s Operations
• 14.1.3.2: Analyzing Walmart’s Marketing
• 14.1.3.3: Analyzing Walmart’s Management and Strategy
o 14.1.4: Analyzing Walmart’s Financial Health
• 14.2: Projecting Walmart’s Future Performance
o 14.2.1: Projecting Walmart’s Income Statement
o 14.2.2: Projecting Walmart’s Balance Sheet
o 14.2.3: Examining Alternate Scenarios
• 14.3: Assessing Walmart’s Long-Term Investing and Financing
o 14.3.1: Assessing Walmart’s Investments
o 14.3.2: Assessing Walmart’s Capital Raising and the Cost of Capital
• 14.4: Valuing Walmart
o 14.4.1: Measuring Walmart’s Economic Value Added
o 14.4.2: Estimating Walmart’s Intrinsic Value: The DCF Approach
o 14.4.3: Estimating Walmart’s Intrinsic Value: Comparable Analysis
o 14.4.4: Creating Value and Overall Assessment of Walmart
• 14.5: Relevance for Managers and Final Comments
• 14.6: Additional Readings and Sources of Information
• 14.7: End of Chapter Problems
------
Part 1: Introduction to Financial Management
Chapter 1: Getting Started - Principles of Finance
Chapter 2: Firms and the Financial Market
Chapter 3: Understanding Financial Statements, Taxes, and Cash Flows
Chapter 4: Financial Analysis - Sizing Up Firm Performance
Part 2: Valuation of Financial Assets
Chapter 5: Time Value of Money - The Basics
Chapter 6: The Time Value of Money - Annuities and Other Topics
Chapter 7: An Introduction to Risk and Return - History of Financial Market Returns
Chapter 8: Risk and Return - Capital Market Theory
Chapter 9: Debt Valuation and Interest Rates
Chapter 10: Stock Valuation
Part 3: Capital Budgeting
Chapter 11: Investment Decision Criteria
Chapter 12: Analyzing Project Cash Flows
Chapter 13: Risk Analysis and Project Evaluation
Chapter 14: The Cost of Capital
Part 4: Capital Structure & Dividend Policy
Chapter 15: Capital Structure Policy
Chapter 16: Dividend Policy
Part 5: Liquidity Management & Special Topics in Finance
Chapter 17: Financial Forecasting and Planning
Chapter 18: Working Capital Management
Chapter 19: International Business Finance
Chapter 20: Corporate Risk Management
------
PART I: INTRODUCTION TO FOREIGN EXCHANGE MARKETS AND RISKS
Chapter 1: Globalization and the Multinational Corporation
Chapter 2: The Foreign Exchange Market
Chapter 3: Forward Markets and Transaction Exchange Risk
Chapter 4: The Balance of Payments
Chapter 5: Exchange Rate Systems
PART II: INTERNATIONAL PARITY CONDITIONS AND EXCHANGE RATE DETERMINATION
Chapter 6: Interest Rate Parity
Chapter 7: Speculation and Risk in the Foreign Exchange Market
Chapter 8: Purchasing Power Parity and Real Exchange Rates
Chapter 9: Measuring and Managing Real Exchange Risk
Chapter 10: Exchange Rate Determination and Forecasting

PART III: INTERNATIONAL CAPITAL MARKETS
Chapter 11: International Debt Financing
Chapter 12: International Equity Financing
Chapter 13: International Capital Market Equilibrium
Chapter 14: Political and Country Risk

PART IV: INTERNATIONAL CORPORATE FINANCE
Chapter 15: International Capital Budgeting
Chapter 16: Additional Topics in International Capital Budgeting
Chapter 17: Risk Management and the Foreign Currency Hedging Decision
Chapter 18: Financing International Trade
Chapter 19: Managing Net Working Capital

PART V: FOREIGN CURRENCY DERIVATIVES
Chapter 20: Foreign Currency Futures and Options
Chapter 21: Interest Rate and Foreign Currency Swaps
------
PART 1: INTRODUCTION
1. The Corporation
2. Introduction to Financial Statement Analysis
3. Financial Decision Making and the Law of One Price
PART 2: TIME, MONEY, AND INTEREST RATES
4. The Time Value of Money
5. Interest Rates
6. Valuing Bonds
PART 3: VALUING PROJECTS AND FIRMS
7. Investment Decision Rules
8. Fundamentals of Capital Budgeting
9. Valuing Stocks
PART 4: RISK AND RETURN
10. Capital Markets and the Pricing of Risk
11. Optimal Portfolio Choice and the Capital Asset Pricing Model
12. Estimating the Cost of Capital
13. Investor Behavior and Capital Market Efficiency
PART 5: CAPITAL STRUCTURE
14. Capital Structure in a Perfect Market
15. Debt and Taxes
16. Financial Distress, Managerial Incentives, and Information
17. Payout Policy
PART 6: ADVANCED VALUATION
18. Capital Budgeting and Valuation with Leverage
19. Valuation and Financial Modeling: A Case Study
PART 7: OPTIONS
20. Financial Options
21. Option Valuation
22. Real Options

PART 8: LONG-TERM FINANCING
23. Raising Equity Capital
24. Debt Financing
25. Leasing
PART 9: SHORT-TERM FINANCING
26. Working Capital Management
27. Short-Term Financial Planning
PART 10: SPECIAL TOPICS
28. Mergers and Acquisitions
29. Corporate Governance
30. Risk Management
31. International Corporate Finance
------
PART 1: INTRODUCTION
1. The Corporation
2. Introduction to Financial Statement Analysis
3. Financial Decision Making and the Law of One Price
PART 2: TIME, MONEY, AND INTEREST RATES
4. The Time Value of Money
5. Interest Rates
6. Valuing Bonds
PART 3: VALUING PROJECTS AND FIRMS
7. Investment Decision Rules
8. Fundamentals of Capital Budgeting
9. Valuing Stocks
PART 4: RISK AND RETURN
10. Capital Markets and the Pricing of Risk
11. Optimal Portfolio Choice and the Capital Asset Pricing Model
12. Estimating the Cost of Capital
13. Investor Behavior and Capital Market Efficiency
PART 5: CAPITAL STRUCTURE
14. Capital Structure in a Perfect Market
15. Debt and Taxes
16. Financial Distress, Managerial Incentives, and Information
17. Payout Policy
PART 6: ADVANCED VALUATION
18. Capital Budgeting and Valuation with Leverage
19. Valuation and Financial Modeling: A Case Study
------
------
PART 1 INTRODUCTION
Chapter 1 Corporate Finance and the Financial Manager
Chapter 2 Introduction to Financial Statement Analysis
PART 2 INTEREST RATES AND VALUING CASH FLOWS
Chapter 3 Time Value of Money: An Introduction
Chapter 4 Time Value of Money: Valuing Cash Flow Streams
Chapter 5 Interest Rates
Chapter 6 Bonds
Chapter 7 Stock Valuation
PART 3 VALUATION AND THE FIRM
Chapter 8 Investment Decision Rules
Chapter 9 Fundamentals of Capital Budgeting
Chapter 10 Stock Valuation: A Second Look
PART 4 RISK AND RETURN
Chapter 11 Risk and Return in Capital Markets
Chapter 12 Systematic Risk and the Equity Risk Premium
Chapter 13 The Cost of Capital
PART 5 LONG-TERM FINANCING
Chapter 14 Raising Equity Capital
Chapter 15 Debt Financing
PART 6 CAPITAL STRUCTURE AND PAYOUT POLICY
Chapter 16 Capital Structure
Chapter 17 Payout Policy
PART 7 FINANCIAL PLANNING AND FORECASTING
Chapter 18 Financial Modeling and Pro Forma Analysis
Chapter 19 Working Capital Management
Chapter 20 Short-Term Financial Planning
PART 8 Special Topics
Chapter 21 Option Applications and Corporate Finance
Chapter 22 Mergers and Acquisitions
Chapter 23 International Corporate Finance  

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FINANCIAL MANAGEMENT AND CORPORATE FINANCE - COLLECTION 2017 (FREE DOWNLOAD)

Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University
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Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business
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International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick
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Free download - PPT 2 - Link

Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Free download - PPT 1 - Link
Free download - PPT 2 - Link
Free download - PPT 3 - Link

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Excel Modeling in Corporate Finance, 5th Edition, 2015, Craig W. Holden, Indiana University
Fundamentals of Corporate Finance, 3rd Edition, 2015, Jonathan Berk, Stanford University, Peter DeMarzo, 
Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown

 

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017
Free download - PPT  - Link


Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016
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Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University
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Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown, 
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Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin
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Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter
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DOWNLOAD ALL TEST BANKs & CASE STUDY GUIDES - 2017

Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University - Test bank

Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business - Test bank

Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University - Test bank

International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick - Test bank

Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown - Test bank

Corporate Finance: The Core, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo - Test bank

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017 - Test bank

Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016 - Test bank

Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University - Test bank

Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown - Test bank

Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin - Test bank

Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter - Test bank

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For Test Bankz, Quiz Answers and Case study Guides, email to: This email address is being protected from spambots. You need JavaScript enabled to view it.

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