FIN622_Online_Quiz # 5

Corporate Finance – FIN622

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1.  According to the Capital Asset Pricing Model (CAPM), which of the following

represent the amount of compensation the investor needs for taking on additional

risk?

 

a.  β ( rM - rF)

b.  β ( rM-+rF)

c.  rF

d.  (rM - rF)

 

2.  Which of the following is measured by Beta ( β ) of a security.

 

a.  Systematic risk of the security

b.  Unsystematic risk of the security

c.  Market risk premium of the security

d.  Expected return of the security

 

3.  If the risk-free rate is 3%, the beta (risk measure) of a stock is 2 and the expected

market return over the period is 10%, according to the CAPM the expected return of

the stock would be

 

a.  17% 

b.  20%

c.  29%

d.  15%

 

 4.  Which of the following statement is correct with respect to a company heavily

financed by debt?

 

a.  The company has a higher level of risk

b.  The company has high cost of capital

c.  The company is unable to meet its debt obligations

d.  The company can not issue common shares

 

5.  Which of the following represents the compensation that the market demands in

exchange for owning the asset and bearing the risk of ownership?

 

a.  Market risk Premium

b.  A firm’s Cost of debt

c.  Risk free rate of return

d.  A firm’s Cost of equity

 

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6.  Which of the following will decrease the cost of debt?

 

a.  A decrease in the tax rate

b.  A decrease in Current Liability

c.  An increase in the tax rate

d.  An increase in Current Assets

 

7.  The purpose of Weighted Average Cost of Capital is to measure:

a.  The cost of debt 

b.  The cost of equity

c.  The cost of capital

d.  The cost of sales

 

8.  A company’s after-tax cost of debt is 3%,  if the company’s marginal tax rate were

40% what would be its before-tax cost of debt?

 

a.  5%

b.  3%

c.  1.80%

d.  2%

 

9.  Which of the following is the appropriate discount rate to use for cash flows with risk

that is similar to that of the overall firm?

 

a.  Cost of Debt

b.  Cost of Equity

c.  Weighted Average Cost of Capital

d.  Cost of Retained earning

 

10. Which of the following measure compares the risk of an unlevered company to the

risk of the market?

 

a.  Ungeared Beta

b.  Geared Beta

c.  Portfolio Beta

d.  Stock Beta

 

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