1. Assume that the risk-free rate is 4%. Which of the following statements is correct?

a. If a stock’s beta were 1.0, its required return under the CAPM would be 4%.
b. If a stock’s beta doubled, its required return under the CAPM would also double.
c. If a stock’s beta were less than 1.0, its required return under the CAPM would less than 4%.
d. If a stock has a negative beta, its required return under the CAPM would be less than 4%.

2. It is more difficult to value a stock than a bond because________

a. the future cash flows of a stock are known
b. the required market rate of return on a stock is known in advance.
c. the maturity of a stock is known
d. equities have no maturity date

3.Which statement can describe the relationship between stock’s return and the probability
distribution?
a. The tighter the probability distribution, the lower the risk assigned to the stock
b. The tighter the probability distribution, the higher the risk assigned to the stock
c. The more diverse probability distribution, the higher the risk assigned to the stock
d. No relationship between the two values.

4.Suppose rRF =5%, rM=10% and rA =12%, stock A’s beta is ?

a.0.05
b.2
c.1.4
d.2.4

5.Bio-green company’s stock currently sells for $18 a share. The stock just paid a dividend of $1.2
per share,. The dividend is expected to grow at a constant rate of 8%. What is the required return
on the company’s stock?
a.15.2%
b.14.67%
c.8%
d.15.1%

6.A portfolio’s beta is 1.2, RPM=6%, risk free rate is 5%. Another stock expected rate of return is
13%. Should the investor add the stock to his portfolio and why?
a.Yes. Because the stock’s expected return is higher than the require rate of return.
b.No. Because the stock’s expected return is higher than the require rate of return.
c.Yes. Because RPM is high than risk free rate.
d.The investor can’t decide based on the insufficient information

7.Which statement is TRUE to describe the difference between a stock’s market price and intrinsic
value?
a.Intrinsic value can be directly observed and represents the “true”value of the company’s stock.
b.Market price represents the “true”value of the company’s stock and is set by all investors..
c.Although intrinsic value represents the “true”value of the company’s stock, it can only be
estimated.
d.If the stock market is reasonably efficient, the gap between market price and intrinsic value can
be large.

8.Yellow Stone company has paid a $1.5 per share dividend. The dividend is expected to grow at a
constant rate of 9.5% per year. The required rate of return on the stock is 16%. What is the value
per share of the company’s stock.
a. 25.27
b. 23.08
c. 15.79
d. 17.29

9.What will be the effective rate of return on a preferred stock which dividend paid quarterly if
the preferred stock’s par value is $25, a stated dividend is 7% annually of par and with a market
price of $20?
a. 8.75%
b. 11.07%
c. 9.04%
d. 39.87%

10. Which of the following gives the measure of risk for a security?
a. the sum of the expected returns for a given security
b. the sum of the total variation of the expected returns for a given security
c. the square root of the sum of the total variation of the expected returns for a given security
d. the beta of the given security

11. Which of the following occurs when investors become less risk averse?
a. SML becomes steeper.
b. SML becomes flatter.
c. SML remains unchanged.
d. SML gets flatter first and then becomes steeper.

12. In what way does the cost of capital reflect the cost of borrowing funds?
a. on average over the short run
b. on average at current book value proportions
c. on average at historical value proportions
d. on average over the long run

13. The cost of capital is affected by a number of factors. Which of the following factors is beyond
a firm’s control?
a. tax rate decisions
b. investment opportunity decisions
c. capital structure decisions
d. dividend policy decisions

14. Most businesses begin life as proprietorships or partnerships that grow with success. As
companies move to become corporations, what provides the first round of financing for most of
them?
a. the initial public offering
b. a private placement of loans or equity through friends and family
c. a private placement of equity with a limited number of investors
d. start-up capital from a venture capital fund

15. When a company decides to go public, there are many factors that must be considered.
Which of the following factors are benefits for a firm going public?
I. reporting
II. liquidity
III. establishment of value for the firm
IV. increased visibility
a. I, II, and III only
b. I, II, and IV only
c. I, III, and IV only
d. II, III, and IV only

16. You observe that a firm has a beta of 1.25, the expected return on the market portfolio is 10%,
and the risk-free rate of return is equal to 3%. What is the estimated cost of new common equity
using the retained earnings of the firm?
a. 10.75%
b. 11.75%
c. 13.75%
d. 15.5%

17.A company’s currently outstanding 14% coupon bonds have a yield to maturity of 7.5%, the
company believes it could issues at par new bonds that would provide a similar yield to maturity.
If its marginal tax rate is 30%, what is the company’s tax cost of debt?
a. 4.55%
b. 5.25%
c. 9.8%
d. 7.5%

18.A firm has 8% dividend preferred stock with a par value of $100 issued and outstanding. The
stock is currently selling for $98.50 in the market today. The flotation costs of the stock are $2,
and the firm’s tax rate is 40%. If the firm is to issue new preferred shares to fund a portion of the
new capital expenditures, what is the after tax cost of new preferred share funding?
a. 4.80%
b. 4.97%
c. 8.00%
d. 8.29%

19. A capital project is to be funded by a single source of capital. Which of the following
statements regarding the project’s evaluation is true?
a. Only the cost of that source should be used to evaluate the project.
b. The project should be evaluated using the cost of capital that reflects the risk of the project
and the capital structure for the future of the company.
c. The project should be evaluated using the historical cost of capital of the firm.
d. The project should be evaluated using the cost of equity of the firm.

20. Firm A currently has 500,000 shares issued and outstanding with a market price of $40 today.
The firm plans to issue 50,000 new shares to brokerage firm A through a bought deal at a price of
$38.00. How much money will the firm receive and from which market?
a. The firm will receive $1,900,000 from the sale of the shares in the primary market.
b. The firm will receive $1,900,000 from the sale of the shares in the secondary market.
c. The firm will receive $2,000,000 from the sale of the shares in the primary market.
d. The firm will receive $2,000,000 from the sale of the shares in the secondary market.