Finance Multiple Choice Question
1. Calculate the before-tax cost of debt on a new bond being issued by Sharon Jones, Inc. (SJI). The bond is a 10 year annual coupon bond with a coupon rate of 12%, and its face value is $1K. SJI's proceeds from the bond issue will equal $806.67 (i.e. the bond's price).
a. 20.00% b. 19.33% c. 16.00%
d. 14.00% e. 12.00% f. 10.00%
2. You're considering investing in Honda Motor Company Inc. (HMC) Which of the following are ex- amples of unsystematic risk? [HINT: Is unsystematic risk a synonym for firm-specific risk or market risk?]
I. Risk of a stock market crash.
II. Risk of an employee strike at HMC.
III. Risk of an expensive recall of an HMC product.
IV. Risk of a decrease in Federal Reserve interest rates.
a. I only
b. I,II,III,IV
c. I and IV
d. II,III
3. If the beta of Herman Inc.'s common stock decreases, Herman's cost of equity .
a. remains unaffected b. increases c. decreases
4. The capital asset pricing model is a formula that:
a. provides a risk-return trade off in which risk is measured in terms of the market volatility. b. depicts the total risk of a security.
c. measures risk as the coecient of variation between security and market rates of return. d. provides a risk-return trade o↵ in which risk is measured in terms of beta.
5. Tally Management, Inc.'s (TMI's) common stock has a beta of 1.5. If the expected risk-free return is 5% and the market risk premium is 8%, what is the appropriate required return on TMI's stock?
a. 3.0%
b. 7.5%
c. 9.5%
d. 12.0%
e. 17.0%
6. Blindly using the WACC to evaluate projects will cause firm managers to:
a. incorrectly accept projects with lower risk then the overall firm
b. incorrectly reject projects with higher risk then the overall firm
c. both a) and b)
d. none of the above
7. In calculating expected payoff on a single investment opportunity, the expected payo↵ for that in- vestment is simply a weighted average of the various possible payo↵s. The weights in the weighted average calculation are:
a. the relative amounts of wealth invested in each stock
b. the relative amounts of wealth invested in each payoff
c. the relative probabilities of each payoff
8. Unexpected return is calculated as , and is caused by :
a. realized return minus expected return; both market-wide & firm-specific events.
b. expected return minus realized return; both market-wide & firm-specific events.
c. realized return minus expected return; only market-wide events.
d. expected return minus realized return; only market-wide events.
e. realized return minus expected return; only firm-specific events.
f. expected return minus realized return; only firm-specific events.
9. Under the weak-form ecient market hypothesis, all is assumed to be incorporated into current asset prices.
a. historical price data
b. all publicly available information
c. publicly available information and private information