Question 1: Greater confidence in the long-run health of the economy leads to a reduced risk aversion,
A) firms' betas will increase
B) firms' betas will decrease
C) investors' required return will decrease
D) investors' required return will increase
E) both (B) and (C)
Question 2: While Stock X has a reward-to-risk ratio of 6.5, Stock Y has a reward-to-risk ratio of 8.2. You know
A) Stock X is overpriced
B) Stock X is a better investment
C) Stock Y is under-priced
D) Stock is a better investment
Question 3: When a firm uses debt financing,
A) it increases the required return on equity because the business risk born by its shareholders increases
B) it decreases the required return on equity because debt financing is cheaper
C) It decreases the WACC because the financial risk born by its shareholders decreases
D) It increases the WACC because the business risk born by its shareholders increases
E) none of above.