1.

[1 point each for a total of 11 points]

(i) On a graph with R_i, returns on the common stock of i^th firm on the vertical axis, and R_M, returns on S&P500, on the horizontal axis, the slope of the regression line represents:

(a) the return on the risk free asset

(b) the correlation coefficient between returns on the stock and returns on S&P500

(c) the beta between returns on the stock and returns on S&P500

(d) none of the above

(ii) Recall that on a graph with R_i, returns on the common stock of i^th firm on the vertical axis and R_M, returns on S&P500 on the horizontal axis, each observation point, (R_Mt, R_it), represents return on S&P500 and return on the common stock of i^th firm for the t^th observation period. On this graph the vertical distance of the observation point for the t^th observation period from the regression line represents:

(a) e_it, that part of return on the stock of i^th firm for t^th observation period, which is due to firm-specific factors.

(b) square of the correlation coefficient between returns on the stock and returns on S&P500

(c) the beta between returns on the stock and returns on S&P500

(d) none of the above

(iii) On a graph with the expected return on the portfolio of an investor on the vertical axis and the standard deviation of returns on the portfolio on the horizontal axis, the intercept of the Capital Market Line with the vertical axis represents:

(a) the risk premium on the market portfolio

(b) correlation coefficient between returns on the stock and returns on S&P500

(c) beta between returns on the stock and returns on S&P500

(d) the return on the risk free asset

(iv) On a graph with the expected return on the portfolio of an investor on the vertical axis and the standard deviation of returns on the portfolio on the horizontal axis, the slope of the Capital Market Line with the vertical axis represents:

(a) the risk premium on the market portfolio

(b) the return on the risk free asset

(c) the reward-to-risk ratio for the market portfolio.

(d) none of the above.

(v) On a graph with r_E, r_D, r_UA, the Costs of Capital for (also known as required rates of return on) debt, equity, and assets of a firm, on the vertical axis and the debt to equity ratio on the horizontal axis, the vertical intercept of r_Erepresents:

(a) the return on the risk free asset

(b) the cost of capital for the assets of the unlevered firm

(c) the present value of the tax shield

(d) none of the above

(vi) On a graph with r_E, r_D, r_UA, the Costs of Capital for (also known as required rates of return on) debt, equity, and assets of a firm, on the vertical axis and the debt to equity ratio on the horizontal axis, the slope of tax-corrected r_Erepresents:

(a) the return on the risk free asset

(b) the cost of capital for the assets of the unlevered firm

(c) (r_UA r_D)

(d) (1 T_C )*(r_UA r_D)

(vii) In the context of the Capital Asset Pricing Model, the Market Portfolio, in principle, should include

(a) an index of large stocks such as the S&P 500

(b) real estate

(c) corporate debt

(d) all of the above

(viii) In the context of the APV method for Capital Budgeting for the Levered Firm, NPV of the side-effects of financing, denoted NPVF, should include

(a) Present Value of the Tax Shield

(b) Issuance Costs

(c) Costs of Financial Distress

(d) all of the above

(ix) Fundamental Valuation Equation says that from a financial perspective, value depends on

(a) future cash flows

(b) time characteristics of future cash flows

(c) risk characteristics of future cash flows

(d) all of the above

(x) Assumptions underlying Capital Asset Pricing Model include

(a) returns on risky assets follow normal distribution

(b) all investors have identical probability beliefs

(c) there are no transactions costs and the risk-free rate is the same for borrowing or lending

(d) all of the above

(xi) Accepting Yield-to-Maturity as a measure of return on Coupon Bonds assumes

(a) that the bond will be held until the maturity date

(b) that all coupon payments between now and the maturity date will be reinvested at the yield-to-maturity

(c) both of the above

(d) none of the above