1. According to Yahoo! Finance, the common stock of Dendreon, a biotechnology company headquartered in Seattle, has a beta of 2.92. The standard deviation of its monthly stock return is 33.3%. The common stock of Petsmart has a beta of 0.38, and the standard deviation of its monthly stock return is 8.6%.

In order:

Which stock has more systematic, or market, risk?

Which stock has more stand-alone risk?

a. Dendreon, Dendreon

b. Dendreon, Petsmart

c. Petsmart, Petsmart

d. Petsmart, Dendreon

2. It is common sense that diversification is a way to decrease risk because it means that you avoid "putting all your eggs into one basket."But why is diversification important for understanding the kind of risk that matters to most investors?

a. Because of diversification, assets' returns are not correlated.

b. Diversification implies that exposure to market-wide risk is not important to most investors.

c. Because of diversification, investors can diversify away all risk.

d. Because of diversification, the risk that matters is covariance risk, not stand-alone risk.

3.Which of the following is thebeststatement of the efficient markets hypothesis?

a. Because of competition among investors, information gets incorporated quickly into share prices, and share prices are unbiased measures of fundamental value.

b. Investors with information that a stock has positive net present value (NPV) will buy it, while investors with information that a stock has negative net present value (NPV) will sell it.

c. If investors are rational and have the same information, share prices will reflect all available information.

d. Investors' valuations require accurate information about a firm's cash flows and accurate predictions of future cash flows.

4. Suppose the WACC for Ajax Inc. is 14%. The company is considering a project that costs $100,000 right now and returns $45,000 annually for three years? What is the project's NPV?

a.$4,473.44

b.$3,397.5

c.$35,000.00

d.$16,100.00

5. Consider the treatment of the overhead allocation when you evaluate a project. Which of the following statements represents best practice?

a. Overhead should be included in the analysis because it represents costs that would have been incurred anyway.

b. Overhead should be included in the analysis because it is mandated by the corporate manual.

c. Overhead should not be included because it represents costs that are likely to increase if the plant renovations are initiated.

d. Overhead should not be included if it represents costs that are not incremental to the plant renovations.

6. Value Line is an investment research firm that provides estimates of the fundamental value of various companies' stocks. Suppose that Value Line projects that Valorous Corporation will pay a dividend of $1.80 per share at the end of this year and a dividend of $2.40 per share at the end of the following year. Value Line also projects that the price of Valorous' stock will be $44 per share after two years. If Valorous has an equity cost of capital of 8%, what is Value Line's estimate of the current fundamental value of one share of Valorous stock?

a.$42.40

b. $41.45

c. $39.27

d. $40.22