1)

Consider the following statements with respect to international considerations in determining the cost of capital.

Statement 1 : Exchange rates are an issue.

Statement 2: The country risk rating model uses a corresponding developed market as a benchmark and adds a premium for the emerging market.

Are the statements correct?

a.

No, because exchange rates are not an issue.

b.

No, because the country risk rating model estimates an equation for the equity risk premium for developed countries and then uses the equation and inputs associated with the emerging market to estimate the required return for emerging markets.

c.

Yes.

2)

Which of the following is included in the Pastor-Stambaugh model but not the Fama-French model?

a.

A market capitalization premium.

b.

A liquidity premium.

c.

A book-to-market premium.

3)

Tom Walder has been instructed to use absolute valuation models, and not relative valuation models, in his analysis. Which of the following is least likely to be an example of an absolute valuation model? The:

a.

residual income model.

b.

price-to-earnings market multiple model.

c.

dividend discount model.