1. The use of WACC based on a firm's own stock price to select new projects or investments is acceptable when the: A) Projects are completely different from existing businesses B) NPV is positive when discounted by the WACC C) Risk of the projects is similar to the risk of the firm's existing activities D) WACC should always be used as a discount rate in evaluating new projects. 2. In reviewing a proposed project's cash flows (where you first invest then earn profits), if you learned that the (systematic) risk of the project had declined from your previous expectations, your revised net present value: A) Should increase B) Should decrease C) Should not change D) Should increase or decrease depending on the number of years of cash flows 3. Which of the following is (are) a rule to follow in estimating cash flows? A) Include sunk costs B) Do not include opportunity costs C) Use after-tax cash flows D) all of A, B, and C are major steps 4. Which of the following statements is FALSE? A) The variance of a portfolio is simply the weighted average of the variance of individual stocks within the portfolio. B) The expected return of a portfolio is simply the weighted average of the expected returns of individual stocks within the portfolio. C) Portfolio weights add up to 1 so that they represent the way we have divided our money between the different individual stocks in the portfolio. D) A portfolio weight is the fraction of the total investment in the portfolio held in an individual stock in the portfolio. 5. Which of the following statements is FALSE? A) A stock's return is perfectly positively correlated with itself. B) When the covariance equals 0, the stocks have no tendency to move either together or in opposition of one another. C) The closer the correlation is to -1, the more the returns tend to move in opposite directions. D) The correlation between a risky portfolio and a risk-free asset can be positive or negative. 6. Which of the following statements is FALSE? A) The tangent portfolio is efficient and has the highest Sharpe Ratio. B) The tangent portfolio depends on investors' risk preference. C) By combining the tangent portfolio with the risk-free asset, an investor will earn the highest possible expected return for any level of volatility her or she is willing to bear. D) When the CAPM assumptions hold, if all investors demand the tangent portfolio, then the market portfolio must equal the tangent portfolio. 7. Which of the following are the assumptions used in deriving the Capital Asset Pricing Model (CAPM)? i. Investors have the same expectations regarding the volatilities, correlation, and expected returns of securities. ii. Investors have the same risk preferences. iii. Investors hold only efficient portfolios of traded securities, that is portfolios that yield the maximum expected return for the given level of volatility. iv. Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions cost and can borrow and lend at the risk-free interest rate. v. Companies have no bankruptcy risk. A) i, ii, and iii B) i, iii, and iv C) i. iii, and v D) ii, iv, and v 8. Which of the following statements is FALSE? A) Leverage decreases the risk of the equity of a firm. B) With perfect capital markets and no tax), the combined cash flows of debt and equity must be equal to the cash flows of the project. C) Franco Modigliani and Merton Miller argued that with perfect capital markets and no tax, the total value of a firm should not depend on its capital structure. D) It is inappropriate to discount the cash flows of levered equity at the same discount rate that we use for unlevered equity. 9. According to Modigliani-Miller I, which of the following statements is FALSE? A) With no debt, the WACC is equal to the unlevered equity cost of capital. B) With perfect capital markets and no tax), a firm's WACC is dependent on its capital structure. C) As a firm takes leverage with low cost of debt capital (and no tax), its equity cost of capital rises, but the net effect is that the firm's WACC is unchanged. D) With tax, taking leverage reduces a firm's WACC. 10. Which of the following statements is FALSE? A) If bankruptcy is costly, these costs might offset the tax advantages of debt financing. B) Bankruptcy is a long and complicated process that imposes both direct and indirect costs on the firm and its investors. C) Bankruptcy is rarely simple and straightforward-equity holders don't just "hand the keys" to debt holders the moment the firm defaults on a debt payment. D) None of the above 11. Which of the following statements is FALSE? A) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate. B) If the cost of capital estimate is more than the IRR, the NPV will be positive. C) To decide whether to invest using the NPV rule, we need to know the cost of capital. D) None of the above 12. Which of the following statements is FALSE? A) The payback investment rule is based on the notion that an opportunity that pays back its initial investments quickly is a good idea. B) An IRR will always exist for an investment opportunity. C) A NPV will always exist for an investment opportunity. D) None of the above. 13. Which of the following is NOT a diversifiable risk? A) The risk that oil prices rise, increasing production costs B) The risk of a product liability lawsuit C) The risk that the CEO commits fraud D) The risk of a key employee being hired away by a competitor 14. Which of the following statements is FALSE? A) Firm specific news is good or bad news about the company itself. B) Individual stocks are affected by both systematic and firm-specific risk. C) When firms carry both types of risk, only the firm-specific risk will be diversified when we combine many firms' stocks into a portfolio. D) The risk premium for a stock is affected by its idiosyncratic risk. 15. The DuPont Identity expresses the firm's ROE in terms of: A) profitability, asset efficiency, and leverage. B) valuation, liquidity, and interest coverage. C) profitability, liquidity, and valuation. D) equity, assets, and liabilities. 16. Which of the following statements is FALSE? A) To estimate a firm's enterprise value, we compute the present value of the free cash flows (FCF) which are available to pay only equity holders. B) The NPV of any individual project represents its contribution to the firm's enterprise value. C) When using the total payout model, we discount total dividends and share repurchases, and use the growth rate in earnings when forecasting the growth of the firm's payout. D) In the total payout model, we first value the firm's equity, rather than just a single share. 17. Which of the following statements is FALSE? A) The firm's weighted average cost of capital (WACC) is the cost of capital that reflects the risk of the overall business, which is the combined risk of the firm's equity and debt. B) When using the discounted free cash flow model we should use the firm's WACC as the discount rate. C) When using the dividend-discount model we should use the firm's equity cost of capital. D) When using the discounted free cash flow model we should use the firm's equity cost of capital. 18. Which of the following statements is FALSE? A) If the bond trades at a discount, and investor who buys the bond will earn a return both from receiving the coupons and from receiving a face value that exceeds the price paid for the bond. B) Most coupon bond issuers choose a coupon rate so that the bonds will initially trade at, or very near to, par. C) Coupon bonds always trade for a discount. D) At any point in time, changes in market interest rates affect a bond's yield to maturity and its price. 19. Which of the following statements is FALSE? A) When a bond is trading at a discount, the price drop when a coupon is paid will be larger than the price increase between coupons, so the bond price will tend to decline as time passes. B) When a bond trades at a price equal to its face value, it is said to trade at par. C) As interest rates and bond yield rise, bond prices will fall. D) Ultimately, the prices of all bonds approach the bond's face value when the bonds mature and their last coupon are paid. 20. Which of the following statements is FALSE? A) The payback investment rule is based on the notion that an opportunity that pays back its initial investments quickly is a good idea. B) An IRR will always exist for an investment opportunity. C) A NPV will always exist for an investment opportunity. D) Multiple IRRs could exist for an investment opportunity