1. Which of the following is true regarding the Capital Asset Pricing Model (CAPM)?

a. CAPM asserts that the expected return on an asset is a function of the total risk associated with that asset.

b. CAPM asserts that asset prices cannot be determined.

c. CAPM asserts that the expected return on an asset is a function of market conditions and the assets systematic risk.

d. CAPM uses a very complicated formula to estimate the price of a stock.

e. None of the above are true.

2. A companys weighted average cost of capital (WACC):

a. Will decrease if the companys tax rate increases.

b. Is used as the discount rate in capital budgeting analysis for projects that are of average risk for the company.

c. Depends on the companys capital structure.

d. All three of the above are true.

e. None of the above are true.

3. A companys cost of equity is the same as:

a. The dollar value of the dividends the company pays.

b. The required return on the companys stock.

c. The companys weighted average cost of capital (WACC)

d. The dollar value of the companys cash flow to shareholders.

e. The companys cost of preferred stock.

4. Which of the following is the name used to refer specifically to the required return on a bond?

a. Yield to maturity.

b. Coupon rate.

c. Cost of debt.

d. Capital gains yield.

e. Current yield.

5. A firm has determined that the net present values (NPVs) for three projects are $10,000, $15,000 and negative $5,000, respectively. The projects have the same risk. Which of the following is the best course of action for the firm?

a. Pursue only the second project with an NPV of $15,000. This is the best project and thus the only one we want.

b. Pursue only the first project with an NPV of $10,000. This is the safest project.

c. Do not pursue any of these projects. Look for other projects.

d. Pursue all three projects. The increased value from the first two outweigh the losses from the third.

e. Pursue the first two projects, but not the third, assuming the projects are not mutually exclusive.

6. The value of a bond:

a. Does not depend on the risk-level of the bond.

b. Is the sum of the present values of the promised cash flows for the bond, which are typically coupon payments and a face value payment, discounted at the yield to maturity.

c. Does not change over time.

d. Always increases in value over time.

e. Does not depend on when the bond matures.

7. A companys free cash flow, which is also called total cash flow or cash flow from assets, can be determined in which of the following ways.

a. Add the companys operating cash flow to the uses of cash, which are net capital spending and changes in net working capital.

b. Find a companys cash flow to creditors and subtract the companys cash flow to shareholders.

c. Find the change in the cash balance on the Balance Sheet from the beginning of the period to the end of the period.

d. Subtract the companys uses of cash, which are net capital spending and changes in net working capital, from the companys operating cash flow.

e. None of the above determine free cash flow.

8. Based on the principle of diversification, which of the following statements is true?

a. Adding additional stocks to your portfolio will reduce the portfolios systematic risk.

b. Adding additional stocks to your portfolio will reduce the portfolios beta.

c. Adding additional stocks to your portfolio will increase the portfolios overall risk.

d. Adding additional stocks to your portfolio will reduce the portfolios unsystematic risk.

e. None of the above.