12. A company is considering a proposed expansion to its facilities. Which of the following statements is most correct?

a. In calculating the project's operating cash flows, the firm should not subtract out financing costs such as interest expense, since these costs are already included in the cost of capital, which is used to discount the projects net cash flows.

b. Since depreciation is a non-cash expense, the firm does not need to know the depreciation rate when calculating the operating cash flows.

c. When estimating the projects operating cash flows, it is important to include any opportunity costs and sunk costs, but the firm should ignore cash flows from externalities since they are accounted for elsewhere.

d. Statements a and c are correct.

e. None of the statements above is correct.

16. Assume the risk-free remains stays constant and all stocks have positive betas. Which of the following statements is most correct?

a. If the market risk premium increases by 1 percentage point, then the required return on all stocks will rise by 1 percentage point.

b. If the market risk premium increases by 1 percentage point, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.

c. If the market risk premium increases by 1 percentage point, then the required return will increase by 1 percentage point for a stock that has a beta equal to 1.0.

d. Statements a and c are correct.

e. None of the statements above is correct.

18. Suppose the market risk premium falls but the risk-free rate remains at its current level. Given this adjustment, which of the following statements is most correct?

a. The required return for all stocks will fall by the same amount.

b. The required return will fall for all stocks, but more so for stocks with higher betas.

c. The required return will fall for all stocks, but less so for stocks with higher betas.

d. The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0.

e. The required return on all stocks will remain unchanged.

19. Stock A and Stock B both have an expected return of 10% and a standard deviation of 25%. Stock A has a beta of 0.8 and Stock B has a beta of 1.2. The correlation coefficient between the two stocks is 0.6. Portfolio P is 50% invested in Stock A and 50% invested in Stock B. Which of the following statements is most correct?

a. Portfolio P has a coefficient of variation (standard deviation mean) equal to 2.5.

b. Portfolio P has more market risk than Stock A but less market risk than Stock B.

c. Portfolio P has a standard deviation of 25 percent and a beta of 1.0.

d. All of the statements above are correct.

e. None of the statements above is correct.