2 of 12 SECTION A (10 marks) Each of these ten multiple-choice questions is worth one mark. Circle the letter corresponding to the one alternative that best completes the statement or answers the question. Each question is worth one mark. 1. Suppose that your company is expected to pay a dividend of $1.70/share next year. There has been a steady growth in dividends of 5.1%/year and the market expects that to continue. The current price is $35. What is the cost of equity? a) 0.100 b) 0.200 c) 0.015 d) 0.001 2. Which one of the following is best classified as unsystematic risk? a) An unexpected recessionary period b) An unexpected increase in interest rates c) An unexpected decline in the sales of a firm d) A sudden increase in the inflation rate 3. The goal of diversification is to eliminate: a) Total risk. b) The market risk premium. c) Systematic risk. d) Unsystematic risk. 4. Which one of the following has a rate of return that is used as a proxy for the risk-free rate? a) Treasury notes (short-term government securities) b) Large-company stocks c) Long-term corporate bonds d) Inflation, as measured by the consumer price index 5. A risk premium is defined as: a) The expected market return b) The premium you have to pay for investing in risky assets c) The premium you have to pay for investing in assets that have high returns with low risk. d) The extra return received on an asset above the risk free rate 6. What is the Beta of the market? a) O b) 1 c) 2 d) Depends on the systematic risk in the market risk in the market The cost of capital for a project should: a) Be adjusted based on the size of the project b) Remain constant even if a decision on accepting the project is delayed for two years. c) Be adjusted based on the risk of the project d) Meet or exceed the internal rate of return of the project H2C091 Business Finance 8. When the management of the firm evaluates the risk of a proposed project and adjusts the firm's WACC based on that evaluation to ascertain the required return for the project, they are using the approach: a) Subjective b) Pure play c) Insider d) Normative 9. If you invest $5000 now, and your investment pays 12% per annum, how much will you have in three years if compounded quarterly? a) $7128.80 b) $7218.80 c) $7812.80 d) $7182.80 10. Suppose your company has an equity beta of 0.58 and the current risk-free rate is 6.1%. If the expected market risk premium is 8.6%, what is your cost of equity capital? a) 13.11% b) 10.11% c) 12.32%. d) 11.09% Section A: Multiple Choice Questions (10 marks) Write in the answer booklet the letter corresponds to the one alternative that best completes the statement or answers the question. Each question is worth one mark 1. Suppose that your company is expected to pay a dividend of $1.70/share next year There has been a steady growth in dividends of 5.1% per year and the market expects that to continue. The current price is $35. What is the cost of equity? a) 0.099 d) 0.102 2. Which one of the following is best classified as unsystematic risk? a) An unexpected recessionary period b) An unexpected increase in interest rates c) Labour Strike d) A sudden increase in the inflation rate 3. The goal of diversification is to eliminate a) Total risk b) The market risk premium c) Systematic risk d) Unsystematic risk 4. Arisk premium is defined as a) The expected market retum b) The premium you have to pay for investing in risky assets c) The premium you have to pay for investing in assets that have high returns with d) The extra return received on an asset above the risk free rate 5. What is the Beta of the market? d) Depends on the systematic risk in the market risk in the market HC2091 Business Finance Trimester 2 2017 6. When a financial market reflects all the available information in the prices of the securities, the market is referred to as: a) Primary market b) Secondary market c) Efficient capital market d) Traditional market 7. A premium bond is a bond that: a) Has a market price less than its par value b) Has a market price equal to its par value c) Has a market price which exceeds its par value d) Has a market price determined by the investment banks 8. If you invest $5,000 now, and your investment pays 12% per annum, how much will you have in three years if compounded quarterly? a) $7,128.80 b) $7,218.80 c) $7,812.80 d) $7,182.80 9. Suppose your company has an equity beta of 0.58 and the current risk-free rate is 6.1%. If the expected market risk premium is 8.6%, what is your cost of equity capital? a) 13.11% b) 10.11% c) 12.32% d) 11.09% 10. Security Market Line (SML) is trying to display the relationship between: a) Systematic risk and unsystematic risk b) Risk and return c) Assets and liabilities d) Equities and liabilities