ing money to repurchase common stock in the market 2. Matthew wants to take out a loan to buy a car. He calculates that he can make repayments of $4,000 per year. If he can geta five-year loan with an annual interest rate of7.5%, what is the maximum price he can a. $20,324 b. $18,243 c. $16,184 pay for the car? 15 3. A stock's beta measures the: a. quantity of firm specific risk an investor must bear. b. quantity of market risk an investor must bear c. market risk premium on the stock. 4. Congress has passed a law that will reduce marginal corporate income tax rates. What impact would a reduction in corpor income tax rates have on a company's WACC? a. Increase the WACC of companies that have capital structures that are 100% equity. b. Increase the WACC of companies that have some debt in their capital structures c. Decrease the WACC of companies that have some debt in their capital structures 5. GM has a book value of $8 billion of equity and a face value of $12 billion of debt. What are the weights in equity and debt that are used for calculating the WACC? a. b. c. 0.4, 0.6 0.6, 0.4 cannot be determined 6. Which of the following is an advantage of a sole proprietorship? ease of setup b. double taxation c. limited liability 7. As debt is added to the capital structure, the: b. c. Cost of Equity Capital can be expected to decline Cost of Debt can be expected to decline. Cost of Equity Capital can be expected to rise 8. The prices of stock in the secondary market are important for the company managers because The secondary market establishes the value of the company Efficient markets prove that market prices are always accurate Prices in the secondary market are irrelevant, because firms raise money in the primary market b. 9. Financial researchers and economists have suggested that interest rates are derived from all of the following exce a. Expected Inflation b. Recent realized returns in the stock market c. Supply and demand for money 1o. What is the typical relationship between the standard deviation of an individual common stock and the standar a well-diversified portfolio of common stocks? a. Individual stock's standard deviation will be higher. b. The standard deviations should be equal. c. Individual stock's standard deviation will be lower