Part E

Everything else equal, an asset's value is directly related to

- the cash flow the asset is expected to generate.

- the risk associated with the investment in that asset.

- the rate of return that the firm must earn to satisfy investors' demands.

- the cost of raising additional capital.

Which of the following is true of the change in the weighted average cost of capital of a firm?

-A decrease in the weighted average cost of the capital increases the value of the firm.

-Any change in the weighted average cost of capital results in no change in the value of the firm.

-A decrease in the weighted average cost of the capital increases the cash flow generated by the investments.

-A decrease in the weighted average cost of the capital decreases the value of the firm.

Which of the following is the only risk that is relevant to a rational, diversified investor?

-Unsystematic risk

-Market risk

-Diversifiable risk

Risk is indicated by variability, whether the variability is considered positive or negative. Both the positive and negative outcomes must be evaluated when considering risk.

-true

-false

The market for a stock is said to be in equilibrium when the _____.

-expected return on the stock is equal to its historical return

-expected return on the stock is equal to the market risk premium

-expected return on the stock is equal to its required return