Question 7 [5 pts]

Suppose a firms current ratio Curr. AssetCurr. Liab=1.2 . Determine what effect the following actions would have on its current ratio (i.e., no change, increase, or decrease).

Inventory is purchased with cash.

Answer:

Short-term loan is repaid with cash.

Answer:

Long-term debt (with the maturity > 1 year) is repaid with cash.

Answer:

A customer has paid off a credit account.

Answer:

Question 8 [5 pts]

The table below summarizes the information about two securities and the market portfolio:

	Security A	Security B	Market portfolio
Variance	0.020	0.024	0.012
Covariance with the market portfolio	0.015	0.009	-

Use the information to answer questions (a) and (b) below.

Calculate the CAPM betas for Securities A and B, respectively, and determine which security has a higher systematic risk under the CAPM framework.

Answer (show the steps/calculation toward yourresults):

Suppose expected returns on a risk-free asset and the market portfolio are 8% and 15%, respectively. Find the CAPM predicted returns on Securities A and B, respectively.

Answer (show the steps/calculation toward yourresults):

Question 9 [5 pts]

Complete each of the statements a)c).

In the CAPM framework, no reward is needed for the ( ) risk, which can be reduced to a small amount.

Answer:

In the CAPM framework, the ( ) is defined as the difference between the expected return on the market portfolio and the return on the risk-free asset.

Answer:

The value of a firms intangible capital, firm-specific knowledge, or future growth opportunities may not be realized outside the firm. Such inseparability gives rise to( ) costs of financial distress.

Answer:

Question 10 [5 pts]

Which of the following statements is correct? Choose only one.

Altmans Z score decreases as the probability of a firms bankruptcy increases.

In the CAPM framework, the systematic risk affects all investments in common and can be diversified away.

A high current ratio is preferrable even if a firm is experiencing an excessively high level of inventories.

The CAPM beta measures the variability of an individualsecuritys returns over time.

NONE of the above.

Answer: