Multiple choice questions QUESTION 13 As the debt ratio of a

Multiple choice questions:

QUESTION 13

As the debt ratio of a firm increases, its equity beta increases because of the added financial risk.

True

False

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QUESTION 14

MM\'s proposition I under no taxes implies that the cost of equity of a firm remains the same as the firm uses more debt because of the no-tax assumption.

True

False

1.00000 points   

QUESTION 15

MM\'s proposition I under no taxes implies that an issue of debt increases both the expected earnings per share (EPS) and the risk of the EPS. As a result, the stock price remains the same.

True

False

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QUESTION 16

_____ evaluates the NPV of a project with respect to changes in one variable while holding others constant.

Sensitivity analysis

Scenario analysis

Simulation

Mean Variance model

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QUESTION 17

The present value (PV) break-even point is better than the accounting break-even point because

PV break-even point is the same as the sensitivity analysis.

PV break-even point covers the economic opportunity costs of the investment.

PV break-even point covers the fixed costs of production, which the accounting break-point does not.

PV break-even point covers the variable costs of production, which the accounting break-even point does not.

1.00000 points   

QUESTION 18

An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the Capital Market Line has to

lend some of her money at the risk-free rate and invest the rest in the optimal risky portfolio.

borrow some money at the risk-free rate and invest it in the optimal risky portfolio

invest only in the risky securities.

hold a portfolio which is not diversified.

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QUESTION 19

If other things remain the same, diversification is more effective when

securities returns are positively correlated.

securities returns are uncorrelated.

securities returns are negatively correlated.

securities returns are high.

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QUESTION 20

A measure of how much the returns of two risky assets move together is

variance

standard deviation

covariance

semi-variance

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QUESTION 21

The optimal risky portfolio can be identified by finding ______ .

the minimum variance point on the efficient frontier

the maximum return point on the efficient frontier

the tangency point of the capital market line and the efficient frontier

none of the above answers is correct.

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QUESTION 22

Which one of the following is not a determinant of beta of the equity of a company?

cyclicality of revenues

operating leverage

financial leverage

All of the above are determinants of beta.

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QUESTION 23

When the SML is written in the following form, the last tem in the equation represents ______________:
RS,L = RF + ?S,U (RM - RF) + ?S,U (B/S) (RM - RF)

total risk premium

business risk premium

financial risk premium

non-systematic risk premium

1.00000 points   

QUESTION 24

When we consider the corporate taxes, the value of a levered firm can be shown as the next equation: V L = V U + tc B.
The last tem (=tc B) in the equation above represents _______.

present value of taxes

present value of tax shields

present value of financial risk premium

present value of bankruptcy costs

		Sensitivity analysis
		Scenario analysis
		Simulation
		Mean Variance model

Solution

13)True. the formuale is
Beta levered=beta unlebvered*(1+(D/E)*(1-tax))
14)True
15)False
16)Senstivity analysis
17)Option B
18)option B and D
19)option C
20)covariance
21)option c