Question 1.Which of the following statements regarding the cost of equity is true?

- It can be estimated in three different ways.
- It is always estimated using the present value of future dividends approach.
- It is estimated by solving for the discount rate for a perpetuity.
- It is generally lower than the cost of debt because equity holders are paid after taxes are paid.

Question 2.In the Capital Asset Pricing Model, the risk-free rate:

- links the CAPM to current market conditions.
- is the historic long-term average rate of government bonds.
- can be approximated by using yields on high-rated corporate bonds.
- is always the current yield on 30-year US government Treasury bonds.

Question 3.In the Capital Asset Pricing Model, the market risk premium is best approximated by:

- the most recent one-year return on the S&P 500 Index (or another market index).
- the long-term historic return on a stock market index such as the S&P 500 (or another market index).
- the long-term average spread of the S&P 500 (or another market index) over the yield of long-term government bonds.
- the return of the S&P 500 (or another market index) over the current yield of long-term government bonds.

Question 4.Investors will make an investment if:

- the historical rate of return exceeds the expected rate of return.
- the required rate of return exceeds the expected rate of return.
- the expected rate of return exceeds the actual rate of return.
- the expected rate of return exceeds the required rate of return.

Question 5.If a firm just paid a dividend equal to $4.00 a share, then for the WACC, in order to find the cost of equity, $4 should be:

- divided by the current price of the stock, and the quotient should be added to the dividend growth rate.
- divided by the current price of the stock.
- multiplied by one minus the tax rate, and the difference divided by the current price of the stock.
- multiplied by the sum of one plus the growth rate, and then divided by the current price of the stock; this quotient should be added to the dividend growth rate.

Question 6.Which of the following is true regarding market risk?

- It is measured by beta.
- It is also called nondiversifiable risk.
- It is also called systematic risk.
- all of the above

Question 7.Chapter 9 discusses three different types of returns. Identify the item in the list below that is NOT one of those three types of returns.

- the actual rate of return
- the expected rate of return
- the risk-free rate of return
- the required rate of return

Question 8.The discount rate used in project evaluation should:

- be based on the firm’s overall risk.
- be based on each project’s risk.
- be estimated using the WACC for all projects.
- All of the above are correct.

Question 9.Which of the following statements regarding the cost of debt is true?

- The cost of debt for bonds equals the coupon rate of outstanding bonds.
- The cost of debt for bonds is found by dividing the price by the annual coupon.
- The cost of debt for bonds is found by calculating their yield to maturity.
- The cost of debt equals the flotation costs charged by investment bankers who advise the firm.

Question 10.If an investor purchases a share of stock for $300, collects a dividend during the year equal to $35 a share, and sells the stock at the end of the year for $289, what is the investor’s return for the year?

- 12.11%
- 8.30%
- 8.00%
- 15.33%