i.

An asset with high risk will have a(n)

A. Low expected return. C. Increasing expected return.
B. Lower price than an asset with low risk. D. High standard deviation of returns

i. Answer (D) is correct. The greater the standard deviation of returns, the greater the risk is for an asset. The expected return can
vary anywhere between the large standard deviation of returns, creating the risk that the actual return is significantly low in the range
of the standard deviation of returns.
Answer (A) is incorrect because an asset with high risk will have a high expected return to compensate for the additional risk. Answer
(B) is incorrect because an asset with high risk will have a higher price than an asset with low risk due to the high expected return.
Answer (C) is incorrect because an asset with high risk will have a constant expected return, not an increasing expected return.
i.

The risk that securities cannot be sold at a reasonable price on short notice is called
A. Default risk. C. Purchasing-power risk.
B. Interest-rate risk. D. Liquidity risk. CIA 1190 IV-51
i.

Business risk is the risk inherent in a firm's operations that excludes financial risk. It depends on all of the following factors except
A. Amount of financial leverage. C. Demand variability.
B. Sales price variability. D. Input price variability.

i. The risk of loss because of fluctuations in the relative value of foreign currencies is called
A. Expropriation risk. C. Multinational beta.
B. Sovereign risk. D. Exchange rate risk

i. O & B Company, a U.S. corporation, is in possession of accounts receivable denominated in German deutsche marks. To what type
of risk are they exposed? (E)
A. Liquidity risk. C. Exchange-rate risk.
B. Business risk. D. Price risk.

A portfolio will a usually contain:

A. One riskless asset C. One risky asset
B. Two or more assets D. None of the above

25. Efficient portfolios are those which offer:

A. Highest expected return for a given level of risk
B. Highest risk for a given level of expected return
C. The maximum risk and expected return
D. All of the above

i. From the viewpoint of the investor, which of the following securities provides the least risk?
a. Mortgage bond. c. Income bond.
b. Subordinated debenture. d. Debentures. CIA 1191 IV-50
3. When stocks with the same expected return are combined into a portfolio, the expected return of the portfolio is:
A. Less than the average expected return value of the stocks
B. Greater than the average expected return of the stocks
C. Equal to the average expected return of the stocks
D. Impossible to predict

i. An investor uses the capital asset pricing model (CAPM) to evaluate the risk-return relationship on a portfolio of stocks held as an
investment. Which of the following would not be used to estimate the portfolio's expected rate of return? (D)
A. Expected risk premium on the portfolio of stocks.
B. Interest rate for the safest possible investment.
C. Expected rate of return on the market portfolio.
D. Standard deviation of the market returns.
9. The correlation measures the:
A. Rate of movements of the return of individual stocks
B. Direction of movement of the return of individual stocks
C. Direction of movement between the returns of two stocks
D. Stock market volatility

42. Cost of capital is (E)

a. The interest rate an entity must pay to borrow money.
b. The return an entity’s stockholders expect on their investment .
c. The rate of return the entity can earn from investing available cash.
d. A concept of managerial finance incorporating all of the above. L&H

13. Cost of capital is

a. The amount the company must pay for its plant assets.
b. The dividends a company must pay on its equity securities.
c. The cost the company must incur to obtain its capital resources.
d. The cost the company is charged by investment bankers who handle the issuance of equity or long-term debt securities.

Which of the following statements is most correct? (E)

a. Since the money is readily available, the cost of retained earnings is usually a lot cheaper than the cost of debt financing.
b. When calculating the cost of preferred stock, a company needs to adjust for taxes, because preferred stock dividends are tax
deductible.
c. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are tax deductible.
d. Statements a and b are correct.
e. Statements b and c are correct.

If a $1,000 bond sells for $1,125, which of the following statements are correct?
I. The market rate of interest is greater than the coupon rate on the bond.
II. The coupon rate on the bond is greater than the market rate of interest.
III. The coupon rate and the market rate are equal.
IV. The bond sells at a premium.
V. The bond sells at a discount.
a. I and IV. c. II and IV.
b. I and V. d. II and V.

17. The basis for measuring the cost of capital derived from bonds and preferred stock, respectively, is the (M)
A. after-tax rate of interest for bonds and stated annual dividend rate for preferred stock
B. pretax rate of interest for bonds and stated annual dividend rate less the expected earnings per share for

preferred stock

C. pretax rate of interest for bonds and stated annual dividend rate for preferred stock
D. after-tax rate of interest for bonds and stated annual dividend rate less the expected earnings per share
for preferred stock

i. In general, it is more expensive for a company to finance with equity capital than with debt capital because (E)
A. Long-term bonds have a maturity date and must therefore be repaid in the future.
B. Investors are exposed to greater risk with equity capital.
C. Equity capital is in greater demand than debt capital.
D. Dividends fluctuate to a greater extent than interest rates.
i. Which of the following criteria theoretically should be used to determine the valuation of common stock? (E)
A. Book value. C. Beta coefficient.
B. Dividends. D. Standard deviation of returns.

The value of the stock:

A. Increases as the dividend growth rate increases

B. Increases as the required rate of return decreases
C. Increases as the required rate of return increases
D. Both A and B

37. The capital asset pricing model (CAPM) states that:

A. The expected risk premium on an investment is proportional to its beta
B. The expected rate of return on an investment is proportional to its beta
C. The expected rate of return on an investment depends on the risk-free rate and the market rate of return B&M
D. The expected rate of return on an investment is dependent on the risk-free rate
.
The market risk premium is:
A. The difference between the rate of return on an asset and the risk-free rate
B. The difference between the rate of return on the market portfolio and the risk-free rate
C. The risk-free rate
D. The market rate of return

Which of the following is not considered a capital component for the purpose of calculating the weighted average cost of capital as it
applies to capital budgeting? (E)
a. Long-term debt. c. Short-term debt.
b. Common stock. d. Preferred stock.

29. The weighted average cost of capital that is used to evaluate a specific project should be based on the
a. mix of capital components that was used to finance a project from last year.
b. overall capital structure of the corporation.
c. cost of capital for other corporations with similar investments.
d. mix of capital components for all capital acquired in the most recent fiscal year

When calculating a firm's cost of capital, all of the following are true except that (E)
A. The cost of capital of a firm is the weighted average cost of its various financing components.
B. The calculation of the cost of capital should focus on the historical costs of alternative forms of financing rather than market or
current costs.
C. All costs should be expressed as after-tax costs.
D. The time value of money should be incorporated into the calculations.

Which class of leverage causes earnings before interest and taxes to be more sensitive to changes in sales? (M)
A. Credit. C. Operating.
B. Financial. D. Intrinsic.

The degree of operating leverage (DOL) is

A. Constant at all levels of sales.
B. A measure of the change in earnings available to common stockholders associated with a given change in operating earnings.
C. A measure of the change in operating income resulting from a given change in sales.
D. Lower if the degree of total leverage is higher, other things held constant.