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FIN 515 Managerial Finance Week 5 Risk, Return, and the Capital Asset Pricing Model Quiz Answer

FIN 515 Managerial Finance Week 5 Risk, Return, and the Capital Asset Pricing Model Quiz Answer

FIN 515 Managerial Finance Week 5 Risk, Return, and the Capital Asset Pricing Model Quiz Answer

Week 5 Risk, Return, and the Capital Asset Pricing Model Quiz

Question 1. Which of the following statements is correct?
If a project with normal cash flows has an IRR greater than the WACC, the project must also have a positive NPV.
If Project A’s IRR exceeds Project B’s, then A must have the higher NPV.
A project’s MIRR can never exceed its IRR.
If a project with normal cash flows has an IRR less than the WACC, the project must have a positive NPV.
If the NPV is negative, the IRR must also be negative

Question 2. (TCO C) Company A has a beta of 2.77. Company B has a beta of .73. Company C has a beta of .90. The risk free rate is 6% and the market risk premium is 4%. What is the expected return of investing in Company B?

Question 3. Your stock portfolio consists of only two stocks. You have $30,000 in Company A and $35,000 in Company B. Company A has an actual return of -8% and Company B has a return of 12%. What is the return on your portfolio?

Question 4.
Division Asset Beta Next Period’s Expected Free Cash
Flow ($mm) Expected Growth Rate
Oil Exploration 1.4 450 4.0%
Oil Refining 1.1 525 2.5%
Gas and Convenience Stores 0.8 600 3.0%
The risk-free rate of interest is 3% and the market risk premium is 5%.

Which is the cost of capital for the oil exploration division closest to?
A) 6.0%
B) 7.0%
C) 8.5%
D) 10.0%

Question 5. (TCO E) A company has a capital structure of 40% debt and 60% equity. The YTM on the company’s bonds is 9%, and the company’s effective tax rate is 40%. The CFO has estimated the company’s WACC to be 9.96%. What is the company’s cost of equity?

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FIN 515 Managerial Finance Week 5 Risk, Return, and the Capital Asset Pricing Model Quiz  Answer

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