CAPM EXAM 3 ACTUAL EXAM PAPER 2026
QUESTIONS WITH SOLUTIONS GRADED A+
◉ The formula for the dividend discount model when the growth
rate is zero is
Answer: R = Div/P
◉ U.S. treasury securities considered to be risk-free because they
have minimal, if any, ___ risk
Answer: default
◉ Two examples of non-cyclical goods
Answer: diapers, milk
◉ What do we know about the stability of the firm's beta?
Answer: Betas are more likely to be stable if the firm remains in the
same industry
Betas can change over time
◉ Suppose a firm has a target debt-equity ratio of 2.5. What is the
firm's target capital structure weight for common stock?
, Answer: 28.57
S/(S+B)= 1/3.5
◉ According to the CAPM, what is the expected return on a stock if
its beta is equal to zero?
Answer: The risk-free rate
◉ True about WACC
Answer: It is the expected return a firm must earn on its existing
assets to maintain its current value
It is also referred to as the discount rate that is used to discount cash
flows in capital budgeting problems
◉ Variables we need to compute the beta for a company's stock
Answer: The variance of the market index's returns
The covariance between the stock and the market index's returns
◉ For both academics and practitioners, the pendulum has swung
over to the ___ for estimating the cost of equity capital
Answer: CAPM
◉ Cyclical firms
Answer: Automakers, Luxury retailers
QUESTIONS WITH SOLUTIONS GRADED A+
◉ The formula for the dividend discount model when the growth
rate is zero is
Answer: R = Div/P
◉ U.S. treasury securities considered to be risk-free because they
have minimal, if any, ___ risk
Answer: default
◉ Two examples of non-cyclical goods
Answer: diapers, milk
◉ What do we know about the stability of the firm's beta?
Answer: Betas are more likely to be stable if the firm remains in the
same industry
Betas can change over time
◉ Suppose a firm has a target debt-equity ratio of 2.5. What is the
firm's target capital structure weight for common stock?
, Answer: 28.57
S/(S+B)= 1/3.5
◉ According to the CAPM, what is the expected return on a stock if
its beta is equal to zero?
Answer: The risk-free rate
◉ True about WACC
Answer: It is the expected return a firm must earn on its existing
assets to maintain its current value
It is also referred to as the discount rate that is used to discount cash
flows in capital budgeting problems
◉ Variables we need to compute the beta for a company's stock
Answer: The variance of the market index's returns
The covariance between the stock and the market index's returns
◉ For both academics and practitioners, the pendulum has swung
over to the ___ for estimating the cost of equity capital
Answer: CAPM
◉ Cyclical firms
Answer: Automakers, Luxury retailers
