FIN 100 Unit 3 Milestone 3

17/19 that's 89%
RETAKE
17 questions were answered correctly.
2 questions were answered incorrectly.
1
You invest $7,000 in a stock that has a 25% chance of a 6% return, a
35% chance of a 9% return and a 40% chance of a 10% return.

What is your expected return after one year?


9.00%


8.65%


7.85%


8.25%

RATIONALE
8.65% is the weighted average of all of the return probabilities.



CONCEPT
Expected Return
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2
Select one reason a company's capital structure may include more
equity than debt.


Equity has significant tax advantages that debt does not.



, Too much debt will decrease a company's volatility.


Relying too heavily on debt can increase the interest rate that a
company must pay on its debt.


Taking on more equity means that a company will be more leveraged.

RATIONALE
The additional debt would increase the associated risk.
CONCEPT
Capital Structure Considerations
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3
A security that falls below the security market line has __________.


a low expected return and a low price


a low expected return and a high price


a high expected return and a low price


a high expected return and a high price

RATIONALE
It's stuck below the SML and would have a lower expected return and, therefore, a
higher price at that level of risk.
CONCEPT
Understanding the Security Market Line
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4
You own a small manufacturing business that produces widgets. You
have spent $150,000 acquiring the fixed assets you need to produce
widgets. Each widget costs you $2 to make and they sell for $15 each,
so your variable cost is 13.3% of the overall revenue.