BUS 413 (Finance) Midterm Questions and Answers with Verified
Solutions | Latest Update
QUESTION
Unique Risk
Answer:
Risk factors affecting only that firm. Also called diversifiable risk
QUESTION
Market Risk
Answer:
Economy-wide sources of risk that affect the overall stock market. Also called systemic risk
QUESTION
Beta
Answer:
Sensitivity of a stock's return to the market portfolio
QUESTION
What is the disadvantage of using too few observations when estimating betas?
Answer:
A small sample can lead to inaccurate estimates
QUESTION
What is a disadvantage of using too many observations over long periods of time when estimating
betas?
Answer:
Betas can change over time for many reasons. Firms can expand, diversify, change industries
overtime. making observations from the past out of date
QUESTION
What are the determinants of Beta
Answer:
Financial risk & Business risk
, QUESTION
What is Financial risk in regards to determining the Beta
Answer:
Financial Leverage
QUESTION
How does financial leverage impact the beta?
Answer:
As firms borrow, they have increased fixed costs from interest payments that are a higher priority
over payment to equity investors. Thus, increasing earning volatility.
QUESTION
What does business risk come from?
Answer:
1. Cyclicality of Revenues
2. Operating Leverage
QUESTION
Highly cyclical firms
Answer:
Firms whose revenues and earnings are strongly correlated with the rest of the economy. They
tend to have high equity betas
QUESTION
Operating Leverage
Answer:
Operating leverage is a measure proportional to the ratio of fixed costs to variable costs
QUESTION
Sensitivity analysis
Answer:
Analysis of the effects of changes in one variable, like sales, cost on a project
QUESTION
Scenario analysis
Answer:
Project analysis given a particular combination of assumptions
Solutions | Latest Update
QUESTION
Unique Risk
Answer:
Risk factors affecting only that firm. Also called diversifiable risk
QUESTION
Market Risk
Answer:
Economy-wide sources of risk that affect the overall stock market. Also called systemic risk
QUESTION
Beta
Answer:
Sensitivity of a stock's return to the market portfolio
QUESTION
What is the disadvantage of using too few observations when estimating betas?
Answer:
A small sample can lead to inaccurate estimates
QUESTION
What is a disadvantage of using too many observations over long periods of time when estimating
betas?
Answer:
Betas can change over time for many reasons. Firms can expand, diversify, change industries
overtime. making observations from the past out of date
QUESTION
What are the determinants of Beta
Answer:
Financial risk & Business risk
, QUESTION
What is Financial risk in regards to determining the Beta
Answer:
Financial Leverage
QUESTION
How does financial leverage impact the beta?
Answer:
As firms borrow, they have increased fixed costs from interest payments that are a higher priority
over payment to equity investors. Thus, increasing earning volatility.
QUESTION
What does business risk come from?
Answer:
1. Cyclicality of Revenues
2. Operating Leverage
QUESTION
Highly cyclical firms
Answer:
Firms whose revenues and earnings are strongly correlated with the rest of the economy. They
tend to have high equity betas
QUESTION
Operating Leverage
Answer:
Operating leverage is a measure proportional to the ratio of fixed costs to variable costs
QUESTION
Sensitivity analysis
Answer:
Analysis of the effects of changes in one variable, like sales, cost on a project
QUESTION
Scenario analysis
Answer:
Project analysis given a particular combination of assumptions
