Corporate Finance Final Exam Newest 2026/2027
Questions and Correct Detailed Answers Already
Graded A+
According to the Capital Asset Pricing Model, investors are primarily concerned
with portfolio risk, not the risks of individual stocks held in isolation. Thus, the
relevant risk of a stock is the stock's contribution to the riskiness of a well-
diversified portfolio. - CORRECT ANSWER-True
If an investor buys enough stocks, he or she can, through diversification,
eliminate all of the market risk inherent in owning stocks, but as a general rule, it
will not be possible to eliminate all diversifiable risk. - CORRECT ANSWER-False
If you plotted the returns of a company against those of the market and found
that the slope of your line was negative, the CAPM would indicate that the
required rate of return of the stock should be less than the risk-free rate for a
well-diversified investor, assuming that the observed relationship is expected to
continue into the future. - CORRECT ANSWER-True
The cost of debt is equal to one minus the marginal tax rate multiplied by the
interest rate on new debt - CORRECT ANSWER-True
,We've identified three methods for estimated the cost of common stock from
retained earnings: The Capital Asset Pricing Model, the Discounted Cash Flow
method, and the bond-yield-plus-risk-premium method. However, only the CAPM
method always provides an accurate and reliable estimate. - CORRECT
ANSWER-False
The reason why retained earnings have a cost equal to Rs is because investors
think they can (i.e. expect to) earn Rs on the earnings that it retains, it should pay
those earnings out to its investors. Thus, the cost of retained earnings is based on
the opportunity cost principle - CORRECT ANSWER-True
The cost to the firm of issuing new stock is called red herring costs - CORRECT
ANSWER-False
Assume that the risk-free rate is 6% and the market risk premium is 5%. Given
this information, which of the following statements is CORRECT?
a. An index fund with beta = 1.0 should have a required return of 11%
b. If a stock has a negative beta, its required return must also be negative.
c. If a stock's beta doubles, its required return must also double.
d. An index fund with a beta = 1.0 should have a required return less than 11%
,e. An index fund with a beta of 1.0 should have a required return greater than
11% - CORRECT ANSWER-a. An index fund with beta = 1.0 should have a
required return of 11%
2. Stocks A and B have the same price and are in equilibrium, but Stock A has the
higher required rate of return. Which of the following statements is CORRECT?
a. Stock A must have a higher dividend yield than Stock B
b. If Stock A has a higher dividend yield than Stock B, its expected capital gains
yield must be lower than Stock B's.
c. Stock A must have both a higher dividend yield and a higher capital gains yield
than Stock B.
d. If Stock A has a lower dividend yield than Stock B, its expected capital gains
yield must be higher than stock B's
e. Stock B must have a higher dividend yield than Stock A. - CORRECT
ANSWER-d. If Stock A has a lower dividend yield than Stock B, its expected
capital gains yield must be higher than stock B's
3. The preemptive right is important to shareholders because it
a. Protects the current shareholders against a dilution of their ownership
interests.
b. Allows managers to buy additional shares below the current market price.
, c. Protects bondholders, and thus enables the firm to issue debt with a relatively
low interest rate.
d. Is included in every corporate charter
e. Will result in higher dividends per share. - CORRECT ANSWER-a. Protects the
current shareholders against a dilution of their ownership interests.
The greater the number of compounding periods within a year, then (1) the
greater the future value of a lump sum investment at Time 0 and (2) the greater
the present value of a given lump sum to be received at some future date -
CORRECT ANSWER-False
As a result of compounding, the effective annual rate on a bank deposit (or a
loan) is always equal to or greater than the nominal rate on the deposit (or loan).
- CORRECT ANSWER-True
The payment made each period on an amortized loan is constant, and it consists
of some interest and some principal. The closer we are to the end of the loan's
life, the greater the percentage of the payment that will be a repayment of
principal. - CORRECT ANSWER-True
Questions and Correct Detailed Answers Already
Graded A+
According to the Capital Asset Pricing Model, investors are primarily concerned
with portfolio risk, not the risks of individual stocks held in isolation. Thus, the
relevant risk of a stock is the stock's contribution to the riskiness of a well-
diversified portfolio. - CORRECT ANSWER-True
If an investor buys enough stocks, he or she can, through diversification,
eliminate all of the market risk inherent in owning stocks, but as a general rule, it
will not be possible to eliminate all diversifiable risk. - CORRECT ANSWER-False
If you plotted the returns of a company against those of the market and found
that the slope of your line was negative, the CAPM would indicate that the
required rate of return of the stock should be less than the risk-free rate for a
well-diversified investor, assuming that the observed relationship is expected to
continue into the future. - CORRECT ANSWER-True
The cost of debt is equal to one minus the marginal tax rate multiplied by the
interest rate on new debt - CORRECT ANSWER-True
,We've identified three methods for estimated the cost of common stock from
retained earnings: The Capital Asset Pricing Model, the Discounted Cash Flow
method, and the bond-yield-plus-risk-premium method. However, only the CAPM
method always provides an accurate and reliable estimate. - CORRECT
ANSWER-False
The reason why retained earnings have a cost equal to Rs is because investors
think they can (i.e. expect to) earn Rs on the earnings that it retains, it should pay
those earnings out to its investors. Thus, the cost of retained earnings is based on
the opportunity cost principle - CORRECT ANSWER-True
The cost to the firm of issuing new stock is called red herring costs - CORRECT
ANSWER-False
Assume that the risk-free rate is 6% and the market risk premium is 5%. Given
this information, which of the following statements is CORRECT?
a. An index fund with beta = 1.0 should have a required return of 11%
b. If a stock has a negative beta, its required return must also be negative.
c. If a stock's beta doubles, its required return must also double.
d. An index fund with a beta = 1.0 should have a required return less than 11%
,e. An index fund with a beta of 1.0 should have a required return greater than
11% - CORRECT ANSWER-a. An index fund with beta = 1.0 should have a
required return of 11%
2. Stocks A and B have the same price and are in equilibrium, but Stock A has the
higher required rate of return. Which of the following statements is CORRECT?
a. Stock A must have a higher dividend yield than Stock B
b. If Stock A has a higher dividend yield than Stock B, its expected capital gains
yield must be lower than Stock B's.
c. Stock A must have both a higher dividend yield and a higher capital gains yield
than Stock B.
d. If Stock A has a lower dividend yield than Stock B, its expected capital gains
yield must be higher than stock B's
e. Stock B must have a higher dividend yield than Stock A. - CORRECT
ANSWER-d. If Stock A has a lower dividend yield than Stock B, its expected
capital gains yield must be higher than stock B's
3. The preemptive right is important to shareholders because it
a. Protects the current shareholders against a dilution of their ownership
interests.
b. Allows managers to buy additional shares below the current market price.
, c. Protects bondholders, and thus enables the firm to issue debt with a relatively
low interest rate.
d. Is included in every corporate charter
e. Will result in higher dividends per share. - CORRECT ANSWER-a. Protects the
current shareholders against a dilution of their ownership interests.
The greater the number of compounding periods within a year, then (1) the
greater the future value of a lump sum investment at Time 0 and (2) the greater
the present value of a given lump sum to be received at some future date -
CORRECT ANSWER-False
As a result of compounding, the effective annual rate on a bank deposit (or a
loan) is always equal to or greater than the nominal rate on the deposit (or loan).
- CORRECT ANSWER-True
The payment made each period on an amortized loan is constant, and it consists
of some interest and some principal. The closer we are to the end of the loan's
life, the greater the percentage of the payment that will be a repayment of
principal. - CORRECT ANSWER-True
