FNAN 522 Midterm
ANSWER ALL QUESTIONS IN THIS SECTION
QUESTION 1
The most common measure of risk in finance is the: - ANSWERS-a. Standard
Outcome
b. Standard Deviation
c. Expected Deviation
d. Expected Outcome
ANSWER: b. Standard Deviation
QUESTION
Under the capital asset pricing model (CAPM), which of the following beta values
is considered the most risky? - ANSWERS-a. A beta between 0 and 1
b. A beta between 0 and 1
c. A beta above 1
d. A beta equal to 0
ANSWER: C. A beta above 1
END OF
PAGE 1
, VA TATTOOING EXAM PSI 2025
QUESTION
Which of the following accurately describes unsystemic risk? - ANSWERS-a.
Unsystemic risk is correlated to investing in only one company or security.
b. A company losing a lawsuit which creates a massive legal liability is an example
of unsystemic risk.
c. Unsystemic risk can be diversified away.
D. All of these answers.
ANSWER: D. All of these answers.
QUESTION
Which of the following statements regarding the Security Market Line (SML) is
true? - ANSWERS-a. The SML graphs unsystematic risk
b. The slope of the SML is equal to the market risk premium and reflects the risk-
return trade off.
c. All of these answers.
d. The x-intercept of the SML is equal to the risk-free interest rate.
ANSWER. B. The slode of the SML is equal to the market risk premium and
reflects the risk-return trade off.
END OF
PAGE 2
, VA TATTOOING EXAM PSI 2025
QUESTION
Suppose the current risk free rate is 2%. The market rate of return is 10% and the
company has a beta of 1.5. What is the company's expected rate of return? -
ANSWERS-14%
QUESTION
A company has retained earnings of $2 million and net income of $10 million.
What is the retention ratio (expressed as a decimal)? - ANSWERS-.20
QUESTION
A company is thinking of issuing more common stock. Its stock's current market
price is $100 a share with an expected annual dividend one year from today of $3 a
share. Dividends are expected to grow 2% per year and there are no flotation costs.
What is the company cost of new common stock? - ANSWERS-5.00%
QUESTION
A company makes an initial $100,000 investment in a project. This project is
projected to earn $80,000 in year one, $100,000 in year 2, $120,000 in year 3, and
$200,000 in year 4. If the WACC is 10%, what is the project's present value?
Round to the nearest dollar. - ANSWERS-$282,132
END OF
PAGE 3
, VA TATTOOING EXAM PSI 2025
QUESTION
In order to compute the statistical values in the capital asset pricing model
(CAPM), you need information over time about: - ANSWERS-a. an overall stock
market rate of return.
b. a companyf??s rate of return.
c. a rate of return from a risk-free rate asset (like the 90-day U.S. Treasury bill
rate).
d. The rate of return of a risk-free asset, the overall stock market return, and a
company's rate of return.
ANSWER: d. The rate of return of a risk-free asset, the overall stock market return,
and a company's rate of return.
QUESTION
Suppose that a company has total financing where 30% comes from bonds, 10%
comes from a loan, and 60% from shareholder equity. The bonds pay on average a
7% after-tax interest rate, the loan has a 6% after-tax interest rate, and shareholders
require a 12% return. What is the weighted average cost of capital equal to? -
ANSWERS-9.90%
END OF
PAGE 4
ANSWER ALL QUESTIONS IN THIS SECTION
QUESTION 1
The most common measure of risk in finance is the: - ANSWERS-a. Standard
Outcome
b. Standard Deviation
c. Expected Deviation
d. Expected Outcome
ANSWER: b. Standard Deviation
QUESTION
Under the capital asset pricing model (CAPM), which of the following beta values
is considered the most risky? - ANSWERS-a. A beta between 0 and 1
b. A beta between 0 and 1
c. A beta above 1
d. A beta equal to 0
ANSWER: C. A beta above 1
END OF
PAGE 1
, VA TATTOOING EXAM PSI 2025
QUESTION
Which of the following accurately describes unsystemic risk? - ANSWERS-a.
Unsystemic risk is correlated to investing in only one company or security.
b. A company losing a lawsuit which creates a massive legal liability is an example
of unsystemic risk.
c. Unsystemic risk can be diversified away.
D. All of these answers.
ANSWER: D. All of these answers.
QUESTION
Which of the following statements regarding the Security Market Line (SML) is
true? - ANSWERS-a. The SML graphs unsystematic risk
b. The slope of the SML is equal to the market risk premium and reflects the risk-
return trade off.
c. All of these answers.
d. The x-intercept of the SML is equal to the risk-free interest rate.
ANSWER. B. The slode of the SML is equal to the market risk premium and
reflects the risk-return trade off.
END OF
PAGE 2
, VA TATTOOING EXAM PSI 2025
QUESTION
Suppose the current risk free rate is 2%. The market rate of return is 10% and the
company has a beta of 1.5. What is the company's expected rate of return? -
ANSWERS-14%
QUESTION
A company has retained earnings of $2 million and net income of $10 million.
What is the retention ratio (expressed as a decimal)? - ANSWERS-.20
QUESTION
A company is thinking of issuing more common stock. Its stock's current market
price is $100 a share with an expected annual dividend one year from today of $3 a
share. Dividends are expected to grow 2% per year and there are no flotation costs.
What is the company cost of new common stock? - ANSWERS-5.00%
QUESTION
A company makes an initial $100,000 investment in a project. This project is
projected to earn $80,000 in year one, $100,000 in year 2, $120,000 in year 3, and
$200,000 in year 4. If the WACC is 10%, what is the project's present value?
Round to the nearest dollar. - ANSWERS-$282,132
END OF
PAGE 3
, VA TATTOOING EXAM PSI 2025
QUESTION
In order to compute the statistical values in the capital asset pricing model
(CAPM), you need information over time about: - ANSWERS-a. an overall stock
market rate of return.
b. a companyf??s rate of return.
c. a rate of return from a risk-free rate asset (like the 90-day U.S. Treasury bill
rate).
d. The rate of return of a risk-free asset, the overall stock market return, and a
company's rate of return.
ANSWER: d. The rate of return of a risk-free asset, the overall stock market return,
and a company's rate of return.
QUESTION
Suppose that a company has total financing where 30% comes from bonds, 10%
comes from a loan, and 60% from shareholder equity. The bonds pay on average a
7% after-tax interest rate, the loan has a 6% after-tax interest rate, and shareholders
require a 12% return. What is the weighted average cost of capital equal to? -
ANSWERS-9.90%
END OF
PAGE 4
