FIN 480 FINAL Exam Questions and
Answers Graded A+
If an identical product can be sold in two different markets, and no restrictions
exist on the sale or transportation of product between markets, the product's price
should be the same in both markets. This is known as:
A) relative purchasing power parity.
B) interest rate parity.
C) the law of one price.
D) equilibrium. - Correct answer-C) the law of one price
2) Other things equal, a firm that must obtain its long-term debt and equity in a
highly illiquid domestic securities market will probably have a:
A) relatively low cost of capital.
B) relatively high cost of capital.
C) relatively average cost of capital.
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,D) cost of capital that we cannot estimate from this question. - Correct answer-B)
relatively high cost of capital.
The weighted average cost of capital (WACC) is:
A) the required rate of return for all of a firm's capital investment projects.
B) the required rate of return for a firm's average risk projects.
C) not applicable for use by MNE.
D) equal to 13%. - Correct answer-B) the required rate of return for a firm's
average risk projects.
The capital asset pricing model (CAPM) is an approach:
A) to determine the price of equity capital.
B) used by marketers to determine the price of saleable product.
C) that can be applied only to domestic markets.
D) none of the above - Correct answer-A) to determine the price of equity capital.
Which of the following is NOT a key variable in the equation for the capital asset
pricing model?
A) the risk-free rate of interest
B) the expected rate of return on the market portfolio
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,C) the marginal tax rate
D) All are important components of the CAPM. - Correct answer-C) the marginal
tax rate
Which of the following is generally unnecessary in measuring the cost of debt?
A) a forecast of future interest rates
B) the proportions of the various classes of debt a firm proposes to use
C) the corporate income tax rate
D) All of the above are necessary for measuring the cost of debt. - Correct answer-
D) All of the above are necessary for measuring the cost of debt.
The after-tax cost of debt is found by:
A) dividing the before-tax cost of debt by (1 - the corporate tax rate).
B) subtracting (1 - the corporate tax rate) from the before-tax cost of debt.
C) multiplying the before-tax cost of debt by (1 - the corporate tax rate).
D) subtracting the corporate tax rate from the before-tax cost of debt. - Correct
answer-C) multiplying the before-tax cost of debt by (1 - the corporate tax rate).
A firm whose equity has a beta of 1.0:
A) has greater systematic risk than the market portfolio.
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, B) stands little chance of surviving in the international financial market place.
C) has less systematic risk than the market portfolio.
D) None of the above is true. - Correct answer-D) None of the above is true.
The difference between the expected (or required) return for the market portfolio
and the risk-free rate of return is referred to as:
A) beta.
B) the geometric mean.
C) the market risk premium.
D) the arithmetic mean. - Correct answer-C) the market risk premium
) If a company fails to accurately predict it's cost of equity, then:
A) the firm's wacc will also be inaccurate.
B) the firm may not be using the proper interest rate to estimate NPV.
C) the firm may incorrectly accept or reject projects based on decisions made using
the cost of capital computed with an incorrect cost of equity.
D) All of the above are true. - Correct answer-D) All of the above are true.
Beta may be defined as:
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Answers Graded A+
If an identical product can be sold in two different markets, and no restrictions
exist on the sale or transportation of product between markets, the product's price
should be the same in both markets. This is known as:
A) relative purchasing power parity.
B) interest rate parity.
C) the law of one price.
D) equilibrium. - Correct answer-C) the law of one price
2) Other things equal, a firm that must obtain its long-term debt and equity in a
highly illiquid domestic securities market will probably have a:
A) relatively low cost of capital.
B) relatively high cost of capital.
C) relatively average cost of capital.
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,D) cost of capital that we cannot estimate from this question. - Correct answer-B)
relatively high cost of capital.
The weighted average cost of capital (WACC) is:
A) the required rate of return for all of a firm's capital investment projects.
B) the required rate of return for a firm's average risk projects.
C) not applicable for use by MNE.
D) equal to 13%. - Correct answer-B) the required rate of return for a firm's
average risk projects.
The capital asset pricing model (CAPM) is an approach:
A) to determine the price of equity capital.
B) used by marketers to determine the price of saleable product.
C) that can be applied only to domestic markets.
D) none of the above - Correct answer-A) to determine the price of equity capital.
Which of the following is NOT a key variable in the equation for the capital asset
pricing model?
A) the risk-free rate of interest
B) the expected rate of return on the market portfolio
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,C) the marginal tax rate
D) All are important components of the CAPM. - Correct answer-C) the marginal
tax rate
Which of the following is generally unnecessary in measuring the cost of debt?
A) a forecast of future interest rates
B) the proportions of the various classes of debt a firm proposes to use
C) the corporate income tax rate
D) All of the above are necessary for measuring the cost of debt. - Correct answer-
D) All of the above are necessary for measuring the cost of debt.
The after-tax cost of debt is found by:
A) dividing the before-tax cost of debt by (1 - the corporate tax rate).
B) subtracting (1 - the corporate tax rate) from the before-tax cost of debt.
C) multiplying the before-tax cost of debt by (1 - the corporate tax rate).
D) subtracting the corporate tax rate from the before-tax cost of debt. - Correct
answer-C) multiplying the before-tax cost of debt by (1 - the corporate tax rate).
A firm whose equity has a beta of 1.0:
A) has greater systematic risk than the market portfolio.
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, B) stands little chance of surviving in the international financial market place.
C) has less systematic risk than the market portfolio.
D) None of the above is true. - Correct answer-D) None of the above is true.
The difference between the expected (or required) return for the market portfolio
and the risk-free rate of return is referred to as:
A) beta.
B) the geometric mean.
C) the market risk premium.
D) the arithmetic mean. - Correct answer-C) the market risk premium
) If a company fails to accurately predict it's cost of equity, then:
A) the firm's wacc will also be inaccurate.
B) the firm may not be using the proper interest rate to estimate NPV.
C) the firm may incorrectly accept or reject projects based on decisions made using
the cost of capital computed with an incorrect cost of equity.
D) All of the above are true. - Correct answer-D) All of the above are true.
Beta may be defined as:
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