FINA 3313 EXAM 2 QUESTIONS WITH CORRECT ANSWERS LATEST UPDATE 2025/2026
Which component is more likely to be biased if book values are used in the calculation of WACC
rather than market values? - Answers Common stock
Complete the following sentence. The WACC__________ - Answers For a firm represents the risk
and target capital structure of the firm's existing assets as a whole.
The risk free rate currently have a return of 2.5% and the market risk premium is 5.77%. If a firm
has a beta of 1.42 - Answers what is its cost of equity? , 0.025+1.42*(0.0577)=10.69%
If the Federal Reserve took action to increase interest rates a firm's cost of capital would
____________ ceteris paribus. - Answers increase
Which of the following is correct for a bond priced at $1100 that has ten years remaining until
maturity and a 10% coupon with semiannual payments? - Answers Each payment of interest
equals $50.
Which of the following bonds would be likely to exhibit a greater degree of interest-rate risk? -
Answers A zero-coupon bond with 30 years until maturity.
The discount rate that makes the present value of a bond's payments equal to its price is
termed the: - Answers Yield to maturity
Which of the following is correct concerning real interest rates? - Answers Real interest rates, if
positive, indicate increased purchasing power.
Suppose you have an investment in a stock that had a negative 50% return (a loss) in the first
year and a positive 50% return (a gain) in the second year. The geometric returns is 0% -
Answers false
scenario analysis - Answers an approach for assessing risk that uses several possible
alternative outcomes (scenarios) to obtain a sense of variability among returns
range - Answers a measure of an asset's risk, which is found by subtracting the return
associated with the pessimistic outcome from the return associated with the optimistic
outcome
probability - Answers the chance that a given outcome will occur
probability distribution - Answers a model that relates probabilities to the associated outcomes
The variance of an investment's returns is a measure of the: - Answers volatility of the rates of
return.
The standard deviations of individual stocks are generally higher than the standard deviation of
the market portfolio because individual stocks: - Answers have no diversification risk
, The benefits of portfolio diversification are highest when the individual securities have returns
that: - Answers are uncorrelated with the rest of the portfolio
Only macro events are reflected in the performance of the market portfolio because: - Answers
unique risks have been diversified away
If you were willing to bet that the overall stock market was heading up on a sustained basis -
Answers it would be logical to invest in: , high beta stocks
You have a portfolio consisting of equal amounts of IBM stock and Treasury bills. If you replace
half of the Treasury bills with more IBM stock the portfolio expected return will ______ - Answers
all else equal. , increase
News that has been "discounted" by the market is reflected in the ________ portion of the total
return. - Answers expected
The main vote that shareholders have is to elect the Board of Directors - Answers true
In addition to voting shareholders also have a claim on the firm's assets after all debts have
been paid. - Answers True
You are considering investing in a firm The dividend on the company's stock has not changed in
the past ten years and most likely will not change in the foreseeable future. In this case the
most appropriate stock valuation model would be the model, - Answers . , zero growth
In the formula r=D1/P0+g what does g represent? - Answers the expected price appreciation
yield from a common stock
Common stock can be valued using the perpetuity formula if the: - Answers dividends are not
expected to grow
Which of the following statements is correct about a stock currently selling for $50 per share
that has 16% expected return and a 10% expected capital appreciation? - Answers It is expected
to pay $3 in annual dividends
A stock's _______is found by dividing the stock's annual dividend by its closing price. - Answers
current yield
Which of the following is a true statement regarding publicly traded stocks and bonds? -
Answers The constant dividend growth model can be used to value stocks only if the dividend
growth rate remains constant.
Regret theory - Answers deals with the emotional reaction people experience after realizing they
have made an error in judgment
Prospect theory - Answers suggests that people express a different degree of emotion toward
gains than losses
Which component is more likely to be biased if book values are used in the calculation of WACC
rather than market values? - Answers Common stock
Complete the following sentence. The WACC__________ - Answers For a firm represents the risk
and target capital structure of the firm's existing assets as a whole.
The risk free rate currently have a return of 2.5% and the market risk premium is 5.77%. If a firm
has a beta of 1.42 - Answers what is its cost of equity? , 0.025+1.42*(0.0577)=10.69%
If the Federal Reserve took action to increase interest rates a firm's cost of capital would
____________ ceteris paribus. - Answers increase
Which of the following is correct for a bond priced at $1100 that has ten years remaining until
maturity and a 10% coupon with semiannual payments? - Answers Each payment of interest
equals $50.
Which of the following bonds would be likely to exhibit a greater degree of interest-rate risk? -
Answers A zero-coupon bond with 30 years until maturity.
The discount rate that makes the present value of a bond's payments equal to its price is
termed the: - Answers Yield to maturity
Which of the following is correct concerning real interest rates? - Answers Real interest rates, if
positive, indicate increased purchasing power.
Suppose you have an investment in a stock that had a negative 50% return (a loss) in the first
year and a positive 50% return (a gain) in the second year. The geometric returns is 0% -
Answers false
scenario analysis - Answers an approach for assessing risk that uses several possible
alternative outcomes (scenarios) to obtain a sense of variability among returns
range - Answers a measure of an asset's risk, which is found by subtracting the return
associated with the pessimistic outcome from the return associated with the optimistic
outcome
probability - Answers the chance that a given outcome will occur
probability distribution - Answers a model that relates probabilities to the associated outcomes
The variance of an investment's returns is a measure of the: - Answers volatility of the rates of
return.
The standard deviations of individual stocks are generally higher than the standard deviation of
the market portfolio because individual stocks: - Answers have no diversification risk
, The benefits of portfolio diversification are highest when the individual securities have returns
that: - Answers are uncorrelated with the rest of the portfolio
Only macro events are reflected in the performance of the market portfolio because: - Answers
unique risks have been diversified away
If you were willing to bet that the overall stock market was heading up on a sustained basis -
Answers it would be logical to invest in: , high beta stocks
You have a portfolio consisting of equal amounts of IBM stock and Treasury bills. If you replace
half of the Treasury bills with more IBM stock the portfolio expected return will ______ - Answers
all else equal. , increase
News that has been "discounted" by the market is reflected in the ________ portion of the total
return. - Answers expected
The main vote that shareholders have is to elect the Board of Directors - Answers true
In addition to voting shareholders also have a claim on the firm's assets after all debts have
been paid. - Answers True
You are considering investing in a firm The dividend on the company's stock has not changed in
the past ten years and most likely will not change in the foreseeable future. In this case the
most appropriate stock valuation model would be the model, - Answers . , zero growth
In the formula r=D1/P0+g what does g represent? - Answers the expected price appreciation
yield from a common stock
Common stock can be valued using the perpetuity formula if the: - Answers dividends are not
expected to grow
Which of the following statements is correct about a stock currently selling for $50 per share
that has 16% expected return and a 10% expected capital appreciation? - Answers It is expected
to pay $3 in annual dividends
A stock's _______is found by dividing the stock's annual dividend by its closing price. - Answers
current yield
Which of the following is a true statement regarding publicly traded stocks and bonds? -
Answers The constant dividend growth model can be used to value stocks only if the dividend
growth rate remains constant.
Regret theory - Answers deals with the emotional reaction people experience after realizing they
have made an error in judgment
Prospect theory - Answers suggests that people express a different degree of emotion toward
gains than losses
