FIN3701 Assignment 2 2025 – Accurate Questions and
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FIN3701: Corporate Finance & Strategy - Core Concepts (100 Q&A)
Part 1: Risk, Return, and Cost of Capital
1. Which of the following best describes systematic risk?
a) The risk of a company's CEO resigning.
b) The risk of a company's factory burning down.
c) The risk associated with a general economic downturn.
d) The risk of a product recall for a single company.
Answer: c) The risk associated with a general economic downturn.
Rationale: Systematic risk is market-wide and non-diversifiable, affecting all
investments. Examples include inflation, war, and interest rate changes.
2. A stock with a beta of 1.5 is expected to:
a) Be 50% less volatile than the market.
,b) Be 50% more volatile than the market.
c) Have the same volatility as the market.
d) Be completely risk-free.
Answer: b) Be 50% more volatile than the market.
Rationale: Beta measures a stock's volatility relative to the market. A beta of 1.0 is
market average; 1.5 means it's 50% more volatile.
3. The Security Market Line (SML) represents the relationship between:
a) Expected return and standard deviation (Total Risk).
b) Expected return and beta (Systematic Risk).
c) Coupon rate and bond maturity.
d) Dividend yield and earnings per share.
Answer: b) Expected return and beta (Systematic Risk).
Rationale: The SML is a graphical representation of the Capital Asset Pricing
Model (CAPM), which uses beta to determine required return.
4. According to the Capital Asset Pricing Model (CAPM), the required return
on a stock is equal to the risk-free rate plus:
a) The stock's standard deviation.
b) A risk premium based on the stock's unsystematic risk.
c) A risk premium based on the stock's beta.
,d) The market return.
Answer: c) A risk premium based on the stock's beta.
Rationale: The CAPM formula is: Required Return = Risk-Free Rate + Beta *
(Market Return - Risk-Free Rate). The term "Beta * (Market Return - Risk-Free
Rate)" is the systematic risk premium.
5. A company's cost of debt is typically:
a) Lower than its cost of equity because debt is less risky for investors.
b) Higher than its cost of equity because of tax deductibility.
c) The same as its cost of preferred stock.
d) Irrelevant for capital budgeting decisions.
Answer: a) Lower than its cost of equity because debt is less risky for
investors.
Rationale: Debt holders have a prior claim on assets and cash flows, making it less
risky than equity. This lower risk translates to a lower required return (cost).
6. The primary reason the cost of debt is adjusted for taxes is that:
a) Interest payments are not tax-deductible.
b) Interest payments are tax-deductible, reducing the government's claim on the
firm's earnings.
c) Principal repayments are tax-deductible.
, d) Equity dividends are tax-deductible.
Answer: b) Interest payments are tax-deductible, reducing the government's
claim on the firm's earnings.
Rationale: Since interest expense is deductible, the effective after-tax cost of debt
is: Pre-tax Cost of Debt * (1 - Tax Rate).
7. The Weighted Average Cost of Capital (WACC) is used primarily for:
a) Evaluating projects with a different risk profile than the firm.
b) Determining the firm's required return for its overall risk level.
c) Calculating the cost of equity in isolation.
d) Valuing the firm's debt.
Answer: b) Determining the firm's required return for its overall risk level.
Rationale: WACC represents the average rate of return required by all of the firm's
investors (debt and equity holders). It's the appropriate hurdle rate for projects that
are similar in risk to the firm as a whole.
8. If a firm's debt-to-equity ratio increases, and everything else remains
constant, the WACC will initially:
a) Increase because debt is more expensive.
b) Decrease because of the tax shield on debt.
Verified Correct Solutions with Rationale
|| 100% Guaranteed Pass
<Latest Version>
FIN3701: Corporate Finance & Strategy - Core Concepts (100 Q&A)
Part 1: Risk, Return, and Cost of Capital
1. Which of the following best describes systematic risk?
a) The risk of a company's CEO resigning.
b) The risk of a company's factory burning down.
c) The risk associated with a general economic downturn.
d) The risk of a product recall for a single company.
Answer: c) The risk associated with a general economic downturn.
Rationale: Systematic risk is market-wide and non-diversifiable, affecting all
investments. Examples include inflation, war, and interest rate changes.
2. A stock with a beta of 1.5 is expected to:
a) Be 50% less volatile than the market.
,b) Be 50% more volatile than the market.
c) Have the same volatility as the market.
d) Be completely risk-free.
Answer: b) Be 50% more volatile than the market.
Rationale: Beta measures a stock's volatility relative to the market. A beta of 1.0 is
market average; 1.5 means it's 50% more volatile.
3. The Security Market Line (SML) represents the relationship between:
a) Expected return and standard deviation (Total Risk).
b) Expected return and beta (Systematic Risk).
c) Coupon rate and bond maturity.
d) Dividend yield and earnings per share.
Answer: b) Expected return and beta (Systematic Risk).
Rationale: The SML is a graphical representation of the Capital Asset Pricing
Model (CAPM), which uses beta to determine required return.
4. According to the Capital Asset Pricing Model (CAPM), the required return
on a stock is equal to the risk-free rate plus:
a) The stock's standard deviation.
b) A risk premium based on the stock's unsystematic risk.
c) A risk premium based on the stock's beta.
,d) The market return.
Answer: c) A risk premium based on the stock's beta.
Rationale: The CAPM formula is: Required Return = Risk-Free Rate + Beta *
(Market Return - Risk-Free Rate). The term "Beta * (Market Return - Risk-Free
Rate)" is the systematic risk premium.
5. A company's cost of debt is typically:
a) Lower than its cost of equity because debt is less risky for investors.
b) Higher than its cost of equity because of tax deductibility.
c) The same as its cost of preferred stock.
d) Irrelevant for capital budgeting decisions.
Answer: a) Lower than its cost of equity because debt is less risky for
investors.
Rationale: Debt holders have a prior claim on assets and cash flows, making it less
risky than equity. This lower risk translates to a lower required return (cost).
6. The primary reason the cost of debt is adjusted for taxes is that:
a) Interest payments are not tax-deductible.
b) Interest payments are tax-deductible, reducing the government's claim on the
firm's earnings.
c) Principal repayments are tax-deductible.
, d) Equity dividends are tax-deductible.
Answer: b) Interest payments are tax-deductible, reducing the government's
claim on the firm's earnings.
Rationale: Since interest expense is deductible, the effective after-tax cost of debt
is: Pre-tax Cost of Debt * (1 - Tax Rate).
7. The Weighted Average Cost of Capital (WACC) is used primarily for:
a) Evaluating projects with a different risk profile than the firm.
b) Determining the firm's required return for its overall risk level.
c) Calculating the cost of equity in isolation.
d) Valuing the firm's debt.
Answer: b) Determining the firm's required return for its overall risk level.
Rationale: WACC represents the average rate of return required by all of the firm's
investors (debt and equity holders). It's the appropriate hurdle rate for projects that
are similar in risk to the firm as a whole.
8. If a firm's debt-to-equity ratio increases, and everything else remains
constant, the WACC will initially:
a) Increase because debt is more expensive.
b) Decrease because of the tax shield on debt.
