If a risky security is correctly priced, its expected risk premium will be
positive
Which one of the following is the vertical intercept of the security market line?
Market rate of return
Individual security rate of return
Market risk premium
Risk-free rate
Risk free rate
For a risky security to have a positive expected return but less risk than the overall market, the security must have a beta:
greater than 0, less than 1
Which one of the following best exemplifies unsystematic risk?
Unexpected increase in the variable costs for a firm
The weighted average cost of capital is defined as the weighted average of a firm's:
cost of equity, cost of preferred, and its aftertax cost of debt
Farmer's Supply is considering opening a clothing store, which would be a new line of business for the firm. Management has decided to use the cost of capital of a similar clothing store as the discount rate to evaluate this proposed expansion. Which one
Pure play approach
The cost of preferred stock is unaffected by the
issues tax rate
Which one of the following represents the minimum rate of return a firm must earn on its assets if it is to maintain the current value of its securities?
weighted average cost of capital
An increase in a levered firm's tax rate will:
decrease the firm's cost of capital.
portfolio standard deviation is _____ a weighted average of the standard deviation of the component securities risk
NOT. Means there would be no benefit to diversification
Systematic risk
#NAME?
Unsystematic Risk
#NAME?
Principle of diversification
#NAME?
Systematic Risk principle
#NAME?
the higher the beta=
the greater the risk premium
security market link (sml) is a representation of
market equilbrium
capital asset pricing model (capm) defines the relationship between
risk and returns on stock
std dev measures:
systematic risk measures:
std dev measures: total risk
systematic risk measures: beta
cost of debt is NOT the
coupon rate
pure play approach
#NAME?
subjective approach
-consider the projects risk relative to the firm overall:
- if the project is riskier than the firm, use a discount rate greater than the WACC
- if the project is less risky than the firm use discount rate less than the WACC
advs and disadv of dividend growth model
A: easy to understand and use
D: only for companies paying dividends, only is growing at a constant rate, sensitive to est growth rate, doesnt consider risk
advs and disadv of sml
A: adjusts for systematic risk, use for all companies if beta is avaliable
D: must estimate the expected market risk premium, must estimate beta, relies on the past to predict future