# Multiple Choice

Suppose you borrow at the risk-free rate an amount equal to your initial wealth and invest in a portfolio with an expected return of 20% and a standard deviation of returns of 16%. The risk-free asset has an interest rate of 4%; calculate the expected return on the resulting portfolio ______.

20%

40%

36%

none of the above

Beta measure indicates ______.

the ability to diversify risk

the change in the rate of return on an investment for a given

change in the market return

the actual return on an asset

A and C

If the beta of Microsoft is 1.7, risk-free rate is 3% and the market risk premium is 8%, calculate the expected return for Microsoft. (Points: 5)

16.6%

15.6%

13.9%

11.3%

The cost of capital for a project depends on ______.

the company's cost of capital

the use to which the capital is put, i.e. the project

the industry cost of capital

all of the above

Cost of capital is the same as cost of equity for firms ______.

financed entirely by debt

financed by both debt and equity

financed entirely by equity

none of the above

The market value of XYZ Corporation's common stock is 40 million and the market value of the risk-free debt is 60 million. The beta of the company's common stock is 0.8, and the expected market risk premium is 10%. If the treasury bill rate is 6%, what is the firm's cost of capital? (Assume no taxes.)

9.2%

14%

10%

none of the above

Cost of equity can be estimated using ______.

discounted cash flow (DCF) approach

capital Asset Pricing Model (CAPM)

arbitrage Pricing theory (APT)

all of the above

You are given the following data for year-1. Revenue = $43; Total costs = $30; Depreciation = $3; Tax rate = 30%. Calculate the operating cash flow for the project for year-1.

$7

$10

$13

none of the above

A project has the following cash flows: C0 = -100,000; C1 = 50,000; C2 = 150,000; C3 = 100,000. If the discount rate changes from 12% to 15%, what is the change in the NPV of the project (approximately)?

12,750 increase

12,750 decrease

122,650 increase

135,400 decrease

The final decision on a project should be from ______.

project analysis

break-even analysis

NPV analysis

sensitivity analysis

#### Solution Summary

The solution explains various multiple choice questions relating to expected return, beta, cost of capital, cost of equity, cash flow and NPV