Question

QUESTION 11

1. If the firm is being operated so as to maximize shareholder wealth, and if our basic assumptions concerning the relationship between risk and return are true, then which of the following should be true?

	A.	If the beta of the asset is greater than the corporate beta prior to the addition of that asset, then the corporate beta after the purchase of the asset will be smaller than the original corporate beta.
	B.	If the beta of an asset is larger than the firm's beta, then the required rate of return is equal to the beta.
	C.	If the beta of an asset is larger than the corporate beta prior to the addition of that asset, then the required return on the firm will be greater after the purchase of that asset than prior to its purchase.
	D.	If the beta of the asset is larger than the firm's beta, then the required return on the asset is less than the required return on the firm.
	E.	If the beta of the asset is smaller than the firm's beta, then the required return on the asset is greater than the required return on the firm.

5 points   

QUESTION 12

1. A project's net present value is equal to:

	A.	the present value of the cash outflows plus the present value of cash inflows.
	B.	the present value of the last cash inflow.
	C.	the present value of all the expected future cash outflows.
	D.	the present value of all the cash inflows after the full recovery of the initial investment.
	E.	the present value of the expected future cash flows minus the present value of all the cash outflows.

5 points   

QUESTION 13

1. The chance of receiving an actual return that differs from the one that is expected is called _____.

	A.	payoff
	B.	beta
	C.	karma
	D.	probability distribution
	E.	risk

5 points   

QUESTION 14

1. If the NPV of a project is positive, it means that:

	A.	the project's discounted payback period is less than its payback period.
	B.	the internal rate of return is lower than the discount rate used.
	C.	the project is not acceptable on a risk adjusted basis.
	D.	accepting the project increases the value of the firm.
	E.	the project's discounted payback period is longer than the useful life of the project.

5 points   

Answer 1

11.

C. If the beta of an asset is larger than the corporate beta prior to the addition of that asset, then the required return on the firm will be greater after the purchase of that asset than prior to its purchase.

because higher beta adds to the risk, so new asset with higher beta will raise the company's current beta levels resulting in higher risk which would result in higher return required because risk and return are positively correlated

12.

E. the present value of the expected future cash flows minus the present value of all the cash outflows.

because net present value is the difference of present value of all cash inflows minus present value of all cash outflows

13.

E. risk

because risk in form of standard deviation or volatility can result in varying returns and lower/higher returns than expected/estimated

14.

D. accepting the project increases the value of the firm.

Because positive NPV means the project will add value to the firm as it will have higher present value of cash inflows than present value of cash outflows resulting in higher value of the firm

the above is answer..