# EBF 401 EBF401 Quiz 3 with Answers (Penn State University)

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EBF 401 EBF401 Quiz 3 Answers (Penn State University)

1. If the risk of an investment project is different than the firm’s risk then:

a.    You must adjust the discount rate for the project based on the firm’s risk;

b.    You must adjust the discount rate for the project based on the project’s risk;

c.    You must use the market rate;

d.    You must use an average rate across prior projects;

e.    You must use the discount rate determined using the CAPM.

2. An industry is likely to have a low beta if the:

a.    Stream of revenues is stable and less volatile than the market;

b.   Economy is in a recession;

c.   Market for its goods is unaffected by the market cycle;

d.  Stream of revenues is stable and less volatile than the market, and economy is in a  recession;

e.    Stream of revenues is stable and less volatile than the market, and market for its goods is unaffected by the market cycle.

3. Jack’s Construction Co. has 80,000 bonds outstanding that are selling at \$1,000. Bonds with similar characteristics yield 8.5%. The company also has 4 million shares of common stock outstanding. The stock has a beta of 1.1 and sells for \$40 per share. The U.S. Treasury bill yields 4% and the market risk premium is 8%. The firm’s tax rate is 35%. What is the WACC?

a.    7.10%;

b.   7.39%;

c.   10.38%;

d.   10.65%;

e.   11.37%.

4. The Consolidated Transfer Co. is an all-equity financed firm. The beta is 0.75, the market risk premium is 8% and the risk-free rate is 4%. What is the expected return of Consolidated?

a.    7%;

b.    8%;

c.     9%;

d.    10%;

e.    13%.

5. A key assumption of M&M Proposition I (without taxes) is that:

a.    Financial leverage increases risk;

b.    Individuals can borrow on their own account at lower rates than the firm;

c.    Individuals must be able to borrow on their own account at rates equal to the firm;

d.   Managers are acting to maximize the value of the firm;

e.    All of these.

6. An efficient capital market is one in which:

a. Brokerage commissions are zero;

b. Taxes are irrelevant;

d. Security prices are guaranteed by the U.S. Securities and Exchange Commission to be fair;

e. Security prices reflect available information.

7. In an efficient market, the price of a security will:

a. Always rise immediately upon the release of new information, with no further price adjustments related to that information;

b. React to new information over a two-day period, after which time no further price adjustments related to that information will occur;

c. Rise sharply when new information is first released and then decline to a new stable level by the following day;

d. React immediately to new information with no further price adjustments related to that information;

e. Be slow to react for the first few hours after new information is released, allowing time for that information to be reviewed and analyzed.

8. Which of the following tend to reinforce the argument that financial markets are efficient?

i. Information spreads rapidly in today’s world;

ii.   There is tremendous competition in financial markets;

iii.  Market prices continually fluctuate;

iv.  Market prices react suddenly to unexpected news announcements.

a. i. and iii. only;

b. ii. and iv. only;

c. i., ii., and iii. only;

d. ii., iii., and iv. only;

e. i., ii., iii., and iv.

9. Market efficiency implies that:

a. Prices may not reflect underlying value;

b. A good financial manager can time stock sales;

c. Managers may profitably speculate in foreign currency;

d. Managers cannot boost stock prices through creative accounting;

e. None of the above.

10. If the market is weak form efficient:

a. Semistrong form efficiency holds;

b. Strong form efficiency must hold;

c. Semistrong form efficiency may hold;

d. Markets are not weak form efficient;

e. None of the above.

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