Returns on systematic risk-free securities (like U

1. Returns on systematic risk-free securities (like U.S. Treasury securities) should exhibit what type of correlation with returns on a diversified marketwide portfolio of stocks?
   a.
   nearly perfect correlation.
   b.
   perfect correlation.
   c.
   no correlation.
   d.
   Unable to tell without specifics about the portfolio.

c.
no correlation.

2. With respect to dividends and priority in liquidation, what has priority over common stock?
   a.
   treasury stock
   b.
   debt capital
   c.
   preferred stock
   d.
   nonconvertible common equity

c.
preferred stock

3. In theory, the value of a share of common equity is the present value of ____________________________________________________________.

the expected future dividends

4. To determine the appropriate weights to use in the weighted average cost of capital, an analyst will need to determine the ______________________________ of the debt, preferred stock and common equity capital.

market values

5. One criticism in using the CAPM to calculate the cost of equity capital is that ______________________________ and the __________________________________________________ are quite sensitive to the time period and methodology used in their computation

market betas

excess market rate of return

6. If dividend projections include the effect of inflation, then the discount rate used should be a ____________________ rate.

nominal

7. A company with a new
   Capital structure will increase the __________ and at the same time the __________ risk.

leverage

systematic risk

8. A company with a market beta of 1 has systemic risk ____________________ to the average amount of systemic risk of all equity securities in the market

equal

9. Because the market equity beta reflects the level of operating leverage, financial leverage, variability of sales, and other characteristics of a firm, there are situations where an analyst might have to adjust the beta because of changes in the capital structure. A situation that might require an analyst to estimate a new levered beta is a ___________________________________.

leveraged buyout

10. Normally, valuation methods are designed to produce reliable estimates of the value of a firm's ______________________________.

equity shares