Which of the following statements does not correctly describe the capital asset pricing model
Which of the following statements does not correctly
Subject: Business / Finance
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Question
Three multiple choice questions, and one short answer question. If the answer could be provided with reasoning it would be great.
Which of the following statements does not correctly describe the capital asset pricing model (CAPM)?
a) A security’s expected return is a linear function of the security’s systematic risk.
b) The market portfolio has a beta of 1.
c) The project beta reflects business and financial risks.
d) Securities are priced on the basis of systematic risk.
ABX is facing two mutually exclusive projects (Gold & Copper) both have project WACC of 5 %. Project Gold has payback of 2 years, NPV of $ 80,000 and IRR of 17 % However Project Copper has payback of 5 years, NPV of $ 170,000 and IRR of 8 %. Which project would you accept?
a) Gold based on IRR
b) Copper based on NPV
c) Gold based on Payback period
d) Copper because of IRR being closer to WACC
Which of the following would be considered a problem with a compensation package that is designed to reward managers’ performance?
a) A compensation package that encourages managers to base their capital budgeting decisions on the average rate of return
b) A compensation package that encourages managers to adopt a risk-taking attitude toward cost-cutting in order to maximize shareholders’ wealth
c) A compensation package that rewards managers for results over which they have control
d) A compensation package that rewards managers for results that are measurable and lead to the maximization of shareholders’ wealth
WI Inc. is an unleveraged firm that pays out all of its after tax earnings as dividends, tax rate is 40%. Its expected cash flow is indicated below. The shareholders expect 16% return per year, what is the fair value of the firm to its shareholders?
State of economy
Downturn Fair Good Very good
Probability 0.2 0.3 0.4 0.1
EDIT$M 1.5 3.5 6.5 10.5
