practice_final_3 - UC - Davis Graduate School of Management...

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1 of 17 UC - Davis Graduate School of Management Management 205 Brad M. Barber Financial Theory and Policy Spring 2002 Final Exam Closed Book (except for 1 page of notes, both sides) Do all work on these pages Allocate your time according to the points for each question Total Number of Points: 100 Total Number of Pages: 17 pages NAME:_______________________________________ SECTION: MONDAY or WEDS.
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2 of 17 1. Multiple Choice (20 points - 1 point each) Use the table below to answer the 20 multiple-choice questions that follow. In the column marked “Answer” clearly write your answer: A, B, C, D, or E. There is only one correct answer per question. Question Answer 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
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3 of 17 1. If the CAPM is used to estimate the cost of equity capital the expected market risk premium is equal to: A) the expected return on the stock minus the risk-free rate. B) the difference between the expected return on the market and the risk-free rate. C) the beta times the market risk premium. D) the beta times the risk-free rate. E) the market rate of return. 2. The use of WACC to select investments is theoretically acceptable when: A) the correlation of all new projects are equal. B) the NPV is positive when discounted by the WACC C) the systematic risk of the projects are equal to the systematic risk of the firm. D) the firm is well diversified and the unsystematic risk is negligible E) none of the above. 3. Comparing two otherwise equal firms, the beta of the common stock of a levered firm is ____________ than the beta of the common stock of an unlevered firm. A) equal to D) greater B) significantly less E) none of the above C) slightly less 4. Efficient capital markets are financial markets : A) in which current market prices reflect available information. B) in which current market prices reflect the present value of expected future cash flows. C) in which there is no economic profit from using available information. D) all of the above. E) none of the above. 5. If the efficient market hypothesis holds investors should expect: A) to earn only a normal return. B) to receive a fair price for their securities. C) always be able to pick stocks that will outperform the market averages. D) Both a & b. E) Both b & c.
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4 of 17 6. In an efficient market when a firm makes an announcement of a new product or product enhancement with superior technology providing positive NPV the price of the stock will: A) rise gradually over the next few days. B) decline gradually over the next few days. C) rise on the same day to the new price. D) stay at the same price, with no net effect. E) drop on the same day to the new price. 7.
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This note was uploaded on 06/15/2008 for the course MAN 205 taught by Professor Na during the Spring '07 term at University of Texas at Austin.

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practice_final_3 - UC - Davis Graduate School of Management...

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