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5813Spring04Solution - Midterm Exam Name CORPORATE...

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Midterm Exam Name CORPORATE VALUATION Spring 2004 Multiple Choice -- Circle the letter of the BEST answer (3 points each) 1. Which of the following statements is most correct about a stock which has a beta of 1.2? a. If the stock’s beta doubles, its expected return will double. b. If expected inflation increases 3%, the stock’s expected return will increase by 3%. c. If the market’s risk premium increases by 3%, then the stocks expected return will increase by 3%. d. All of the above are true. e. None of the above are true. 2. Project A has twice as much risk as the firm as a whole. The firm’s cost of capital is 12% and the risk-free rate is 5%. The firm can borrow long-term debt at 8%. The appropriate risk- adjusted discount rate for Project A is: 3. Which of the following statements is NOT true? 4. Which of the following statements is NOT correct?
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