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SHUBHAM NAHATA <[email protected]>

Birla Institute of Technology and Science Pilani, Hyderabad Campus

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Birla Institute of Technology and Science

Pilani, Hyderabad Campus
Summer Term 2024
Business Analysis and Valuation
Quiz 5

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Name *

Shubham Nahata

ID *

2021B4AA0760P

Multiple Choice Questions (MCQs)

Each question carries 0.5 marks and 50% negative marks for wrong answer.

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More the risk, _______the cost of equity to the

extent of__________.

Less; equity risk premium

More; equity risk premium

Less; dividend per share

More; dividend per share

The risk return model in finance is based on

which of the following assumption?

Marginal investors are not efficient

Marginal investors who can influence the share price are well diversified.

Marginal investors who have least interest in stock price.

Marginal investors are risk neutral

Which of the following is the assumption of

capital asset pricing model?

Business risk can be measured by standard deviation of EBIT.

All investors belong to homogeneous risk class

Lending and borrowing rates are not same

There is brokerage or transaction cost

According to CAPM, cost of equity is defined as

the sum of _________ and .

Risk free rate; Equity risk premium based on systematic risk

Risk free rate; beta

Risk adjusted return of equity; Equity risk premium based on unsystematic risk

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Risk free rate; Equity risk premium based on unsystematic risk

Which of the following type of risk is avoidable

through proper diversification?

Portfolio risk

Market risk

Company/security specific risk

Operating risk

Greater the beta; of

the security involved.

Greater the systematic risk

Greater the unsystematic risk

Less the systematic risk

None of the above

The risk-free rate is 4%. The beta of a company

is 2.5 and market return is 7%. What is the expected rate of return?

11.5%

7.5%

21.5%

None of the above

An aggressive common stock would have a beta

Less than 1

Equal to one

Greater than 1

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None of the above

If the implied expected return of stock A is 10%

and T-bill rate is 5%, what will be the implied equity risk premium?

50%

15%

5%

None of the above

The risk-free
security has beta equal to and
while the market portfolio’s beta is equal to ___________.

One; more than one

One; less than one

Zero; one

Less than zero; more than zero

In an efficient market, actual return of an

asset is expected
return.

Less than

Greater than

Equal to

Unrelated to

Suppose India Government bond rate is 7% and the

default spread for India is 5%. What is the risk free rate in rupees for external
investor?

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7% and 12%

7% and 2%

2% and 7%

2% and 12%

Credit default swaps are the credit derivatives

that

Present high levels of risk and should only be used by the wealthy investors.

Allow lenders to insure themselves against the credit risk that a borrower will default.

Should only be used by people seeking high returns from low risk.

Do not require collateral to be posted by either the buyer or the seller of the insurance.

Unlevered beta measures the market risk of the

security without impact of debt

True

False

If we
assume debt carries no market risk, beta of equity can be written as a function
of unlevered beta and __________.

Debt-equity ratio

Capital adequacy ratio

Quick ratio

Dividend payout ratio

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