The risk reduction through diversification in a portfolio of the two stocks incr
ID: 2725206 • Letter: T
Question
The risk reduction through diversification in a portfolio of the two stocks increases as the correlation between the stocks declines. Increases as the correlation between the stocks rises. Is the highest when the correlation between the two stocks is positive 1. GM has a book value of $8 billion of equity and a face value of $12 billion of debt. What are the weights in equity and debt that are used for calculating the WACC? 0.4, 0.6 0.6, 0.4 cannot be determined The dividend of a constant growth stock is expected to grow at 5 percent a year. Which of the following statements is most correct? The expected return on the stock is 5 percent a year. The stock's dividend yield is 5 percent. The stock's price one year from now is expected to be 5 percent higher. Which of the following changes in working capital accounts will result in an increase in cash flows? Decrease in other current liabilities. Increase in inventories. Decrease in accounts receivables. As a firm reduces the amount of debt in its capital structure, The return on the firm's assets should increase. The required return on debt should increase. The required return on equity should fall. Which of the following statements is TRUE about Enterprise Value in a Free Cash Flow Valuation. Enterprise Value = MV Debt + MV Equity Enterprise Value - MV of Debt = MV Equity - Cash on Hand Enterprise Value + Cash on Hand = MV of Equity - MV DebtExplanation / Answer
Answer for question 10
When Correlation between two portfolios is decrease then risk can be reduce by diversification.
Hence, Option (A) is correct answer.
Answer for question 11
Book value of debt = 12 million
Book value of equity = 8 million
Total value of capital = $8 + $12
= $20
Total Value of capital is $20 million.
Weight of equity = $8 / $20
= 40%
Weight of debt = $12 / $20
= 60%.
So weight of equity is 40% and weight of debt is 60%.
Hence, option (A) is correct answer.
Answer for question 12
If dividend is grow by 5% then Dividend yield of stock is 5%.
Hence, Option (B) is correct answer.
Answer for question 13
When Account receivable which is a part of current assets decrease then cash flow of the company increases.
Hence, Option (C) is correct answer.
Answer for question 14
If company decrease its capital structure then risk level in company reduce, So required rate of return on equity will decreases.
Hence, Option (C) is correct answer.
Answer for question 15
Enterprise value is calculated by following formula:
Enterprise value = MV Equity + MV Debt – Cash
Or
Enterprise value – MV Debt = MV Equity - Cash
Hence, Option (B) is correct answer.
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