Good Luck!! (1) What is the beta for (8 points): a) The market as a whole? b) A

Question

Good Luck!! (1) What is the beta for (8 points): a) The market as a whole? b) A stock that is half as risky as the market? c) A stock that is twice as risky as the market? d) A T-bill? a) bl cl d) (2) The correct WACC is based on (circle your answer) (4 points) The cost of the funds a) b) The use of the funds What the investment banker recommends c) d) What your medium tells you Fillin the blanks. The higher the standard deviation the The (3) the total risk. the beta, the greater the return. (4 points) (4) You are analyzing a project and have developed the following estimates. Circle each of s you would use to calculate the best case scenario i.e. the one that wil the four input produce the greatest possible value: (6 points) Upper Bound Base Case 2,500 $190 $120 Lower Bound Unit sales Sales price per unit Variable cost per unit Fixed costs 2,200 $180 $100 $23,500 2,800 $200 $140 $26,500 $25,000

Explanation / Answer

1.

Beta is a numerical value of market systematic risk.

a. Beta for the whole market is 1.

b. Since the beta for the whole market is 1, half as risky would be then ½ = 0.5.

c. Since the beta for the whole market is 1, twice as risky would be then (1 × 2 =) 2.

d. T-bill is issued by the US-government, which is having maturity of less than 1 year. Investors are least assured about the income on such investment; therefore, there is no risk of investment and the beta coefficient for T-bill is 0.

Answers: a) 1; b) 0.5; c) 2; d) 0

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