Question

In the CAPM (Capital Asset Pricing Model) formula, one component is called the Normal Market Premium (or Normal Market Premium). Which one of the following description is wrong about it?

a. It is the extra (or additional) rate of return investors demand from the entire market beyond the risk-free rate to compensate the risk they take when investing into the private sector.

b. It is the extra (or additinal) rate investors demand to the company beyond the risk-free rate to compensate the risk they take.

c. Usually general investors use long-term historical average for it.

d. When determining the reasonable rate of return, it (market premium) is applied same to all companies. However, due to the different beta values of each company, the final demand (of return) will be different

2. If you want to find out whether a company is improving its overall cost control, what would you do?

Group of answer choices

a. Analyze multiple years' Balance Sheets to investigate the growth of Current Assets.

b. Analyze the ROA ratios of the past few years.

c. Analyze the ROS ratios of the past few years.

d. Analyze the Asset Turnover ratios of the past years.

3. You want to find out whether a certain company has been investing into its assets effectively to generate revenues at its maximum level. Which ratio would you investigate?

Group of answer choices

a. Return on sales (ROS)

b. Return on equity (ROE)

c. Asset turnover ratio

d. Return on Asset (ROA)

4. which of the following is the ultimate advantage of debt-financing when a business borrows to acquire its necessary assets (capital)?

Group of answer choices

a. Borrowing is always an easier option to obtain necessary cash.

b. Because interests are paid out as an expenses, the management of the corporation does not have to explain the use of it to its shareholders

c. The firm can provide higher return to its owners, in most cases, even after paying the interests as long as the borrowed funds are used efficiently.

d. Creditors are more generous (patient) because their investments (loan) will always be paid back.

5.

Which of the following is considered a financing decision?

Group of answer choices

a. Purchasing common stocks of other company for future gains when the price (of the common stocks purchased) goes up.

b. Buying Federal Government's bonds at a cheap price to receive higher interests.

c. Issuing (selling) common stocks of its own to obtain necessary cash.

d. Adjusting the price of its product to increase future revenues.

Answer 1

1. Option A

Normal market premium is the extra return investors demand over risk free rate for taking risk of investing in market.

2. Option B

For identifying whether cost is controlled, one should use return on assets ratio.

3. Option C

Total asset turnover determines how effectively company uses it's assets to generate revenue.

4. Option C

Borrowed funds can be used to provide higher returns to shareholder's if they are used efficiently.

5. Option C

Issue of common stocks is financing activity.