Question

When there are no taxes and no bankruptcy costs, by increasing the debt-equity ratio of a firm you are:
a)   increasing the riskiness that is borne by its equity holders and therefore you are reducing the firm’s value
b) decreasing the riskiness that is borne by its equity holders and therefore you are decreasing the firm’s value
c)   increasing the riskiness that is borne by its equity holders and therefore you are increasing the firm’s value
d) decreasing the riskiness that is borne by its equity holders and therefore you are increasing the firm’s value
e)   not doing any of the above
A portfolio is made up of two assets. 30% of the portfolio value is invested in the first asset that has a beta of 0.8 while the second asset has a beta of 1.3. The portfolio beta is:
a) 0.8
b) 0.95
c) 1.15
d) 1.54
e) it is not possible to know
The standard deviation and beta differ as risk measures in that the standard deviation measures:
a) only unsystematic risk, while beta measures total risk
b) only systematic risk, while beta measures total risk
c) only unsystematic risk, while beta measures systematic risk
d) both systematic and unsystematic risk, while beta measures only unsystematic risk
e) both systematic and unsystematic risk, while beta measures only systematic risk
f) none of the above
The IRR decision rule
a) is always equivalent to the NPV decision rule
b) is very similar to the payback period decision rule
c) is equivalent most of the times to the NPV decision rule, but may disagree with it in some situations
d) almost never agrees with the NPV decision rule
e) none of the above

Answer 1

1. When there are no taxes and no bankruptcy costs, by increasing the debt-equity ratio of a firm you are:

a)   increasing the riskiness that is borne by its equity holders and therefore you are reducing the firm’s value

2. portfolio beta is weighted average beta.

so portfolio beta = (weight of first asset * beta of first asset) + (weight of second asset * beta of second asset)

portfolio beta = (0.30 * 0.8) + (0.70 * 1.3) = 0.24+0.91 = 1.15 so answer is (c)

3. The standard deviation and beta differ as risk measures in that the standard deviation measures:

e) both systematic and unsystematic risk, while beta measures only systematic risk.