Question

1. The capital asset pricing model uses three variables to evaluate required returns on common equity: the risk-free rate, the beta coefficient, and the market risk premium.

2. A firm's cost of capital is influenced by current ratio.

3. Two projects that have the same cost and the same expected cash flows will have the same net present value.

4. If the net present value of a project is zero, then it must be accepted.

5. Financial leverage affects a firm’s earnings per share but not the firm’s return on equity.

Answer 1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

1. TRUE.

As per CAPM model:

Re= Rf+(Rm-Rf)B

Re= required rate of return.

Rf= Risk-free rate.

Rm = return on the market.

Rm-Rf =Market Risk Premium.

B = Beta, systematic risk.

2. FALSE.

Cost of capital is dependent on long term debt, preference capital, equity capital.

It's not based on the current ratio.

3. TRUE.

If the 2 projects have same:

1. expected cash flow from the assets over its lifetime and Its initial investment.

2. The timing of the cash flow.

3. The required rate of return from the cashflows to satisfy the cost of capital & risk levels.

Then its NPV is the same.

4. FALSE.

It may or may not be accepted, it's not compulsory.

5. FALSE.

ROE = EPS/ shareholders equity per share.

If EPS is effected than ROE is also affected.

Both are dependent on each other.