Introduction to Finance
Question 1
(5 points) In a world with no frictions (i.e., taxes, etc.), having debt is always better because it increases the value of the firm/projet. Your Answer | Score | Explanation | False | 5.00 | Correct. You understand the irrelevance of financing. | Total | 5.00/5.00 | | Question Explanation | | | Fundamental question about value creation. |
Question 2
(5) the return of equity is equal to the return on debt of a project/firm Your Answer | Score | Explanation | Never true | 5.00 | Correct. Equity is always riskier. | Total | 5.00/5.00 | | Question Explanation | | | Financing`s effects on equity. |
Question 3
(10 points) Suppose the expected returns on equity of two firms, Macrosoft and Microsoft, that operate in the same industry are 10.50% and 12.60%, respectively. What is the return on assets in this business if Macrosoft has no debt? (No more than two decimals in the percentage interest rate, but do not enter the % sign.) Your Answer | Score | Explanation | 10.50 | 10.00 | Correct. You understand that return on assets in a business connot vary for different forms. | Total | 10.00/10.00 | | Question Explanation | | | The effects of leverage on business risk. |
Question 4
(10 points) Suppose CAPM holds, and the beta of the equity of your company is 2.30. The expected market risk premium (the difference between the expected market return and the risk-free rate) is 5% and the risk-free rate is 3.25%. Suppose the debt-to-equity ratio of your company is 25% and the market believes that probability of default on your debt is zero. What is return on assets of your business? (No more than two decimals in the percentage interest rate, but do not enter the % sign.) Your Answer | Score | Explanation | 12.45 | 10.00 | Correct. You know how to un-lever to obtain return on assets. | Total | 10.00/10.00 | | Question Explanation | | | Mechanics of calculating the return on assets.=2,3/1,25=1,84*5%=1,84*5% |
(5 points) In a world with no frictions (i.e., taxes, etc.), having debt is always better because it increases the value of the firm/projet. Your Answer | Score | Explanation | False | 5.00 | Correct. You understand the irrelevance of financing. | Total | 5.00/5.00 | | Question Explanation | | | Fundamental question about value creation. |
Question 2
(5) the return of equity is equal to the return on debt of a project/firm Your Answer | Score | Explanation | Never true | 5.00 | Correct. Equity is always riskier. | Total | 5.00/5.00 | | Question Explanation | | | Financing`s effects on equity. |
Question 3
(10 points) Suppose the expected returns on equity of two firms, Macrosoft and Microsoft, that operate in the same industry are 10.50% and 12.60%, respectively. What is the return on assets in this business if Macrosoft has no debt? (No more than two decimals in the percentage interest rate, but do not enter the % sign.) Your Answer | Score | Explanation | 10.50 | 10.00 | Correct. You understand that return on assets in a business connot vary for different forms. | Total | 10.00/10.00 | | Question Explanation | | | The effects of leverage on business risk. |
Question 4
(10 points) Suppose CAPM holds, and the beta of the equity of your company is 2.30. The expected market risk premium (the difference between the expected market return and the risk-free rate) is 5% and the risk-free rate is 3.25%. Suppose the debt-to-equity ratio of your company is 25% and the market believes that probability of default on your debt is zero. What is return on assets of your business? (No more than two decimals in the percentage interest rate, but do not enter the % sign.) Your Answer | Score | Explanation | 12.45 | 10.00 | Correct. You know how to un-lever to obtain return on assets. | Total | 10.00/10.00 | | Question Explanation | | | Mechanics of calculating the return on assets.=2,3/1,25=1,84*5%=1,84*5% |