Capital Management and Financial Decisions

Question 1

The Security Market Line (SML)

Answer 1

graphs the relationship between expected return and risk as measured by the beta coefficient

Question 2

equation for the SML

Answer 2

capital asset pricing model (CAPM)

Question 3

beta coefficient

Answer 3

measures systematic risk

Question 4

When two investments have the same expected return

Answer 4

the project with the lower standard deviation is preferred

Question 5

when projects have different expected returns

Answer 5

the project with the lower coefficient of variation is preferred

Question 6

Limitations of IRR vs NRV

Answer 6

1) IRR assumes reinvestment of each cash flow at the IRR

2) NPV assumes reinvestment at the cost of capital

Question 7

Modified Internal Rate of Return (MIRR) improves upon the Internal Rate of Return (IRR) technique by

Answer 7

allowing the reinvestment rate assumption to be modified by the user

Question 8

Perpetuity

Answer 8

pays cash flows Forever

Question 9

consol

Answer 9

is a perpetual bond issued by the British government.

Question 10

An annuity and annuity due

Answer 10

are equal cash flows over a specified period of time