Question 15 (4 points) Listen A security has a beta of 1.5, the expected market return is 12%, and the risk-free rate is 5%. What is the expected return on the security? 1) 14.5 percent O2) 15.5 percent 3) 16.5 percent O4) 17.5 percent Question 16 (4 points) E Listen The goal of diversification is to eliminate: 1) firm-specific risk 2) systematic risk O 3) effects of beta 4) total risk Question 17 (4 points) - Listen The optimal capital structure: 1) Maximizes expected earnings per share and maximizes the price per share of common stock O2) Maximizes firm value and minimizes the weighted average cost of capital. O 3) Minimizes the required return on equity and maximizes the stock price. 4) Minimizes the interest rate on debt and maximizes expected earnings per share. Question 18 (4 points) 5 Listen According to Modigliani & Miller first proposition without taxes: 1) Managers prefer to make financing choices that are least likely to send signals to investors. 2) The firm should use internal sources of financing before pursuing external sources O 3) The firm should use debt up to the point where the tax benefit from an extra dollar in debt is exactly equal to the cost that comes from the increased probability of financial distress. 4) The firm leverage is irrelevant. Question 19 (4 points) 5 Listen Among the following events, the best example of systematic risk is: 1) reduced demand for dairy products 2) the Federal reserve tapering quantitative easing to reduce money supply 3) A couple of CEOs and CFOs were indicted by the SEC for financial fraud 4) Consumers are spending less on movie theaters. Question 20 (4 points) Listen A security has an expected return of 14% and a beta of 1.2. The risk-free rate is 5%. What is the market risk premium? 1) 4.5 percent O2) 5.5 percent O 3) 6.5 percent 4) 7.5 percent