If you use market values to calculate the WACC, and your stock price is volatile or bond prices become unstable, will this affect your capital structure and, in turn, the investment decision the firm makes? In other words, can the WACC be volatile?

A high level of financial leverage exposes firms to default risk. However, as a result of it, shareholders of the firm expect high potential returns.   Select one: True False

How investors handle risk is an important topic that usually only economists observe.

Increasing leverage lowers the firm’s risk position, yielding the risk-return trade-off. True or False

“The Capital Asset Pricing Model [CAPM] assumes that the stock market is dominated by well-diversified investors who are concerned with specific risk. “ is the following statment correct? And explain why.

Do you think investors can earn abnormal returns in financial markets that are at least semi strong-form efficient?

According to the Capital Asset Pricing Model (CAPM), an asset with negative beta:   a. Cannot exist   b. Is expected to earn a negative return   c. Should be short sold   d. Will not be included in the market portfolio   e. None of the above

The NZ Equity market is illiquid, both in the primary and secondary markets. What does market illiquidity mean? What are the reasons for the low liquidity? How might equity market liquidity be improved?

2. If the value of the financial sector is in terms of reducing the individual risk in the economy, how could you measure the value of the financial sector without using information on loan payments (broadly construed to include any interest payment necessary to measure an interest rate or any payment that looks like a return on an investmemt)? If we think of the amount of individual risk remaining after individuals buy portfolios is a measure of the ineffectiveness of the financial sector [or its imperfections], what do you think accounts for these imperfections?

One approach for using multifactor models is to use factors that capture systematic risk. Which of the following is not a common factor used in this approach? Market capitalization O Unexpected changes in real GDP O Unexpected changes in inflation Yield curve shifts Consumer confidence