It is not possible for two companies to have similar financial and operating leverage but vary in terms of risk as calculated by EPS variability. * O Correct O Wrong

Q: Purchasing Power Risk is A) the risk of bad business strategy or management decisions being made B)…

A: Purchasing Power Risk is a risk that could cause a possible loss to an investment you made or income…

Q: What is (a) unsystematic risk (company-unique or diversifiable risk) and (b) systematic risk market…

A: The risks are of two types, systematic and unsystematic risk. Systematic risk is tied to the market…

Q: The WACC is an estimate.  Explain what the risk is of estimating the WACC lower than a company’s…

A: Wacc - it stands for weighted average cost of capital . it means cost of capital used to calculate…

Q: statements is false

A: Investors who sell short assume the stock's price will fall in value. If the price falls, you can…

Q: The following is an extract from Isaac LLP's assurance report on a profit forecast: 'Based on our…

A: A line from an Assurance Report has been produced. Based on the content, we have to find if it's a…

Q: What is meant by positive financial leverage?  What about negative financial leverage?

A: Leverage -It refers to the use of source of funds  for which the firm has to pay a fixed cost.

Q: In determining the optimal weighted average cost of capital, an MNC can never have too much debt.…

A: The Weighted Average Cost of Capital is always post tax. It is calculated with the help of following…

Q: What type of risk is the risk that is unique to an individual firm?     Systematic risk…

A: There are different types of risks that are associated with investments like risk of change in state…

Q: Which of the following is NOT a way to to reduce revenue portfolio risk? Group of answer choices…

A: There are many ways to reduce revenue portfolio risk

Q: Describe how investing in more than one asset can reduce risk through diversification.

A: Investing in more than one asset is a widely recognized method of reducing risk through…

Q: Efficient Markets Hypothesis imply that investment strategies purely based on publicly available…

A: The Efficient Market Hypothesis (EMH) argues that the stocks currently trading on exchanges reflect…

Q: Liquidity risk is A) the risk of bad business strategy or management decisions being made B) the…

A: Liquidity risk is the possibility that an investor or entity may encounter difficulty in buying or…

Q: It is better to use Free Cash Flow to Firm rather than Free Cash Flow to Equity when the leverage is…

A: The free cash flow is the amount of money remaining by adding the non cash expenses of the company.…

Q: Profitable projects are difficult to find.    a. Efficient capital markets b. The curse of…

A: Profitable project are difficult to find just because of severe competition world wise, because in…

Q: DOES NOT affect a firm's business risk. Question 9 options: A ) Revenue variability B) Input price…

A: Business Risk: Business risk refers to any exposure a firm has to factor(s) that may reduce its…

Q: A company's market value is generally less than its book value. True of Falses ?

A: Fixed Assets are the Non-current portion of the assets that disclosed in the assets section of the…

Q: Proponents of the use of Fair Value Accounting (FVA) argue that the use of fair value reflects…

A: Fair Value Accounting (FVA) is a method of accounting that values assets and liabilities at their…

Q: Many firms still use the internal rate of return rule instead of net present value. When used…

A: The net present value (NPV) and internal rate of return (IRR) are the methods that are used for the…

Q: True or False Investment bankers and other valuation professionals often utilize relative valuation…

A: Long term investments are the investment or assets that are beneficial for the firm for a number of…

Q: Value forward agreements normally have adjustments dependent on the price of the equity, worth of…

A: The value of the forward agreement is an agreement that has already specified its assets to be…

Q: Briefly define capital risk and explain how a positive leverage-adjusted duration gap can contribute…

A: Capital risk is the potential of loss of part or all of an investment. It applies to the whole gamut…

Q: Another name for systematic risk is: Unique risk None of these are correct Diversifiable risk…

A: Systematic risks are related to risk of overall market risk and these are related to whole market…

Q: Which combination of investment policy and financing policy related to working capital provides the…

A: A relaxed current asset investment policy is one under which relatively large amounts of current…

Q: he use of increasing amounts of combined leverage ____ the risk of financial distress.   a.…

A: The degree of combined leverage (DCL) is a leverage ratio reflecting the combined effect of the…

Q: According to the CAPM, the main factor that explains the performance of an asset is given by the...…

A: The formula to determine the expected return of a stock using CAPM is as follows: Required Return =…

Q: A declining trend in the capital outlay ratio could be an indicator of deferred replacement of…

A: Capital Outlay Ratio:/The capital outlay ratio is a financial metric used to assess the efficiency…

Q: When the insiders can eam abnormally high profits based on private information. This is against of…

A: Market efficiency is the theory that reflects the impact of information on the prices of stock…

Q: Concerning the EBIT-EPS indifference analysis, which of the following statements is accurate? If…

A: EBIT-EPS analysis is the financial tool used to evaluated different alternatives of project…

Q: In general, if an action increases a firm's value by providing benefits with a value greater than…

A: The value of the firm showing the current value of the firm in the market it comprises common…

Q: The Fama-French 3-factor model is a multi-factor models that includes two additional risk factors…

A: The Fama and French model takes into account three variables: the ratio of a company's book value to…

Q: In theory, should a firm be equally concerned with stand-alone,corporate, and market risk? Would…

A: Introduction: Risk can be characterised in terms of the uncertainty of future consequences resulting…

Q: Why is eps not a consistently good measure of a firms performanc

A: After all the operating expenses i.e., all the fixed costs, which remain fixed irrespective of the…

Q: Statement I: Total leverage is the product of operating leverage and financial leverage. Statement…

A: EBIT stands for earnings before interest and taxes. It is that level of income which has been earned…

Q: None

A: Market risk premium is defined as the difference between the market rate of return and the return on…

Q: A high level of financial leverage exposes firms to default risk. However, as a result of it,…

A: Financial leverage is related to the capital structure of company and it is very important for the…

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

A: Risk return trade off: return increases as the risk increases

Q: Using common-size balance sheet percentages to project individual assets, liabilities, or…

A: In a common size balance sheet we show all different line items as a percentage of total assets.…

Q: The bid-ask spread:   a. Includes a transaction cost component to compensate liquidity providers…

A: Bid-ask spread can be explained as the difference between the price at which a trader is willing to…

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary. 

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.