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/project.
Your Answer Score Explanation
True.
False. Correct 5.00 Correct. You understand the irrelevance of financing.
Total 5.00 / 5.00
Question Explanation

Fundamental question about value creation.
Question 2
(5 points) The return of equity is equal to the return on debt of a project/firm
Your Answer Score Explanation
Sometimes true.
Always true.
Never true. Correct 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 …show more content…

Question 9
(15 points) Suppose all investors are risk-averse and hold diversified portfolios. You are evaluating a new energy company that is going to use wind and will have two divisions: an electricity production unit and a Sales unit. [Transportation of the electricity will be outsourced.] Your CEO and you are arguing about whether projects that emerge in the two units should have the same cost of capital (WACC), or whether the discount rates should be different. If different, what should be the relative magnitudes of the discount rates, that is, which unit Production or Sales should have the higher discount rate. Assume the discount rates of the two units are labeled as P and S, for the production and Sales units, respectively. What do you think?
Your Answer Score Explanation
P>S.
Same discount rates for both divisions/units (P=S).
S>P. Correct 15.00 Correct. You understand the important difference between systematic and idiosyncratic risk.
Total 15.00 / 15.00
Question Explanation

This is a crucial issue; much misunderstood in the real world (except by real value creators).
Question 10
(15 points) NorthSouth Airlines has been granted permission to fly passengers between major U.S. cities. The new company faces competition from four airlines that operate between the major cities. The betas of the equity of the four major competitors (A, B, C, D) are