CCA CCA Corporate Finance & Capital Structure 2

Question 1

What is the difference between systematic risk and unsystematic risk?

Accepted Answer

Systematic risk affects the entire market and cannot be diversified away; unsystematic risk is firm-specific and can be diversified

Answer

Systematic risk can be diversified away; unsystematic risk cannot

Answer

Unsystematic risk affects the entire market; systematic risk affects individual firms

Answer

Both types can be eliminated through portfolio diversification

Question 2

Which metric measures the sensitivity of a stock's returns to movements in the overall market?

Accepted Answer

Beta

Answer

Alpha

Answer

Standard deviation

Answer

Sharpe ratio

Question 3

A company repurchases its own shares. What is the most likely immediate effect on earnings per share (EPS)?

Accepted Answer

EPS increases because the same earnings are spread over fewer shares

Answer

EPS decreases because equity capital is reduced

Answer

EPS is unchanged because repurchases don't affect net income

Answer

EPS decreases because cash dividends are eliminated

Question 4

What is the primary purpose of a rights offering?

Accepted Answer

To allow existing shareholders to purchase additional shares at a discount before new investors

Answer

To grant employees stock options at market price

Answer

To buy back shares from institutional investors

Answer

To convert debt into equity at the company's discretion

Question 5

Which of the following best describes a leveraged buyout (LBO)?

Accepted Answer

A takeover financed mostly with debt, using the target's assets as collateral

Answer

An acquisition funded primarily with retained earnings of the acquiring firm

Answer

A merger between two equal-sized companies using stock-for-stock exchange

Answer

A minority stake purchase by a venture capital fund

Question 6

The Capital Asset Pricing Model (CAPM) estimates the required return on a stock as:

Accepted Answer

Risk-free rate + Beta × (Market return – Risk-free rate)

Answer

Dividend yield + Capital gains yield

Answer

Earnings per share ÷ Stock price

Answer

Risk-free rate × Beta