Chapter 13: Risk, Return, and Capital Budgeting

Question 1

beta

Answer 1

the sensitivity of a stock’s return to the return on the market portfolio

Question 2

operating leverage

Answer 2

refers to the sensitivity to the firm’s fixed costs of production

Question 3

financial leverage

Answer 3

is the sensitivity of a firm’s fixed costs of financing

Question 4

cost of debt

Answer 4

return demanded by the firm’s long-term creditors

Question 5

liquidity

Answer 5

of a share related to its cost of buying and selling

brokerage fees, the bid-ask spread, and the market impact costs