To convince investors to accept greater volatility you must

38. The average annual return on small-company stocks was about _____ percent greater than the average annual return on large-company stocks over the period 1926-2007.
A. 3
B. 5
C. 7
D. 9
E. 11

39. To convince investors to accept greater volatility, you must:
A. decrease the risk premium.
B. increase the risk premium.
C. decrease the real return.
D. decrease the risk-free rate.
E. increase the risk-free rate.

40. According to Jeremy Siegel, the real return on stocks over the long-term has averaged about:
A. 6.8 percent
B. 8.7 percent
C. 10.4 percent
D. 12.3 percent
E. 14.8 percent

41. Which of the following statements are correct?
I. The SML approach is dependent upon a reliable measure of a firm's unsystematic risk.
II. The SML approach can be applied to firms that retain all of their earnings.
III. The SML approach assumes a firm's future risks are similar to its past risks.
IV. The SML approach assumes the reward-to-risk ratio is constant.
A. I and III only
B. II and IV only
C. III and IV only
D. I, II, and III only
E. II, III, and IV only

42. The capital structure weights used in computing the weighted average cost of capital:
A. are based on the book values of total debt and total equity.
B. are based on the market value of the firm's debt and equity securities.
C. are computed using the book value of the long-term debt and the book value of equity.
D. remain constant over time unless the firm issues new securities.
E. are restricted to the firm's debt and common stock.

43. Markley and Stearns is a multi-divisional firm that uses its WACC as the discount rate for all proposed projects. Each division is in a separate line of business and each presents risks unique to those lines. Given this, a division within the firm will tend to:
A. receive less project funding if its line of business is riskier than that of the other divisions.
B. avoid risky projects so it can receive more project funding.
C. become less risky over time based on the projects that are accepted.
D. have equal probability of receiving funding as compared to the other divisions.
E. prefer higher risk projects over lower risk projects.