FIN FINAL

Of the options listed below, which is the best example of a diversifiable risk?

A firm's sales decrease

The Swanson Corporation's common stock has a beta of 1.6. If the risk-free rate is 4.7 percent and the expected return on the market is 13 percent, what is the company's cost of equity capital?

Cost of equity capital 17.98

Which of the following statements best describes the principle of diversification?

Spreading an investment across many diverse assets will eliminate some of the total risk.

Based on the capital asset pricing model (CAPM), which of the following should earn the highest risk premium?

Stock with a beta of 1.24

Too Young, Incorporated, has a bond outstanding with a coupon rate of 7.2 percent and semiannual payments. The bond currently sells for $1,863 and matures in 21 years. The par value is $2,000. What is the company's pretax cost of debt?

7.87%

A stock has had the following year-end prices and dividends: Year Price Dividend 1$ 43.27 - 2 48.25 $ .45 3 57.17 .48 4 45.25 .60 5 52.17 .65 6 61.25 .73 What are the arithmetic and geometric average returns for the stock?

Arithmetic average return9.55% Geometric average return8.38%

Of the options listed below, which is the best measure of systematic risk?

Beta

A stock has an expected return of 13.8 percent, the risk-free rate is 4.5 percent, and the market risk premium is 7.5 percent. What must the beta of this stock be?

Beta of stock 1.24

The Tribiani Company just issued a dividend of $2.85 per share on its common stock. The company is expected to maintain a constant 5.9 percent growth rate in its dividends indefinitely. If the stock sells for $57 a share, what is the company's cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Cost of equity 11.20

Ginger Industries stock has a beta of 1.30. The company just paid a dividend of $.30, and the dividends are expected to grow at 4 percent. The expected return on the market is 13 percent, and Treasury bills are yielding 4.8 percent. The most recent stock price for the company is $65. a.Calculate the cost of equity using the DGM method. b.Calculate the cost of equity using the SML method.

DGM method 4.48% SML method 15.46%

Suppose a stock had an initial price of $58 per share, paid a dividend of $1.90 per share during the year, and had an ending share price of $68. What was the dividend yield and the capital gains yield?

Dividend yield 3.27% Capital gains yield 17.24%

A stock has a beta of 1.12, the expected return on the market is 10 percent, and the risk-free rate is 3 percent. What must the expected return on this stock be?

Expected return 10.84%

A portfolio is invested 10 percent in Stock G, 52 percent in Stock J, and 38 percent in Stock K. The expected returns on these stocks are 6 percent, 12 percent, and 16 percent, respectively. What is the portfolio's expected return?

Expected return 12.92%

Consider the following information: State Prob Port Rec .21 -.15 Norm .46 .11 Boom .33 .37 Calculate the expected return.

Expected return 14.12%

Consider the following information: State Prob stock A stock B stock C Boom .60 .09 .18 .36 Bust .40 .15 .07 -.05 a.What is the expected return on an equally weighted portfolio of these three stocks? b.What is the variance of a portfolio invested 15 percent each in A and B and 70 percent in C?

Expected return 14.87% Variance 0.020820

An analyst wishes to estimate the amount of additional reward she will receive for investing in a risky asset rather than a risk-free asset. The minimum values she will need to know are: I. both assets' standard deviations II. the risky asset's beta III. the risk-free rate of return IV. the market risk premium

II and IV only

Of the options listed below, which are examples of diversifiable risk? I. Wildfires damage an entire town II. The federal government imposes a $1,000 fee on all business entities III. Payroll taxes are increased nationally IV. All software providers are required to improve their privacy standards

II and IV only

Which of the following statements regarding unsystematic risk is accurate?

It can be effectively eliminated by portfolio diversification.

Which of the following statements regarding a firm's pretax cost of debt is accurate?

It is based on the current yield to maturity of the company's outstanding bonds.

Which of the following statements is accurate regarding the dividend growth model?

It is only as reliable as the estimated rate of growth.

Which of the following statements regarding the weighted average cost of capital is accurate?

It is the return investors require on the total assets of the firm.

A stock has an expected return of 13 percent, its beta is 1.40, and the risk-free rate is 6 percent. What must the expected return on the market be?

Market expected return 11.00%

Which one of the following correctly describes the dividend yield?

Next year's annual dividend divided by today's stock price

Which one of the following is defined by its mean and its standard deviation?

Normal distribution

You own a stock portfolio invested 30 percent in Stock Q, 25 percent in Stock R, 25 percent in Stock S, and 20 percent in Stock T. The betas for these four stocks are .95, 1.12, 1.13, and 1.30, respectively. What is the portfolio beta?

Portfolio beta 1.11

You own a portfolio that has $2,100 invested in Stock A and $3,100 invested in Stock B. If the expected returns on these stocks are 10 percent and 13 percent, respectively, what is the expected return on the portfolio?

Portfolio expected return 11.78%

Jiminy's Cricket Farm issued a bond with 30 years to maturity and a semiannual coupon rate of 4 percent 2 years ago. The bond currently sells for 107 percent of its face value. The company's tax rate is 21 percent. a. What is the pretax cost of debt? b.What is the aftertax cost of debt? c.Which is more relevant, the pretax or the aftertax cost of debt?

Pretax cost of debt 3.60% After tax cost of debt 2.85% Aftertax cost of debt

Assume that last year T-bills returned 2.2 percent while your investment in large-company stocks earned an average of 8.1 percent. Which one of the following terms refers to the difference between these two rates of return?

Risk premium

Which one of the following categories of securities had the highest average annual return for the period 1926-2019?

Small-company stocks

Year Returns X Y 1 19% 15% 2 22 34 3 8 14 4 −15 −20 5 10 24 Using the returns shown above, calculate the arithmetic average returns, the variances, and the standard deviations for X and Y.

The average return is the sum of the returns, divided by the number of returns. The average return for each stock was: X¯¯¯=[Σi−1Nxi]/N=[.19 + .22 + .08 − .15 + .10]5=.0880, or 8.80%�¯=[Σ�−1���]/�=[.19 + .22 + .08 − .15 + .10]5=.0880, or⁢ 8.80% Y¯¯¯=[Σi−1Nyi]/N=[.15 + .34 + .14 − .20 + .24]5=.1340, or 13.40%�¯=[Σ�−1���]/�=[.15 + .34 + .14 − .20 + .24]5=.1340, or⁢ 13.40% Remembering back to "sadistics," we calculate the variance of each stock as: σX2=[Σi−1N(xi−x¯)2]/(N−1)��2=[Σ�−1�(��−�¯)2]/(�−1) σX2=15−1{(.19−.088)2+(.22−.088)2+(.08−.088)2+(−.15−.088)2+(.10−.088)2}=.02117��2=15−1{(.19−.088)2+(.22−.088)2+(.08−.088)2+(−.15−.088)2+(.10−.088)2}=.02117 σY2=15−1{(.15−.134)2+(.34−.134)2+(.14−.134)2+(−.20−.134)2+(.24−.134)2}=.04138��2=15−1{(.15−.134)2+(.34−.134)2+(.14−.134)2+(−.20−.134)2+(.24−.134)2}=.04138 The standard deviation is the square root of the variance, so the standard deviation of each stock is: σX = .021171/2σX = .1455, or 14.55% σY = .041381/2σY = .2034, or 20.34%

Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient.

The information was expected.

Which of the following is the main advantage of using the dividend growth model to estimate a firm's cost of equity?

The simplicity of the model.

Suppose a stock had an initial price of $62 per share, paid a dividend of $1.10 per share during the year, and had an ending share price of $74. Compute the percentage total return.

Total return 21.13%

The rate of return on which type of security is normally used as the risk-free rate of return?

Treasury bills

Standard deviation is a measure of which one of the following?

Volatility

Brannan Manufacturing has a target debt-equity ratio of .85. Its cost of equity is 12 percent, and its cost of debt is 6 percent. If the tax rate is 24 percent, what is the company's WACC?

WACC 8.58%

Ninecent Corporation has a target capital structure of 70 percent common stock, 5 percent preferred stock, and 25 percent debt. Its cost of equity is 11 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 23 percent. a.What is the company's WACC? b.What is the aftertax cost of debt?

WACC 9.11% Cost of debt 4.62%

Fundamental analysis can be useful under which form of the Efficient Market Hypothesis (EMH)?

Weak form EMH

Suppose we have the following returns for large-company stocks and Treasury bills over a six-year period: Year Large-Company stocks US Treasury 1 3.67% 4.69% 2 14.32 3.55 3 19.11 4.14 4 −14.57 5.89 5 −32.06 5.16 6 37.35 5.33 a. Calculate the arithmetic average returns for large-company stocks and T-bills over this period. b.Calculate the standard deviation of the returns for large-company stocks and T-bills over this period. c-1.Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the average risk premium over this period? c-2.Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the standard deviation of the risk premium over this period? (

a. Large-company stocks4.64% a. T-bills4.79% b. Large-company stocks 24.86% b. T-bills0.85% Average risk premium-0.16% Standard deviation 25.18%

When calculating a firm's weighted average cost of capital, the capital structure weights:

are based on the market values of the outstanding securities.

A ________ is the market's measure of systematic risk.

beta of 1

The ________ explains the relationship between the expected return on a security and the level of that security's systematic risk.

capital asset pricing model

Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest rate is called the:

cost of debt.

Okonjo Economics has a debt-equity ratio of .38. All of the firm's outstanding shares were purchased by a small number of investors. The return these investors require is called the:

cost of equity.

A firm's aftertax cost of debt will increase if there is a(n):

decrease in the company's tax rate.

The average compound return earned per year over a multiyear period is called the _____ average return.

geometric

To convince investors to accept greater volatility, you must:

increase the risk premium.

Evidence seems to support the view that studying public information to identify mispriced stocks is:

ineffective.

Rafia owns stocks of 15 different companies. Together, the stocks have a value of $78,640. Twelve percent of that total value is from one company, Gambrell & Valdez. The twelve percent figure is called a(n):

portfolio weight.

Buchi owns several financial instruments: stocks issued by seven different companies, plus bonds issued by four different companies. Her investments are best described as a(n):

portfolio.

To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return.

risk-free rate

For any given capital project proposal, the discount rate should be based on the:

risks associated with the use of the funds required by the project.

To determine a firm's cost of capital, one must include:

the returns currently required by both debtholders and stockholders.