Finance final practice qs

Levine Inc. is considering an investment that has an expected return of 15% and a variance of 10%. What is the investment's coefficient of variation?

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11) Assume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2 percent. Lexant stock has 2 percent less systematic risk than the market and has an actual return of 10.2 percent. This stock: A) is underpriced. B) is correctly priced. C) will plot below the security market line. D) will plot on the security market line. E) will plot to the right of the overall market on a security market line graph.

A

Levine Inc. is considering an investment that has an expected return of 15% and a standard deviation of 10%. What is the investment's coefficient of variation? a. 0.67 b. 0.73 c. 0.81 d. 0.89 e. 0.98

A

Phillips Equipment has 6,500 bonds outstanding that are selling at 96.5 percent of par. Bonds with similar characteristics are yielding 6.7 percent, pretax. The company also has 48,000 shares of 5.5 percent preferred stock and 75,000 shares of common stock outstanding. The preferred stock sells for $64 a share. The common stock has a beta of 1.32 and sells for $41 a share. The preferred stock has a stated value of $100. The U.S. Treasury bill is yielding 2.2 percent and the return on the market is 10.6 percent. The corporate tax rate is 21 percent. What is the weighted average cost of capital? A) 8.09 percent B) 8.64 percent C) 10.18 percent D) 9.30 percent E) 10.56 percent

A

Tom O'Brien has a 2-stock portfolio with a total value of $100,000. $37,500 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42. What is his portfolio's beta? a. 1.17 b. 1.23 c. 1.29 d. 1.35 e. 1.42 f. 0.98

A

6) Suppose ALK Co. needs $13.8 million to build a new assembly line. The target debt-equity ratio is .48. The flotation cost for new equity is 9.6 percent, but the floatation cost for debt is only 5.1 percent. What is the true cost of building the new assembly line after taking flotation costs into account? A) $17,306,191 B) $15,022,949 C) $16,318,414 D) $15,719,310 E) $16,666,667

B

7) Yesteryear Productions is considering a project with an initial costs of $318,000. The firm maintains a debt-equity ratio of .60 and has a flotation cost of debt of 5.2 percent and a flotation cost of equity of 11.1 percent. The firm has sufficient internally generated equity to cover the equity cost of this project. What is the initial cost of the project including the flotation costs? A) $349,019 B) $324,324 C) $312,386 D) $318,513 E) $324,706

B

8) Franktown Motors is expected to have an EBIT of $687,400 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $48,000, $7,000, and $42,000, respectively. All cash flow items are expected to grow at 6 percent per year for four years. After Year 5, the CFA* is expected to grow at 2.1 percent indefinitely. The company currently has $3.2 million in debt and 250,000 shares outstanding. The company's WACC is 9.9 percent and the tax rate is 21 percent. What is the price per share of the company's stock? A) $17.82 B) $18.74 C) $12.07 D) $20.12 E) $16.47

B

Which one of the following statements is correct concerning unsystematic risk? A) An investor is rewarded for assuming unsystematic risk. B) Eliminating unsystematic risk is the responsibility of the individual investor. C) Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk. D) Beta measures the level of unsystematic risk inherent in an individual security. E) Standard deviation is a measure of unsystematic risk.

B

If you are a strict risk minimizer, you would choose Stock _________ if it is to be held in isolation and Stock _________ if it is to be held as part of a well-diversified portfolio. a. A; A. b. A; B. c. B; A. d. C; A. e. C; B.

C

Maxwell Inc.'s stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return. What is the firm's expected rate of return? a. 9.41% b. 9.65% c. 9.90% d. 10.15% e. 10.40%

C

Sweet Treats common stock is currently priced at $36.72 a share. The company just paid $2.18 per share as its annual dividend. The dividends have been increasing by 2.2 percent annually and are expected to continue doing the same. What is the cost of equity? A) 9.41 percent B) 9.51 percent C) 8.47 percent D) 8.27 percent E) 8.82 percent

D

10. You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.46 and the total portfolio is equally as risky as the market. What is the beta of the second stock? A) 1.38 B) .87 C) 1.94 D) 1.72 E) 1.54

E

3) Wayco Industrial Supply has a pretax cost of debt of 8.3 percent, a cost of equity of 14.7 percent, and a cost of preferred stock of 8.9 percent. The firm has 165,000 shares of common stock outstanding at a market price of $33 a share. There are 15,000 shares of preferred stock outstanding at a market price of $43 a share. The bond issue has a face value of $750,000 and a market quote of 101. The company's tax rate is 21 percent. What is the weighted average cost of capital? A) 12.18 percent B) 10.84 percent C) 14.32 percent D) 12.60 percent E) 13.25 percent

E

5) Granite Works maintains a debt-equity ratio of .58 and has a tax rate of 21 percent. The pretax cost of debt is 8.9 percent. There are 18,000 shares of stock outstanding with a beta of 1.42 and a market price of $23 a share. The current market risk premium is 7.8 percent and the current riskfree rate is 3.1 percent. This year, the firm paid an annual dividend of $1.68 a share and expects to increase that amount by 2 percent each year. Using an average expected cost of equity, what is the weighted average cost of capital? A) 8.44 percent B) 9.78 percent C) 8.96 percent D) 9.13 percent E) 10.06 percen

E

Consider the following information and then calculate the required rate of return for the Global Investment Fund, which holds 4 stocks. The market's required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows: a. 9.58% b. 10.09% c. 10.62% d. 11.18% e. 11.77%

E

Deep Mines has 43,800 shares of common stock outstanding with a beta of 1.54 and a market price of $51 a share. There are 10,000 shares of 7 percent preferred stock outstanding with a stated value of $100 per share and a market value of $83 a share. The 8 percent semiannual bonds have a face value of $1,000 and are selling at 96 percent of par. There are 5,000 bonds outstanding that mature in 13 years. The market risk premium is 7.5 percent, T-bills are yielding 3.6 percent, and the tax rate is 21 percent. What discount rate should the firm apply to a new project's cash flows if the project has the same risk as the company's typical project? A) 9.59 percent B) 8.72 percent C) 9.17 percent D) 8.28 percent E) 9.30 percent

E

Linke Motors has a beta of 1.30, and the T-bill rate is 6.5%. The annual return on the stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 13.00%. Based on the SML, what is the firm's required return? a. 13.51% b. 13.86% c. 14.21% d. 14.58% e. 14.95%

E

Which of the following statements is CORRECT? a. An investor can eliminate virtually all market risk if he or she holds a very large and well diversified portfolio of stocks. b. The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio. c. It is impossible to have a situation where the market risk of a single stock is less than that of a portfolio that includes the stock. d. Once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk by even a small amount. e. An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well diversified portfolio of stocks.

E