q4 finance

A share of common stock has a current price of $82.50 and is expected to grow at a constant rate of 10 percent. If you require a 14 percent rate of return, what is the current dividend (D0) on this stock?

3.00

A firm expects to pay dividends at the end of each of the next four years of $2.00, $1.50, $2.50, and $3.50. If growth is then expected to level off at 8 percent, and if you require a 14 percent rate of return, how much should you be willing to pay for this stock? (Round intermediate calculations to two decimal places.) Selected Answer:

43.96

For Investment A, the probability of the return being 20 percent is 0.5, 10 percent is 0.4, and -10 percent is 0.1. Compute the standard deviation for the investment with the given information.

9%

Which of the following portfolios would have no diversification benefits?

A portfolio consisting of two perfectly positively correlated stocks

The next expected dividend for Stock P is $2.50, the current price of the stock is $32.50, and the firm is expected to grow at a constant rate of 4 percent per year forever. The risk free rate is 3 percent, the market risk premium is 5.5 percent, and the stock's beta is 1.2. Based on the given information, which of the following statements is correct?

An investor should buy this stock because its expected rate of return, 11.69 percent, is greater than its required rate of return, 9.6 percent.

A common stock's par value is always equal to the market value of the stock on the last day of the fiscal year in which the stock is issued.

False

A firm can affect its beta risk by changing the composition of its assets and by modifying its use of debt financing, but external factors do not have any bearing on a firm's beta.

False

A firm undertakes stock repurchase only if the price of its stock is overvalued.

False

A stock's standard deviation indicates how the stock affects the riskiness of a diversified portfolio. Therefore, the standard deviation is a better measure of a stock's relevant risk than its beta coefficient, which measures total, or stand-alone, risk.

False

According to the convertibility provision, a common stock can be converted to a certain number of shares of preferred stock at the stated conversion price.

False

American depository receipts (ADRs) are foreign stocks listed on stock exchanges located outside the country where the firms are headquartered.

False

Economic risk is an unsystematic risk that can be diversified by the investors.

False

If we view price-earnings (P/E) ratios as measures of payback, all else equal, higher earnings multipliers are better

False

Risk refers to the chance that no unfavorable event will occur.

False

Short-term investments have higher maturity risks than long-term investments.

False

Systematic risk is diversifiable, so it is an investment's relevant risk. Unsystematic risk is nondiversifiable risk and therefore not relevant.

False

The market portfolio contains only unsystematic risk, therefore the market risk premium represents the return that investors require to be compensated for taking an average amount of relevant, or unsystematic, risk.

False

Which of the following is true of founders' shares?

Founders' shares are stocks owned by the creators of a company that have sole voting rights but generally pay out only restricted (if any) dividends for a specified number of years

Which of the following statements is true about the beta of a portfolio?

If the beta of a stock is three, the stock's relevant risk is three times as volatile as the market portfolio.

Which of the following statements about the various types of risks is true?

Inflation risk is a systematic risk.

Which of the following statements about the various kinds of risks is correct?

Interest rate risk is a systematic risk, hence it should be rewarded by the market.

What action would the management take if it wants to gain more ownership control of the firm?

Repurchase shares of common stock

A probability distribution consists of a listing of all possible outcomes, or events, with the chance of occurrence assigned to each.

True

A stock might be quite risky if held by itself, but if much of this total (stand-alone) risk can be eliminated through diversification, then its relevant risk—that is, its contribution to the portfolio's risk—is much smaller than its total risk.

True

A stock's beta coefficient measures the tendency of its returns to move with the returns on the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and it will have a beta greater than 1.0

True

Changes in stock prices occur because investors change the rates of return they require to invest in stocks and/or the expectations about the cash flows associated with stocks change.

True

Other things held constant, a risk-averse investor requires a higher return to invest in securities with higher risks, which means they will pay lower prices for such investments.

True

Risk is indicated by variability of returns, whether the variability is considered positive or negative. Both the positive and negative outcomes must be evaluated when considering risk.

True

The standard deviation is calculated as the weighted average of all the deviations of possible returns from the expected value, and it indicates how far above or below the expected value the actual value is expected to be.

True

Two stocks can be combined to form a portfolio that is risk free (i.e., has no risk) if the stocks are perfectly negatively correlated (r = −1.0) with each other.

True

Which of the following statements about diversification is correct?

When two perfectly positively correlated stocks with the same risk are combined, the portfolio risk is equal to the risk associated with the individual stocks.

If a German company sells its stock in the United States, it is termed as a(n) _____.

Yankee stock

Assume Danny is considering combining two investments to form a portfolio, and he is very concerned with the risk that will result from the combination. If he wants to attain the greatest effect from diversification, he would prefer that the assets _____.

are negatively related

A convertible preferred stock can be exchanged for a certain number of shares of common stock at the _____.

conversion price

The expected rate of return of an investment _____.

is the mean value of the probability distribution of possible outcomes

Which of the following is the only risk that is relevant to a rational, diversified investor, because it cannot be eliminated or reduced through diversification?

market risk

The preferred dividend is generally stated as a percentage of the preferred stock's _____.

per share par value

The difference between the expected rate of return on a given risky asset and the expected rate of return on a less risky asset is known as the _____.

risk premium

f the standard deviation of returns from an investment is zero, then:

there is no risk associated with the investment; that is, the investment is risk free, because there is only one possible payoff.

The risk that is limited to a particular firm is also known as _____.

unsystematic risk