Ch13

if you buy 40 shares of BP stock at $35 per share, your total investment in BP is___

$1,400

A firm has cash flows of $100 at the end of years 1 - 4. What is the net present value of an investment in this firm if we pay $300 to purchase the firm and the discount rate is 10 percent?

$100 × [(1 - (1/1.10)4))/.10] - $300 = $16.99

What will the dividend income be on 1.000 shares of XYZ stock if XYZ distributes a $0.20 per share dividend?

$200

The price of XYZ stock rises from $10 to $15. If you own 100 shares, your capital gain is _____.

$500 (15x100) - (10x100) = 500

What is the maximum capital loss that you can incur if you bought 200 shares of TP Inc. for $32?

$6,400

What will your capital gain be if you hold 40 shares of BP stock and the stock price rises from $27 to $40 a share?

(40 X [$40 - 27] =) $520

If the dividend paid over the past year was $2.25 and the beginning stock price was $42 per share, what is the dividend yield?

5.4 percent

A firm is exposed to both systematic and unsystematic risks. Which of the following are examples of systematic risks?

An increase in the Federal funds rate An increase in the corporate tax rate

What is the equation for the capital asset pricing model?

Expected return on security = Risk-free rate + Beta × (Return on market - Risk-free rate)

What is unsystematic risk?

It is a risk that affects a single asset or a small group of assets

What is a risk premium?

It is additional compensation for taking risk, over and above the risk-free rate

As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk?

It is likely to decrease. It may eventually be almost totally eliminated.

What is the CAPM formula?

RS = RF + β× (RM- RF)

The equity risk premium rewards investors for bearing

Risk

The market risk premium is defined as

Rm-Rf

What happens to the expected returns of the existing securities in your portfolio if new securities are added to your portfolio?

The expected returns of existing securities will not change.

What is expected return?

The return that an individual expects to earn over the next period

The dividend yield for a 1-year period is equal to the annual dividend amount divided by the

beginning stock price

Which of the following are ways to make money by investing in stocks?

capital gains and dividends

The total dollar return is the sum of dividends and

capital gains or losses

The average return on the stock market can be used to

compare stock returns with the returns on other securities

The two potential ways to make money as a stockholder are through _______ and capital appreciation.

dividends

Normally, the excess rate of return is

positive

Which of the following variables is NOT required when using the CAPM to compute the cost of equity capital?

rate of inflation

A project should only be accepted if its return is above what is

required by investors

The CAPM can be used to estimate the

required return on equity

According to the capital asset pricing model (CAPM), what is the expected return on a security with a beta of zero?

risk free rate of return

What are the two components of the expected return on the market

risk-free rate; risk premium

Which type of risk is unaffected by adding securities to a portfolio?

systematic risk

What does WACC stand for?

weighted average cost of capital