VanBeo_Part1
D
36. The expected return for a portfolio without borrowing A) should never be less than the expected return of the asset with lowest expected return. B) should never be greater than the expected return of the asset with highest expected return. C) may not be an event with even a positive probability of occurrence. D) All of the above.
C
36. The value of the cash flows that the assets of the firm are expected to generate must equal A) the value of the cash flows claimed by the equity investors. B) the value of the cash flows claimed by the debt investors. C) the value of the cash flows claimed by both the equity and debt investors. D) the revenue produced by the firm.
C
37. In a game of chance, the probability of winning a $50 prize is 40 percent, and the probability of winning a $100 prize is 60 percent. What is the expected value of a prize in the game? A) $50 B) $75 C) $80 D) $100
B
37. The beta for a firm can be estimated by A) adding up the betas of the individual projects of the firm. B) taking the weighted average of the beta for the individual projects of the firm. C) taking the simple average of the beta for the individual projects of the firm. D) None of the above.
A
38. In a game of chance, the probability of winning a $50 is 40 percent and the probability of losing a $50 prize is 60 percent. What is the expected value of a prize in the game? A) -$10 B) $0 C) $10 D) $25
C
40. If markets are not reasonably efficient, then A) the estimates of expected returns are not needed. B) the need for a discount rate to analyze project cash flows is not needed. C) estimates of expected returns that were based on security prices will not be reliable. D) none of the above.
C
40. Use the following table to calculate the expected return for the asset. Return Probability 0.1 0.25 0.2 0.5 0.25 0.25 A) 15.00% B) 17.50% C) 18.75% D) 20.00%
C
41. Use the following table to calculate the expected return for the asset. Return Probability 0.05 0.1 0.1 0.15 0.15 0.5 0.25 0.25 A) 12.50% B) 13.75% C) 15.75% D) 16.75%
B
41. When estimating the cost of debt capital for the firm, we are primarily interested in A) the cost of short-term debt. B) the cost of long-term debt. C) the coupon rate of the debt. D) none of the above.
A
42. Long-term debt typically describes A) debt with a maturity greater than one year. B) only coupon debt. C) publicly traded debt. D) none of the above.
A
42. The expected return for the asset below is 18.75 percent. If the return distribution for the asset is described as in the following table, what is the variance for the asset's returns? Return Probability 0.1 0.25 0.2 0.5 0.25 0.25 A) 0.002969 B) 0.000613 C) 0.015195 D) 0.054486
D
43. The expected return for the asset shown in the following table is 18.75 percent. If the return distribution for the asset is described as below, what is the standard deviation for the asset's returns? Return Probability 0.1 0.25 0.2 0.5 0.25 0.25 A) 0.002969 B) 0.000613 C) 0.015195 D) 0.054486
B
43. Which of the following need to be excluded from the calculation of the firm's amount of permanent debt? A) Long-term debt B) Revolving lines of credit C) Mortgage debt D) None of the above
D
44. If you are dealing with percentage returns, then which of the following is generally true? A) The variance of the return distribution is generally smaller than the standard deviation. B) The variance of the return distribution is generally larger than the standard deviation. C) The variance of the return distribution is measured in the same units as expected return. D) None of the above is generally true.
A
44. When analyzing a firm's cost of debt, we are typically interested in A) the cost of the debt on the date that the analysis is being completed. B) the coupon rate on the firm's bonds. C) the risk-free rate plus half a percent. D) none of the above.
B
45. If a firm has bonds outstanding and the firm would like to calculate the current cost of debt for the bonds, then the firm would A) use the coupon rate of the bonds to estimate the cost. B) use the current yield to maturity of the bonds to estimate the cost. C) use the current coupon yield of the bonds to estimate the cost. D) none of the above.
C
45. The return distribution for an asset is as shown in the following table. What are the missing values if the expected return is 10 percent? Return Probability 0.1 0.25 x 0.5 x 0.25 A) 0.20 B) 0.15 C) 0.10 D) None of the above
B
46. A bond has a coupon rate of 6 percent and the bond makes semiannual coupon payments. The dollar amount of coupon interest received every six months is A) $60. B) $30. C) $30 plus or minus the prorate portion of the discount or premium that the bond was purchased for. D) none of the above.
B
46. The expected return for Stock Z is 30 percent. If we know the following information about Stock Z, then what return will it produce in the Lukewarm state of the world? Return Probability Poor 0.2 0.25 Lukewarm ? 0.5 Dynamite! 0.4 0.25 A) 20% B) 30% C) 40% D) It is impossible to determine.
D
47. Bond issuance costs include A) investment banking fees. B) legal fees. C) accountant fees. D) all of the above.
B
47. The expected return for Stock V is 24.5 percent. If we know the following information about Stock Z, then what is the probability of the Dynamite state of the world occurring? Return Probability Poor 0.15 0.2 Lukewarm 0.28 0.7 Dynamite! 0.19 ? A) 5% B) 10% C) 15% D) 20%
D
48. Ahmet purchased a stock for $45 one year ago. The stock is now worth $65. During the year, the stock paid a dividend of $2.50. What is the total return to Ahmet from owning the stock? (Round your answer to the nearest whole percent.) A) 5% B) 44% C) 35% D) 50%
B
48. Income taxes have the effect of A) increasing the cost of debt. B) decreasing the cost of debt. C) decreasing the cost of capital for the firm. D) both b and c are correct.
B
49. Julio purchased a stock one year ago for $27. The stock is now worth $32, and the total return to Julio for owning the stock was 37 percent. What is the dollar amount of dividends that he received for owning the stock during the year? A) $4 B) $5 C) $6 D) $7
A
49. The appropriate risk-free rate to use when calculating the cost of equity for a firm is A) a long-term Treasury rate. B) a short-term Treasury rate. C) a 50/50 mix of short-term and long-term Treasury rates. D) none of the above.
B
50. Francis purchased a stock one year ago for $20, and it is now worth $24. The stock paid a dividend of $3 during the year. What was the stock's rate of return from capital appreciation during the year? (Round your answer to the nearest percent.) A) 17% B) 20% C) 29% D) 35%
C
50. The average risk-premium for the market from 1926 to 2009 was A) 8.00%. B) 7.50%. C) 6.01%. D) 6.51% + the Treasury rate.
A
51. Gwen purchased a stock one year ago for $25, and it is now worth $31. The stock paid a dividend of $1.50 during the year. What was the stock's rate of return income during the year? (Round your answer to the nearest percent.) A) 6% B) 15% C) 24% D) 26%
C
51. The recommended model to estimate the cost of common equity for a firm is A) a one-stage constant growth model. B) a multistage growth model. C) the CAPM. D) none of the above.
C
52. Gunther earned a 62.5 percent return on a stock that he purchased one year ago. The stock is now worth $12, and he received a dividend of $1 during the year. How much did Gunther originally pay for the stock? A) $7.00 B) $7.50 C) $8.00 D) $8.50
D
52. In order to use the WACC to evaluate a future project's flows, which of the following must hold? A) The project will be financed with the same proportion of debt and equity as the firm. B) The systematic risk of the project is the same as the overall systematic risk of the firm. C) The project must be viable. D) a and b above.
D
53. Moshe purchased a stock for $30 last year. He found out today that he had a -100 percent return on his investment. Which of the following must be true? A) The stock is worth $30 today. B) The stock is worth $0 today C) The stock paid no dividends during the year. D) Both b and c must be true.
D
53. Overall cost of capital: If the market risk premium is currently 6 percent and the risk-free rate of return is 4 percent, then what is the expected return on a common share with a beta equal to 2? A) 8.0% B) 10.0% C) 12.0% D) 16.0%
B
54. Babs purchased a piece of real estate last year for $85,000. The real estate is now worth $102,000. If Babs needs to have a total return of 25 percent during the year, then what is the dollar amount of income that she needed to have to reach her objective? A) $3,750 B) $4,250 C) $4,750 D) $5,250
B
54. Overall cost of capital: What is the beta of a firm whose equity has an expected return of 21.3 percent when the risk-free rate of return is 7.0 percent and the expected return on the market is 18.0 percent? A) 0.79 B) 1.30 C) 1.57 D) none of the above
B
55. Genaro needs to capture a return of 40 percent for his one-year investment in a property. He believes that he can sell the property at the end of the year for $150,000 and that the property will provide him with rental income of $25,000. What is the maximum amount that Genaro should be willing to pay for the property? A) $112,500 B) $125,000 C) $137,500 D) $150,000
D
55. Overall cost of capital: Stryder, Inc., has 3 million shares outstanding at a current price of $15 per share. The book value of the shares is $10 per share. The firm also has $30 million in par value of bonds outstanding. The bonds are selling at a price equal to 101 percent of par. What is the market value of the firm? A) $30.0 million B) $45.0 million C) $75.0 million D) $75.3 million
D
56. Books Brothers stock was priced at $15 per share two years ago. The stock sold for $13 last year and now it sells for $18. What was the total return for owning Books Brothers stock during the most recent year? Assume that no dividends were paid and round to the nearest percent. A) 17% B) 20% C) 23% D) 38%
B
56. How firms estimate their cost of capital: The Diverse Co. has invested 40 percent of the firm's assets in a project with a beta of 0.4 and the remaining assets in a project with a beta of 1.8. What is the beta of the firm? A) 0.96 B) 1.24 C) 1.28 D) None of the above
C
57. How firms estimate their cost of capital: You are analyzing the cost of capital for a firm that is financed with 65 percent equity and 35 percent debt. The cost of debt capital is 8 percent, while the cost of equity capital is 20 percent for the firm. What is the overall cost of capital for the firm? A) 12.2% B) 14.0% C) 15.8% D) 20.0%
B
57. Serox stock was selling for $20 two years ago. The stock sold for $25 one year ago, and it is currently selling for $28. Serox pays a $1.10 dividend per year. What was the rate of return for owning Serox in the most recent year? (Round to the nearest percent.) A) 12% B) 16% C) 32% D) 40%
B
71. You have invested 20 percent of your portfolio in Homer, Inc., 40 percent in Marge Co., and 20 percent in Bart Resources. What is the expected return of your portfolio if Homer, Marge, and Bart have expected returns of 2 percent, 18 percent, and 3 percent, respectfully? A) 7.7% B) 8.2% C) 8.7% D) 9.2%
B
59. How firms estimate their cost of capital: The WACC for a firm is 19.75 percent. You know that the firm is financed with $75 million of equity and $25 million of debt. The cost of debt capital is 7 percent. What is the cost of equity for the firm? A) 19.75% B) 24.00% C) 32.50% D) 58.00%
C
59. You know that the average college student eats 0.75 pounds of food at lunch. If the standard deviation of that eating is 0.2 pounds of food, then what is the total amount of food that a cafeteria should have on hand to be 95percent confident that it will not run out of food when feeding 50 college students. A) 17.90 pounds B) 21.05 pounds C) 53.95 pounds D) 57.10 pounds
D
60. How firms estimate their cost of capital: The WACC for a firm is 13.00 percent. You know that the firm's cost of debt capital is 10 percent and the cost of equity capital is 20%. \ What proportion of the firm is financed with debt? A) 30% B) 33% C) 50% D) 70%
B
62. Niles is making an investment with an expected return of 12 percent. If the standard deviation of the return is 4.5 percent, and if Niles is investing $100,000, then what dollar amount is Niles 95 percent sure that he will have at the end of the year? A) $100,000.00 B) $104,597.50 C) $116,500.00 D) $119,402.50
C
62. The cost of debt: Dynamo Corporation has semiannual bonds outstanding with 12 years to maturity and are currently priced at $1,080.29. If the bonds have a coupon rate of 8 percent, then what is the equivalent annual return (EAR) to the investor for purchasing the bonds at the described price? A) 3.5% B) 7.00% C) 7.12% D) 8.00%
B
63. The cost of debt: Beckham Corporation has semiannual bonds outstanding with 13 years to maturity and are currently priced at $746.16. If the bonds have a coupon rate of 8.5 percent, then what is the after-tax cost of debt for Beckham if its marginal tax rate is 35%? Assume that your calculation is made as on Wall Street. A) 6.250% B) 8.125% C) 12.500% D) 12.890%
D
63. Which of the following investment classes had the greatest average return based on recent historical data? A) Intermediate-Term Government Bonds B) Long-Term Government Bonds C) Large U.S. Stocks D) Small U.S. Stocks
A
64. The cost of debt: PackMan Corporation has semiannual bonds outstanding with nine years to maturity and are currently priced at $754.08. If the bonds have a coupon rate of 7.25 percent, then what is the after-tax cost of debt for Beckham if its marginal tax rate is 30 percent? Complete the calculation as is done on Wall Street. A) 7.050% B) 8.225% C) 11.750% D) 12.095%
D
64. Which of the following investment classes had the greatest variability in returns for recent historical data? A) Intermediate-Term Government Bonds B) Long-Term Government Bonds C) Large U.S. Stocks D) Small U.S. Stocks
A
65. If you were to compare the returns of an individual stock to a market index, select the answer below that is most true. A) The returns of the individual stock will show more variability than those of the market index. B) The returns of the individual stock will show less variability than those of the market index. C) The returns of the individual stock will show the same level of variability than those of the market index, if they have the same beta. D) None of the above.
B
65. The cost of equity: Jacque Ewing Drilling, Inc., has a beta of 1.3 and is trying to calculate its cost of equity capital. If the risk-free rate of return is 8 percent and the expected return on the market is 12 percent, then what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 40 percent? A) 7.92% B) 13.20% C) 15.57% D) 23.60%
D
66. The cost of equity: TeleNyckel, Inc., has a beta of 1.4 and is trying to calculate its cost of equity capital. If the risk-free rate of return is 9 percent and the market risk premium is 5 percent, then what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 30 percent? A) 11.20% B) 10.60% C) 15.14% D) 16.00%
D
67. Elrond has made an investment that will generate returns that are subject to the state of the economy. Use the following information to calculate the variance of the return distribution for Elrond's investment. State Return Probability Weak 0.10 0.8 OK 0.17 0.1 Great 0.28 0.1 A) 0.0536 B) 0.0543 C) 0.0550 D) 0.0557
C
67. The cost of equity: RadicalVenOil, Inc., has a cost of equity capital equal to 22.8 percent. If the risk-free rate of return is 10 percent and the expected return on the market is 18 percent, then what is the firm's beta if the firm's marginal tax rate is 35 percent? A) 1.0 B) 1.28 C) 1.60 D) 4.10
B
68. Braniff Ground Services stock has an expected return of 9 percent and a variance of 0.25 percent. What is the coefficient of variation for Braniff? A) 0.0278 B) 0.5556 C) 1.800 D) 36.00
C
68. The cost of equity: Gangland Water Guns, Inc., is expected to pay a dividend of $2.10 one year from today. If the firm's growth in dividends is expected to remain at a flat 3 percent forever, then what is the cost of equity capital for Gangland if the price of its common shares is currently $17.50? A) 12.00% B) 14.65% C) 15.00% D) 15.36%
A
69. Sayers purchased a stock with a coefficient of variation equal to 0.125. The expected return on the stock is 20 percent. What is the variance of the stock? A) 0.000625 B) 0.025000 C) 0.625000 D) 0.790500
D
69. The cost of equity: UltraFlex Diving Boards, Inc., is just paid a dividend of $1.50. If the firm's growth in dividends is expected to remain at a flat 4 percent forever, then what is the cost of equity capital for Ultra Flex Diving Boards if the price of its common shares is currently $26.00? A) 5.77% B) 6.00% C) 9.77% D) 10.00%
B
70. The cost of equity: Rubber Chicken, Inc., was paid a dividend of $1.87 last year. If the firm's growth in dividends is expected to be 10 percent next year and then zero thereafter, then what is the cost of equity capital for Rubber Chicken if the price of its common shares is currently $25.71? A) 7.27% B) 8.00% C) 18.00% D) The problem is not solvable with the information that is given.
C
70. You have invested 40 percent of your portfolio in an investment with an expected return of 12 percent and 60 percent of your portfolio in an investment with an expected return of 20 percent. What is the expected return of your portfolio? A) 15.2% B) 16.0% C) 16.8% D) 17.6%
C
71. The cost of equity: The Dedus Shoes, Inc., has common shares with a price of $28.76 per share. The firm paid a dividend of $1.00 yesterday, and dividends are expected to grow at 10 percent for two years and then at 5 percent thereafter. What is the implied cost of common equity capital for Dedus? A) 7.00% B) 8.00% C) 9.00% D) 10.00%
D
72. The cost of equity: Tranquility, Inc., has common shares with a price of $18.37 per share. The firm paid a dividend of $1.50 yesterday, and dividends are expected to grow at 9 percent for three years and then at 2 percent thereafter. What is the implied cost of common equity capital for Tranquility? A) 9% B) 10% C) 11% D) 12%
B
72. You invested $3,000 in a portfolio with an expected return of 10 percent and $2,000 in a portfolio with an expected return of 16 percent. What is the expected return of the combined portfolio? A) 6.2% B) 12.4% C) 13.0% D) 13.6%
A
73. Given the returns for two stocks with the following information, calculate the covariance of the returns for the two stocks. Assume the expected return is 10.8 percent for Stock 1 and 9.7 percent for Stock 2. Prob Stock 1 Stock 2 0.4 0.09 0.11 0.5 0.11 0.08 0.1 0.17 0.13 A) 0.000094 B) 0.00051600 C) 0.00032100 D) 0.71750786
B
73. The cost of equity: Oasis, Inc., has common shares with a price of $21.12 per share. The firm is expected to pay a dividend of $1.75 one year from today, and dividends are expected to grow at 10 percent for two years after that and then at 5 percent thereafter. What is the implied cost of common equity capital for Oasis? A) 13% B) 14% C) 15% D) 16%
A
74. Given the returns for two stocks with the following information, calculate the correlation coefficient of the returns for the two stocks. Assume the expected return for Stock 1 is 10.8 percent and 9.7 percent for Stock 2. Prob Stock 1 Stock 2 0.4 0.09 0.11 0.5 0.11 0.08 0.1 0.17 0.13 A) 0.230967 B) -0.00002548 C) 0.00032100 D) 0.17671455
C
74. The cost of preferred equity: Billy's Goat Coats has a preferred share issue outstanding with a current price of $38.89. The firm last paid a dividend on the issue of $3.50 per share. What is the firm's cost of preferred equity? A) 7% B) 8% C) 9% D) 10%
C
75. Given the returns for two stocks with the following information, calculate the covariance of the returns for the two stocks. Assume the expected return is 14.4 percent for Stock 1 and 15.9 percent for Stock 2. Prob Stock 1 Stock 2 0.5 0.11 0.18 0.3 0.17 0.15 0.2 0.19 0.12 A) 0.001204001 B) 0.000549003 C) -0.00079 D) -0.3372012
B
75. The cost of equity: Wally's War Duds has a preferred share issue outstanding with a current price of $26.57. The firm is expected to pay a dividend of $1.86 per share a year from today. What is the firm's cost of preferred equity? A) 6.50% B) 7.00% C) 7.50% D) 8.00%
D
76. Given the returns for two stocks with the following information, calculate the correlation coefficient of the returns for the two stocks. Assume the expected return is 14.4 percent for Stock 1 and 15.9 percent for Stock 2. Prob Stock 1 Stock 2 0.5 0.11 0.18 0.3 0.17 0.15 0.2 0.19 0.12 A) 0.001204001 B) 0.000549003 C) -0.00271370 D) -0.971689
C
76. The cost of equity: Melba's Toast has a preferred share issue outstanding with a current price of $19.50. The firm is expected to pay a dividend of $2.34 per share a year from today. What is the firm's cost of preferred equity? A) 11.50% B) 11.75% C) 12.00% D) 12.25%
A
77. The covariance of the returns between Einstein Stock and Bohr Stock is 0.0087. The standard deviation of Einstein is 0.26, and the standard deviation of Bohr is 0.37. What is the correlation coefficient between the returns of the two stocks? A) 0.090437 B) 0.096200 C) 0.90437 D) 0.96200
C
77. Using the WACC in practice: Swirlpool, Inc., has found that its cost of common equity capital is 18 percent, and its cost of debt capital is 8 percent. If the firm is financed with 60 percent common shares and 40 percent debt, then what is the after-tax weighted average cost of capital for Swirlpool if it is subject to a 40 percent marginal tax rate? A) 10.37% B) 12.00% C) 12.72% D) 14.00%
D
78. The covariance of the returns between Wildcat Stock and Sun Devil Stock is 0.09875. The variance of Wildcat is 0.2116, and the variance of Sun Devil is 0.1369. What is the correlation coefficient between the returns of the two stocks? A) 0.170200 B) 0.293347 C) 0.340823 D) 0.578731
C
78. Using the WACC in practice: Maloney's, Inc., has found that its cost of common equity capital is 17 percent and its cost of debt capital is 6 percent. If the firm is financed with $3,000,000 of common shares (market value) and $2,000,000 of debt, then what is the after-tax weighted average cost of capital for Maloney's if it is subject to a 40 percent marginal tax rate? A) 8.96% B) 11.16% C) 11.64% D) 12.60%
A
79. Horse Stock returns have exhibited a standard deviation of 0.57, whereas Mod T Stock returns have a standard deviation of 0.63. The correlation coefficient between the returns is 0.078042. What is the covariance of the returns? A) 0.028025 B) 0.217327 C) 0.359100 D) 0.993094
B
79. Using the WACC in practice: Ronnie's Comics has found that its cost of common equity capital is 15 percent and its cost of debt capital is 12 percent. If the firm is financed with $250,000,000 of common shares (market value) and $750,000,000 of debt, then what is the after-tax weighted average cost of capital for Ronnie's if it is subject to a 35 percent marginal tax rate? A) 6.05% B) 9.6% C) 8.75% D) 13.65%
B
80. Batman Stock has exhibited a standard deviation in stock returns of 0.5, whereas Superman Stock has exhibited a standard deviation of 0.6. The correlation coefficient between the stock returns is 0.5. What is the variance of a portfolio composed of 70 percent Batman and 30 percent Superman? A) 0.1549 B) 0.2179 C) 0.4668 D) 0.5500
D
81. Using the WACC in practice: Marley's Pipe Shops has found that its common equity capital shares have a beta equal to 1.5 while the risk-free return is 8 percent and the expected return on the market is 14 percent. Its cost of debt financing is 12 percent. If the firm is financed with $120,000,000 of common shares (market value) and $80,000,000 of debt, then what is the after-tax weighted average cost of capital for Marley's if it is subject to a 35 percent marginal tax rate? A) 10.20% B) 11.76% C) 11.88% D) 13.32%
C
82. Most of the risk-reduction benefits from diversification can be achieved in a portfolio consisting of A) 5 to 10 stocks B) 10 to 15 stocks C) 15 to 20 stocks D) 20 to 25 stocks
D
82. Using the WACC in practice: Droz's Hiking Gear, Inc., has found that its common equity capital shares have a beta equal to 1.5 while the risk-free return is 8 percent and the expected return on the market is 14 percent. It has 7-year semiannual maturity bonds outstanding with a price of $767.03 that have a coupon rate of 7 percent.. If the firm is financed with $120,000,000 of common shares (market value) and $80,000,000 of debt, then what is the after-tax weighted average cost of capital for Droz's if it is subject to a 35 percent marginal tax rate? Calculate the cost of debt as it would be done on Wall Street. A) 10.20% B) 11.76% C) 11.88% D) 13.32%
B
83. Which of the following investors should be willing to pay the highest price for an asset? A) An investor with a single-asset portfolio. B) An investor with a 50-asset portfolio. C) An investor who is not completely diversified. D) An investor who is so risk-averse that he does not recognize the benefits of diversification.
B
83. Which type of project do financial managers typically use the highest cost of capital when evaluating? A) Extension projects B) New product projects C) Efficiency projects D) Market expansion projects
B
84. A portfolio with a level of systematic risk the same as that of the market has a beta that is A) equal to zero. B) equal to one. C) less than the beta of the risk-free asset. D) less than zero.
C
84. After-tax cost of debt financing A recent leveraged buyout was financed with $50M. This amount comprised of partner's equity capital of $12M, $20M unsecured debt borrowed at 7% from one bank and the remainder from another bank at 8.5%. What is the overall after-tax cost of the debt financing if you expect the firm's tax rate to be 33%? A) 2.55% B) 3.34% C) 5.17% D) 7.71%
C
85. If a company's weighted average cost of capital is less than the required return on equity, then the firm: A) Is financed with more than 50% debt. B) Is perceived to be safe C) Has debt in its capital structure D) Must have preferred stock in its capital structure
C
87. The risk-free rate of return is currently 3 percent, whereas the market risk premium is 6 percent. If the beta of Lenz, Inc., stock is 1.8, then what is the expected return on Lenz? A) 8.40% B) 10.80% C) 13.80% D) 19.20%
B
88. The expected return on Kiwi Computers stock is 16.6 percent. If the risk-free rate is 4 percent and the expected return on the market is 10 percent, then what is Kiwi's beta? A) 1.26 B) 2.10 C) 2.80 D) 3.15
D
89. The expected return on Mike's Seafood stock is 17.9 percent. If the expected return on the market is 13 percent and the beta for Kiwi is 1.7, then what is the risk-free rate? A) 4.5% B) 5.0% C) 5.5% D) 6.0%
B
90. The expected return on KarolCo. stock is 16.5 percent. If the risk-free rate is 5 percent and the beta of KarolCo is 2.3, then what is the risk premium on the market? A) 2.5% B) 5.0% C) 7.5% D) 10.0%
B
91. Which of the following statements is most correct? A) The greater the risk associated with an investment, the lower the return investors expect from it. B) When choosing between two investments that have the same level of risk, investors prefer the investment with the higher return. C) If two investments have the same expected return, investors prefer the riskiest alternative. D) When choosing between two investments that have the same level of risk, investors prefer the investment with the lower return.
A
92. Holding Period Return: George Wilson purchased Bright Light Industries common stock for $47.50 on January 31, 2010. The firm paid dividends of $1.10 during the last 12 months. George sold the stock today (January 30, 2011) for $54.00. What is George's holding period return? Round off the nearest 0.01%. A) 16.00% B) 14.35% C) 11.28% D) 19.60%
D
94. Standard Deviation: View Point Industries has forecast a rate of return of 20.00% if the economy booms (25.00% probability); a rate of return of 15.00% if the economy in in a growth phase (45.00% probability); a rate of return of 2.50% if the economy in in decline (20.00% probability); and a rate of return of -15.00% if the economy in a depression (10.00% probability). What is View Point's standard deviation of returns? A) 17.31% B) 9.25% C) 15.00% D) 10.46%
C
95. Which of the following represents a plot of the relation between expected return and systemic risk? A) The beta coefficient. B) The covariance of returns line. C) The security market line. D) The variance.
C
33. Firms have no way to directly estimate the discount rate that reflects the risk of A) a publicly traded security. B) its debt securities. C) the incremental cash flows from a particular project. D) none of the above.
B
34. A firm's overall cost of capital is A) equal to its cost debt. B) a weighted average of the costs of capital for the collection of individual projects that the firm is working on. C) best measured by the cost of capital of the riskiest projects that the firm is working on. D) none of the above.
A
35. The finance balance sheet is A) the same as the accounting balance sheet, but it is based on market values. B) the same as the accounting balance sheet, but it does not have to balance. C) based on cash rather than accrual accounting. D) net income.
A
38. The firm can be viewed as A) a portfolio of individual projects, each with their own risks, cost of capital, and returns. B) a collection of equity shares comprising it. C) a collection of debt instruments financing it. D) none of the above.
A
39. In order for a firm to estimate its cost of debt capital by observing the price of its debt instruments, A) the firm must depend on markets being reasonably efficient. B) the debt must be privately held. C) the beta of the debt must be greater than the beta of the firm's equity. D) None of the above.
D
39. Which of the following is the best measure of the systematic risk in a portfolio? A) variance B) standard deviation C) covariance D) beta
C
58. How firms estimate their cost of capital: You are analyzing the cost of capital for a firm that is financed with $300 million of equity and $200 million of debt. The cost of debt capital for the firm is 9 percent, while the cost of equity capital is 19 percent. What is the overall cost of capital for the firm? A) 13.0% B) 14.0% C) 15.0% D) 16.0%
C
58. You have observed that the average size of a particular goldfish is 1.5 inches long. The standard deviation of the size of the goldfish is 0.25 inches. What is the size of a goldfish such that 95 percent of the goldfish are smaller? Assume a normal distribution for the size of goldfish. A) 1.01 inches B) 1.09 inches C) 1.91 inches D) 1.99 inches
B
60. If a random variable is drawn from a normal distribution, what is the probability that the random variable is larger than 1.96 standard deviations larger than the mean? A) 1.25% B) 2.50% C) 3.75% D) 5.00%
C
61. If a random variable is drawn from a normal distribution, what is the probability that the random variable is larger than 1.96 standard deviations below the mean? A) 95.00% B) 96.25% C) 97.50% D) 98.75%
C
61. The cost of debt: Bellamee, Inc., has semiannual bonds outstanding with five years to maturity and are priced at $920.87. If the bonds have a coupon rate of 7 percent, then what is the YTM for the bonds? A) 4.5% B) 7.0% C) 9.0% D) 9.2%
B
66. Tommie has made an investment that will generate returns that are subject to the state of the economy during the year. Use the following information to calculate the standard deviation of the return distribution for Tommie's investment. State Return Probability Weak 0.13 0.3 OK 0.2 0.4 Great 0.25 0.3 A) 0.0453 B) 0.0467 C) 0.0481 D) 0.0495
D
80. Using the WACC in practice: Poly's Parrot Shops has found that its cost of common equity capital is 17 percent. It has 7-year maturity semiannual bonds outstanding with a price of $767.03 that have a coupon rate of 7 percent. If the firm is financed with $120,000,000 of common shares (market value) and $80,000,000 of debt, then what is the after-tax weighted average cost of capital for Poly's if it is subject to a 35 percent marginal tax rate? A) 10.20% B) 11.76% C) 11.88% D) 13.32%
C
81. Aquaman Stock has exhibited a standard deviation in stock returns of 0.7, whereas Green Lantern Stock has exhibited a standard deviation of 0.8. The correlation coefficient between the stock returns is 0.1. What is the standard deviation of a portfolio composed of 70 percent Aquaman and 30 percent Green Lantern? A) 0.32122 B) 0.54562 C) 0.56676 D) 0.75000
B
85. The beta of Elsenore, Inc., stock is 1.6, whereas the risk-free rate of return is 8 percent. If the expected return on the market is 15 percent, then what is the expected return on Elsenore? A) 11.20% B) 19.20% C) 24.00% D) 32.00%
B
86. The beta of RicciCo.'s stock is 3.2, whereas the risk-free rate of return is 9 percent. If the expected return on the market is 18 percent, then what is the expected return on RicciCo.? A) 28.80% B) 37.80% C) 48.60% D) 57.60%
B
93. Expected Return: Security Analysts that have evaluated Concordia Corporation have determined that there is a 15% chance that the firm will generate earnings per share of $2.40; a 60% probability that the firm will generate earnings per share of $3.10; and a 25% probability that the firm will generate earnings per share of $3.80. What are the expected earnings per share for Concordia Corporation? (Round off to the nearest $0.01) A) $3.10 B) $3.17 C) $2.75 D) $2.91
