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
