FIN 300 Final Exam Chapters 12-14

One year ago, you purchased 300 shares of Davis & Saha stock at a price of $29.64 per share. The stock pays an annual dividend of $4.40 per share. Today, you sold all of your shares for $34.60 per share. What is your total dollar return on this investment? a. $1,488 b. $1,492 c. $2,808 d. $936 e. $496

c. $2,808

Which one of the following is most indicative of a totally efficient stock market? a. Extraordinary returns earned on a routine basis b. Positive net present values on stock investments over the long-term c. Zero net present values for all stock investments d. Arbitrage opportunities which develop on a routine basis e. Realizing negative returns on a routine basis

c. Zero net present values for all stock investments

Sung Office Products just announced it is decreasing its annual dividend from $2.20 per share to $1.85 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price: a. was unaffected by the announcement. b. increased proportionately with the dividend decrease. c. decreased proportionately with the dividend decrease. d. decreased by $.35 per share. e. increased by $.35 per share.

c. decreased proportionately with the dividend decrease

While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 percent figure is called the: a. arithmetic return. b. historical return. c. expected return. d. geometric return. e. required return.

c. expected return.

For the period 1926-2019, U.S. Treasury bills always: a. provided an annual rate of return that exceeded the annual inflation rate. b. had an annual rate of return in excess of 1.2 percent. c. provided a positive annual rate of return. d. earned a higher annual rate of return than long-term government bonds. e. had a greater variation in returns year-over-year than did long-term government bonds.

c. provided a positive annual rate of return.

Vanessa purchased a stock one year ago and sold it today for $3.15 per share more than her purchase price. She received a total of $2.60 per share in dividends. Which one of the following statements is correct in relation to this investment? a. The dividend yield is expressed as a percentage of the par value. b. The capital gain would have been less had Vanessa not received the dividends. c. The total dollar return per share is $.55. d. The capital gains yield is positive. e. The dividend yield is greater than the capital gains yield.

d. The capital gains yield is positive.

Which of the following statements best describes the principle of diversification? a. Concentrating an investment in two or three stocks will eliminate all of the unsystematic risk. b. Concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. c. Spreading an investment across multiple diverse companies will not lower the total risk. d. Spreading an investment across many diverse assets will eliminate all of the systematic risk. e. Spreading an investment across many diverse assets will eliminate some of the total risk.

e. Spreading an investment across many diverse assets will eliminate some of the total risk.

Which one of the following best defines the variance of an investment's annual returns over a number of years? a. The average squared difference between the arithmetic and the geometric average annual returns b. The squared summation of the differences between the actual returns and the average geometric return c. The average difference between the annual returns and the average return for the period d. The difference between the arithmetic average and the geometric average return for the period e. The average squared difference between the actual returns and the arithmetic average return

e. The average squared difference between the actual returns and the arithmetic average return

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2019? a. Long-term government bonds b. Small-company stocks c. Large-company stocks d. Long-term corporate bonds e. U.S. Treasury bills

e. U.S. Treasury bills

When utilizing the capital asset pricing model approach to value equity, the outcome: a. is dependent upon the unsystematic risk of a security. b. assumes the reward-to-risk ratio increases as beta increases. c. can only be applied to dividend-paying firms. d. assumes a firm's future risks will be higher than its current risks. e. assumes the reward-to-risk ratio is constant.

e. assumes the reward-to-risk ratio is constant.

The slope of the security market line is the: a. expected return of the market. b. market standard deviation. c. beta coefficient. d. risk-free interest rate. e. market risk premium.

e. market risk premium.

Velasquez Manufacturing has two vastly different lines of business: Alpha and Omega. The Alpha line is the riskiest of the two, and accounts for 72 percent of the firm's sales. When deciding which project proposals should be accepted, the managers should: a. allocate more funds to Alpha since it is the largest line of business. b. fund all of Omega's projects first since they tend to be less risky and then allocate the remaining funds to the Alpha projects that have the highest net present values. c. allocate the company's funds to the projects with the highest net present values based on the company's weighted average cost of capital. d. assign appropriate, but differing, discount rates to each business line and then select the projects with the highest net present values. e. fund the highest net present value projects from each line of business based on an allocation of 72 percent of the funds to Alpha and the remainder to Omega.

d. assign appropriate, but differing, discount rates to each business line and then select the projects with the highest net present values.

An unexpected post on social media caused the prices of 22 different companies' stocks to immediately increase by 10 to 15 percent. This occurrence is best described as an example of ________ risk. a. portfolio b. non-diversifiable c. market d. unsystematic e. expected

d. unsystematic

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 per share. The current market risk premium is 7.8 percent and the current risk-free rate is 3.1 percent. This year, the firm paid an annual dividend of $1.68 per 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% b. 9.78% c. 8.96% d. 9.13% e. 10.06%

e. 10.06%

The common stock of Air Express had annual returns of 11.7 percent, 8.8 percent, 16.7 percent, and −7.9 percent over the last four years, respectively. What is the standard deviation of these returns? a. 8.29% b. 9.14% c. 11.54% d. 7.78% e. 10.66%

e. 10.66%

Last year, you purchased 500 shares of Ayala, Incorporated, stock for $25.20 per share. You have received a total of $400 in dividends and $17,000 in proceeds from selling the shares. What is your capital gains yield on this stock? a. 25.9% b. 12.7% c. 3.2% d. 47.6% e. 34.9%

e. 34.9%

The expected return on Cerrato, Incorporated, stock is 16.28 percent while the expected return on the market is 11.97 percent. The stock's beta is 1.63. What is the risk-free rate of return? a. 2.22% b. 4.31% c. 2.42% d. 4.50% e. 5.13%

e. 5.13%

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $3.36 per share and has a beta of 1.38, all else constant, which of the following actions will increase the firm's cost of equity? a. A decrease in the dividend amount b. An increase in the dividend amount c. A decrease in the market rate of return d. A decrease in the firm's beta e. A decrease in the risk-free rate

e. A decrease in the risk-free rate

Which of the following items are included when calculating the expected return on a portfolio? I. Percentage of the portfolio invested in each individual security II. Projected states of the economy III. The performance of each security given various economic states IV. Probability of occurrence for each state of the economy a. I and III only b. II and IV only c. I, III, and IV only d. II, III, and IV only e. I, II, III, and IV

e. I, II, III, and IV

Which of the following statements is true of a portfolio's standard deviation? a. It is a weighted average of the standard deviations of the individual securities held in the portfolio. b. It can never be less than the standard deviation of the most risky security in the portfolio. c. It is equal to or greater than the lowest standard deviation of any single security held in the portfolio. d. It is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio. e. It can be less than the standard deviation of the least risky security in the portfolio.

e. It can be less than the standard deviation of the least risky security in the portfolio.

What is the beta of the following portfolio? A - Amt: $6,000, Beta: 1.37 B - Amt:$17,000, Beta: 0.95 C - Amt: $2,750, Beta: 1.48 a. 1.10 b. 1.49 c. 1.27 d. 1.54 e. 1.40

a. 1.10

A stock experienced returns of 5 percent, −17 percent, and 15 percent during the last three years. What is the standard deviation of the stock's returns for the three-year period? a. 16.37% b. 13.37% c. 48.86% d. 5.98% e. 2.68%

a. 16.37%

A stock had annual returns of 7 percent, −28 percent, 13 percent, and 23 percent for the past four years. The arithmetic average of these returns is _____ percent while the geometric average return for the period is _____ percent. a. 3.75; 17.46 b. 3.75; 1.72 c. 17.75; 4.27 d. 17.75; 17.46 e. 3.75; 4.27

b. 3.75; 1.72

Which one of the following categories of securities had the highest average annual return for the period 1926-2019? a. U.S. Treasury bills b. Large-company stocks c. Small-company stocks d. Long-term corporate bonds e. Long-term government bonds

c. Small-company stocks

To determine a firm's cost of capital, one must include: a. only the return required by the firm's current shareholders. b. only the current market rate of return on equity shares. c. the weighted costs of all future funding sources. d. the returns currently required by both debtholders and stockholders. e. the company's original debt-equity ratio.

d. the returns currently required by both debtholders and stockholders.

Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions? a. Riskless market b. Evenly distributed market c. Zero volatility market d. Blume's market e. Efficient capital market

e. Efficient capital market

With respect to returns, which one of the following statements is accurate? a. The unexpected return is always negative. b. The expected return minus the unexpected return is equal to the total return. c. Over time, the average return is equal to the unexpected return. d. The expected return includes the surprise portion of news announcements. e. Over time, the average unexpected return will be zero.

e. Over time, the average unexpected return will be zero.

One year ago, you purchased a stock at a price of $38.22 per share. Today, you sold the stock and realized a total loss of 11.09 percent on your investment. Your capital loss was −$4.68 per share. What was your dividend yield? a. 1.15% b. .88% c. 1.02% d. .67% e. .38%

a. 1.15%

Of the options listed below, which is the best example of systematic risk? a. Investors panic causing security prices around the globe to fall precipitously. b. A flood washes away a firm's warehouse. c. A city imposes an additional one percent sales tax on all products. d. A toymaker has to recall its top-selling toy. e. Corn prices increase due to increased demand for alternative fuels.

a. Investors panic causing security prices around the globe to fall precipitously.

Which of the following statements regarding a firm's pretax cost of debt is accurate? a. It is based on the current yield to maturity of the company's outstanding bonds. b. It is equal to the coupon rate on the latest bonds issued by the company. c. It is equivalent to the average current yield on all of a company's outstanding bonds. d. It is based on the original yield to maturity on the latest bonds issued by a company. e. It must be estimated as it cannot be directly observed in the market.

a. It is based on the current yield to maturity of the company's outstanding bonds.

Assume that last year T-bills returned 2.2 percent while your investment in large-company stocks earned an average of 8.1 percent. Which one of the following terms refers to the difference between these two rates of return? a. Risk premium b. Geometric average return c. Arithmetic average return d. Standard deviation e. Variance

a. Risk premium

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst? a. Weak b. Semi-weak c. Semi-strong d. Strong e. Perfect

a. Weak

During the past five years, KwonCo.'s stock earned annual returns of 7 percent, 13 percent, 19 percent, −8 percent, and 15 percent. Suppose the average inflation rate over this time period was 2.6 percent and the average T-bill rate was 3.1 percent. Based on this information, what was the average nominal risk premium? a. 6.6% b. 6.1% c. 9.2% d. 1.2% e. 3.5%

b. 6.1%

AZ Products has 140,000 shares of common stock outstanding at a market price of $27 per share. Next year's annual dividend is expected to be $1.43 per share and the dividend growth rate is 2 percent. The company also has 2,500 bonds outstanding with a face value of $1,000 per bond. The bonds have a pretax yield of 7.35 percent and sell at 98.2 percent of face value. The company's tax rate is 21 percent. What is the weighted average cost of capital? a. 8.41% b. 6.71% c. 7.52% d. 6.58% e. 6.59%

b. 6.71%

Which of the following statements is true based on the historical record for 1926-2019? a. Risk-free securities produce a positive real rate of return each year. b. Bonds are generally a safer, or less risky, investment than are stocks. c. Risk and potential reward are inversely related. d. The normal distribution curve for large-company stocks is narrower than the curve for small-company stocks. e. Returns are more predictable over the short term than they are over the long term.

b. Bonds are generally a safer, or less risky, investment than are stocks.

When calculating a firm's weighted average cost of capital, the capital structure weights: a. are based on the book values of debt and equity. b. are based on the market values of the outstanding securities. c. depend upon the financing obtained to fund each specific project. d. remain constant over time unless new securities are issued or outstanding securities are redeemed. e. are restricted to debt and common stock.

b. are based on the market values of the outstanding securities.

To convince investors to accept greater volatility, you must: a. decrease the risk premium. b. increase the risk premium. c. decrease the real return. d. decrease the risk-free rate. e. increase the risk-free rate.

b. increase the risk premium.

According to the capital asset pricing model (CAPM), the amount of reward an investor receives for bearing the risk of an individual security depends upon the: a. amount of total risk assumed and the market risk premium. b. market risk premium and the amount of systematic risk inherent in the security. c. risk-free rate, the market rate of return, and the standard deviation of the security. d. beta of the security and the market rate of return. e. standard deviation of the security and the risk-free rate of return.

b. market risk premium and the amount of systematic risk inherent in the security.

Estimates of the rate of return on a security based on the historical arithmetic average will probably tend to _____ the expected return for the long-term and estimates using the historical geometric average will probably tend to _____ the expected return for the short-term. a. overestimate; overestimate b. overestimate; underestimate c. underestimate; overestimate d. underestimate; underestimate e. accurately estimate; accurately estimate

b. overestimate; underestimate