FIN 3030 - FINAL CH 10, 11, 12

Over the past five years, a stock returned 8.3 percent, -32.5 percent, -2.2 percent, 46.9 percent, and 11.8 percent, respectively. What is the variance of these returns? a. 0.071188 b. 0.076290 c. 0.081504 d. 0.082547 e. 0.091306

c. 0.081504 *

BJB, Inc. stock has an expected return of 15.15 percent. The risk-free rate is 3.8 percent and the market risk premium is 8.6 percent. What is the stock's beta? a. 1.19 b. 1.21 c. 1.32 d. 1.48 e. 1.62

c. 1.32 **

The Five and Dime Store has a cost of equity of 15.8 percent, a pretax cost of debt of 7.7 percent, and a tax rate of 35 percent. What is the firm's weighted average cost of capital if the debt-equity ratio is 0.40? a. 10.18 percent b. 11.72 percent c. 12.72 percent d. 13.49 percent e. 14.93 percent

c. 12.72 percent

Four years ago, the Morgan Co. issued 15-year, 7.0 percent semiannual coupon bonds at par. Today, the bonds are quoted at 101.6. What is this firm's pretax cost of debt? a. 6.97 percent b. 7.08 percent c. 6.79 percent d. 6.83 percent e. 7.39 percent

c. 6.79 percent

Given the following information, what is the standard deviation of the returns on this stock? State of Economy BOOM NORMAL RECESSION Probability of State of Economy .20 .70 .10 Rate of Return .21 .13 -.09

c. 7.80 percent **

Which of the following terms can be used to describe unsystematic risk? I. Asset-specific risk II. Diversifiable risk III. Market risk IV. Unique risk a. I and IV only b. II and III only c. I, II, and IV only d. II, III, and IV only e. I, II, III, and IV

c. I, II, and IV only

The standard deviation measures the _____ of a security's returns over time. a. average value b. frequency c. volatility d. mean e. arithmetic average

c. volatility

You own a portfolio that is invested 38 percent in Stock A, 43 percent in Stock B, and the remainder in Stock C. The expected returns on these stocks are 10.9 percent, 15.4 percent, and 9.1 percent, respectively. What is the expected return on the portfolio? a. 10.55 percent b. 11.02 percent c. 11.67 percent d. 12.49 percent e. 13.05 percent

d. 12.49 percent **

One year ago, LaTresa purchased 600 shares of Outland Co. stock for $3,600. The stock does not pay any regular dividends but it did pay a special dividend of $0.30 a share last week. This morning, she sold her shares for $7.25 a share. What was the total return on this investment? a. 18.00 percent b. 20.83 percent c. 22.50 percent d. 25.83 percent e. 28.24 percent

d. 25.83 percent

Which of the following features are advantages of the dividend growth model? I. Easy to understand II. Model simplicity III. Constant dividend growth rate IV. Model's applicability to all common stocks a. II only b. I and III only c. II and IV only d. I and II only e. I, II, and III only

d. I and II only

The systematic risk principle states that the expected return on a risky asset depends only on which one of the following? a. Unique risk b. Diversifiable risk c. Asset-specific risk d. Market risk e. Unsystematic risk

d. Market risk

Portfolio diversification eliminates which one of the following? a. Total investment risk b. Portfolio risk premium c. Market risk d. Unsystematic risk e. Reward for bearing risk

d. Unsystematic risk

Systematic risk is: a. totally eliminated when a portfolio is fully diversified. b. defined as the total risk associated with surprise events. c. risk that affects a limited number of securities. d. measured by beta. e. measured by standard deviation.

d. measured by beta.

Standard deviation measures _____ risk while beta measures _____ risk. a. systematic; unsystematic b. unsystematic; systematic c. total; unsystematic d. total; systematic e. asset-specific; market

d. total; systematic

One year ago, you purchased 500 shares of stock for $12 a share. The stock pays $0.22 a share in dividends each year. Today, you sold your shares for $28.30 a share. What is your total dollar return on this investment? a. $6,222 b. $7,432 c. $8,150 d. $7,775 e. $8,260

e. $8,260 = 500 * ( 0.22 + 28.30 - .12 ) = 500 * 16.52= 8260

A firm wants to create a WACC of 10.4 percent. The firm's cost of equity is 14.5 percent and its pretax cost of debt is 8.5 percent. The tax rate is 34 percent. What does the debt-equity ratio need to be for the firm to achieve its target WACC? a. 0.51 b. 0.57 c. 0.62 d. 0.70 e. 0.86

e. 0.86

Currently, the risk-free rate is 4.0 percent. Stock A has an expected return of 9.6 percent and a beta of 1.08. Stock B has an expected return of 13.5 percent. The stocks have equal reward-to-risk ratios. What is the beta of Stock B? a. 1.21 b. 1.33 c. 1.52 d. 1.78 e. 1.83

e. 1.83 *

Given the following information, what is the variance of the returns on this stock? State of Economy BOOM NORMAL RECESSION Probability of State of Economy .18 .77 .05 Rate of Return .29 .14 -.45 a. 0.021387 b. 0.021449 c. 0.021506 d. 0.021538 e. 0.0215641

b. 0.021449 **

Cromwell's Interiors is considering a project that is equally as risky as the firm's current operations. The firm has a cost of equity of 13.7 percent and a pretax cost of debt of 8.4 percent. The debt-equity ratio is .65 and the tax rate is 40 percent. What is the cost of capital for this project? a. 9.97 percent b. 10.29 percent c. 11.38 percent d. 11.62 percent e. 12.30 percent

b. 10.29 percent

Over the past six years, a stock had annual returns of 14 percent, -3 percent, 8 percent, 21 percent, -16 percent, and 4 percent, respectively. What is the standard deviation of these returns? a. 11.27 percent b. 13.05 percent c. 13.59 percent d. 15.08 percent e. 14.40 percent

b. 13.05 percent *

The Green Balloon just paid its first annual dividend of $0.12 a share. The firm plans to increase the dividend by 3.5 percent per year indefinitely. What is the firm's cost of equity if the current stock price is $6.50 a share? a. 5.35 percent b. 5.41 percent c. 14.42 percent d. 18.79 percent e. 19.98 percent

b. 5.41 percent

Your portfolio has provided you with returns of 8.6 percent, 14.2 percent, -3.7 percent, and 12.0 percent over the past four years, respectively. What is the geometric average return for this period? a. 7.25 percent b. 7.54 percent c. 7.57 percent d. 7.63 percent e. 9.55 percent

b. 7.54 percent *

The weighted average cost of capital is defined as the weighted average of a firm's: a. return on its investments. b. cost of equity and its aftertax cost of debt. c. pretax cost of debt and equity securities. d. bond coupon rates. e. dividend and capital gains yields.

b. cost of equity and its aftertax cost of debt.

What is the beta of the following portfolio? Stock Value Beta J $21,600 1.48 K 13,000 1.13 L 46,000 .99 M 19,800 1.08 a. 1.13 b. 1.15 c. 1.17 d. 1.21 e. 1.23

a. 1.13

Home Grown Tomatoes stock returned 28.7 percent, 2.6 percent, 13.1 percent, 12.2, and 11.8 percent over the past five years, respectively. What is the arithmetic average return for this period? a. 13.68 percent b. 14.62 percent c. 15.10 percent d. 15.93 percent e. 17.10 percent

a. 13.68 percent = ( 28.7+ 2.6 + 13.1 + 12.2 + 11.8)=68.4 / 5 = 13.68

The common stock of Contemporary Interiors has a beta of 1.65 and a standard deviation of 27.4 percent. The market rate of return is 13.2 percent and the risk-free rate is 4.8 percent. What is the cost of equity for this firm? a. 18.66 percent b. 18.76 percent c. 21.08 percent d. 24.40 percent e. 26.05 percent

a. 18.66 percent

The lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk. a. lower; lower b. lower; higher c. higher; lower d. higher; higher e. You cannot determine anything about the expected rate of return from the standard deviation.

a. lower; lower