Fin 310 Exam 3

The expected return of Fizbin Inc. stock is 14%. The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT? a. The stock's dividend yield is 8%. b. The stock's dividend yield is 7%. c. The stock's dividend yield is 7%. d. The stock price is expected to be $54 a share one year from now. e. The stock price is expected to be $57 a share one year from now.

??? d. The stock price is expected to be $54 a share one year from now.

Other things held constant, if expected inflation rate decreases and investors also become more risk averse, the security market line would be affected as follows: A) The y-axis intercept would decline, and the slope would increase. B) The x-axis intercept would decline, and the slope would increase. C) The y-axis intercept would increase, and the slope would decline. D) The SML would be affected only if betas changed. E) Both the y-axis intercept and the slope would increase, leading to higher required returns.

A) The y-axis intercept would decline, and the slope would increase.

Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $80.00 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1? A. $3.40 B. $4.25 C. $3.57 D. $3.23 E. $2.89

A. $3.40

If markets are in equilibrium, which of the following conditions will exist? A. Each stock's expected return should equal its realized return as seen by the marginal investor. B. Each stock's expected return should equal its required return as seen by the marginal investor. C. All stocks should have the same expected return as seen by the marginal investor. D. The expected and required returns on stocks and bonds should be equal. E. All stocks should have the same realized return during the coming year. Best Answer

B. Each stock's expected return should equal its required return as seen by the marginal investor.

Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 3.50% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now? a. $41.87 b. $52.33 c. $46.89 d. $40.61 e. $36.42

a. $41.87

Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $4.00 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell? a. $61.54 b.$64.62 c.$48.00 d.$52.92 e.$63.38

a. $61.54

Pic Inc. is considering an investment that has an expected return of 24% and a standard deviation of 10% what is the investment's coefficient of variation? round final answer to 2 decimal places a. 0.42 b. 0.49 c. 0.52 d.0.50 e. 0.46

a. 0.42

which of following statements is correct? a. an investor can eliminate virtually all diversifiable risk if he or she holds a very large, well-diversified portfolio os stocks. b. the higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio c. it is impossible to have a situation where the market risk of a single stock in less than that of a portfolio that includes the stock d. once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk by even a small amount e. an investor can eliminate virtually all market risk if he or she holds a very large and well diversified portfolio of stocks

a. An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well diversified portfolio of stocks.

Which of the following is NOT a potential problem when estimating and using betas, i.e. which state ment is FALSE? a. The beta of an "average stock," or "the market," can change over time, sometimes drastically. b. Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta. c. The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. This calculated historical beta may differ from the beta that exists in the future. d. The fact that a security or project may not have a past history that can be used as the basis for calculating beta. e. Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.

a. The beta of an "average stock," or "the market," can change over time, sometimes drastically.

which one of the following security classes has the highest standard deviation of returns? a. common stocks b. long-term treasury bills c. treasury bills d. corporate bonds

a. common stocks

investment risk can best be described as the: a. dispersion of possible returns b. elimination of macro risk through diversification c. possibility of changes in the cost of capital d. level of systemic risk for an undiversified investor

a. dispersion of possible returns

investment risk can best be described as the: a. dispersion of possible returns b. elimination of macro risk through diversification c. possibility of changes in the cost of capital d. level of systematic risk for an undiversified investor

a. dispersion of possible returns

if the liquidation value of a corporation exceeds the market value of the equity, then the: a. firm has no value as a going concern b. firm's stock will sell for book value c. firm is not taking advantage of available growth opportunities d. dividend payout ratio has been too high

a. firm has no value as a going concern

what happens to a firm that reinvests its earnings at a rate equal to the firm's required return? a. its stock price will remain constant b. its stock price will increase by the sustainable growth rate c. its stock price will decline unless the dividend payout ratio is zero d. its stock price will decline unless the plowback rate exceeds the required return

a. its stock price will remain constant

which one of the following guarantees is offered to common stock investors? a. no guarantees of any form b. guarantee only to receive a refund of principal c. guarantee to receive dividends d. guarantee to receive capital gains

a. no guarantees of any form

the appropriate opportunity cost of capital is the return that investors give up in alternative investments that: a. possess the same level of risk b. earn the risk-free rate of return c. are included in the s&p 500 index d. earn the average market rate of return

a. possess the same level of risk

companies that are exposed to the business cycle: a. tend to have high market risk b. tend to have a low market risk c. have a negligible specific risk d. are safe investments

a. tend to have high market risk

which of the following statements is correct ? a. the constant growth model takes into consideration the capital gains investors expect to earn on a stock b. Two firms with the same expected dividend and growth rates must also have the same stock price. c. It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. d. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

a. the constant growth model takes into consideration the capital gains investors expect to earn on a stock

Stock A has a beta of 0.8 and stock B has a beta of 1.2. 50% of portfolio P is invested in stock A and 50% is invested in stock B. if the market risk premium (rm-rrf) were to increase but the risk-free rate(rfr) remained constant, which of the following would occur? a. the required return would increase for both stocks but the increase would be greater for stock B than for stock A b. the required return would decrease by the same amount for both stock A and Stock B c. the required return would increase for stock A but decrease for stock B d. the required return on portfolio P would remain unchanged e. the required return would increase for stock B but decrease for stock A

a. the required return would increase for both stocks but the increase would be greater for stock B than for stock A

which of the following statements is correct? a. the slope of the security market line is equal to the market risk premium b. lower beta stocks have higher required returns c. a stock's beta indicates its diversifiable risk d. diversifiable risk cannot be completely diversified away e. two securities with the same stand-alone risk must have the same betas

a. the slope of the security market line is equal to the market risk premium

the variance of an investment's return is a measure of the: a. volality of the rates of return b. average value of the investment c. probablity of a negatvie return d. historic return. over long time periods

a. volality of the rates of return

which of the following is true for a firm having a stock price of $42, and expected dividend of $3, and a sustainable growth rate of 8%? a.it has a required return of 15.14% b. it has a dividend yield of 7.35% c. the stock price is expected to be $45 next year d. it has a capital appreciation rate of 7.14%

a.it has a required return of 15.14%

A firm has 120,000 shares of stock outstanding, a sustainable rate of growth of 3.8, and $648,200 in next year's free cash flows. What value would you place on a share of this firm's stock if you require a 14% rate of return? a. $48.09 b. $52.96 c. $54.02 d. $61.58

b. $52.96

Dothan Inc.'s stock has a 25% chance of producing a 36% return, a 50% chance of producing a 12% return, and a 25% chance of producing a −18% return. What is the firm's expected rate of return? a. 9.35% b. 10.50% c. 10.40% d. 9.14% e. 11.76%

b. 10.50%

which of the following statements is correct? a. a major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights b. One of the disadvantages to a corporation of owning preferred stock is that 50% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free. c. One of the advantages to financing with preferred stock is that 50% of the dividends paid out are tax deductible to the issuer. d. Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock.

b. One of the disadvantages to a corporation of owning preferred stock is that 50% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free.

which of the following statements is NOT correct? a. the corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends b. The corporate valuation model discounts free cash flows by the required return on equity. c. The corporate valuation model can be used to find the value of a division. d. Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or continuing, value.

b. The corporate valuation model discounts free cash flows by the required return on equity.

what is the typical relationship between the standard deviation of an individual common stock and the standard deviation of a diversified portfolio of common stocks? a. The individual stock's standard deviation will be lower. b. The individual stock's standard deviation will be higher. c. The standard deviations should be equal. d. There is no way to predict this relationship.

b. The individual stock's standard deviation will be higher.

One common reason for reporting standard deviations of percentage returns rather than variances is that standard deviations: a. are lower b. are stated in understandable percentages c. account properly for negative returns d. take probability estimates into consideration

b. are stated in understandable percentages

individual stocks are: a. exposed to differing amounts of the market risk but the same amount of specific risk b. exposed to differing amounts of market risk c. not exposed to market risk; only the general economy is subject to market risk d. exposed to the same amount of market risk but differing amounts

b. exposed to differing amounts of market risk

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT? a. the two stocks must have the same dividend per share b. if one stock has a higher dividend yield, then it must also have a lower dividend growth rate c. if one stock has a higher dividend yield, then it must also have a higher dividend growth rate d. the two stocks must have the same dividend growth rate e. the two stocks must have the same dividend yield

b. if one stock has a higher dividend yield, then it must also have a lower dividend growth rate

Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2. The returns on the two stocks have a correlation coefficient of +0.6. You have a portfolio that consists of 50% A and 50% B. Which of the following statements is CORRECT? a. the portfolio's beta is less than 1.2 b. the portfolio's expected return is 15% c. the portfolio's standard deviation is greater than 20% d. the portfolio's beta is greater than 1.2 e. the portfolio's standard deviation is 20%

b. the portfolio's expected return is 15%

The idea that investors on average have earned a higher return from common stocks than from treasury bills supports the view that: a. investors are irrational b. there is a relationship between risk and return c. real rates of return will be lower during periods of price stability d. stocks should be avoided when inflation is low

b. there is a relationship between risk and return

ABC common stock is expected to have extraordinary growth of 20% per year for two years, at which time the growth rate will settle into a constant 6%. If the discount rate is 15% and the most recent dividend was $2.50, what should be the current share price? a. $31.16 b. $33.23 c. $37.39 d. $47.77

c. $37.39

a stock is expected to pay a dividend of $0.75 at the end of the year. the required rate of return is rs-10.5% and the expected constant growth rate is g-8.6%. what is the stock's current price? a. $36.32 b. $37.11 c. $39.47 d. $43.03 e. $47.76

c. $39.47

Suppose Boyson Corporation's projected free cash flow for next year is FCF1 = $250,000, and FCF is expected to grow at a constant rate of 6.5%. Assume the firm has zero non-operating assets. If the company's weighted average cost of capital is 11.5%, then what is the firm's total corporate value? a. $3,850,000 b. $4,000,000 c. $5,000,000 d. $5,050,000 e.$ 4,200,000

c. $5,000,000

a project's expected return is 15%, which represents a 35% return in a boom and a 5% return in a stagnant economy. what is the probability of a boom if these are only two economic states? a. 18.33% b. 25% c. 33.33% d. 50%

c. 33.33%

if D1=1.25, g(which is constant) =4.7% and P0= $30.00, then what is the stock's expected dividend yield for the coming year? a. 4.13% b. 3.17% c. 4.17% d. 3.25% e. 3.38%

c. 4.17%

What constant growth rate in dividends is expected for a stock valued at $32.40 if next year's dividend is forecast at $2.20 and the appropriate discount rate is 13.6%? a. 7.02% b. 6.59% c. 6.81% d. 7.38%

c. 6.81%

Kara has a portfolio of 20 average stocks, and Drew has a portfolio of 2 average stocks. Assuming the market is in equilibrium, which of the following statements is correct? a. the expected return on Kara's portfolio must be lower than the expected return on Drew's portfolio because kara is more diversified b. if the two portfolios have the same beta, their required returns will be the same, but Kara's portfolio will have less market risk than Drew's c. Drew's portfolio will have more a diversifiable risk, the same market risk, and thus more total risk than Kara's portfolio, but the required (and expected) returns will be the same on both portfolios. d. the required return on Kara's portfolio will be lower than that on Drew's portfolio because Kara's portfolio will have less total risk e. Kara's portfolio will have less diversifiable risk and also less market risk than Drew's portfolio

c. Drew's portfolio will have more a diversifiable risk, the same market risk, and thus more total risk than Kara's portfolio, but the required (and expected) returns will be the same on both portfolios.

The benefits of portfolio diversification are highest when the individual securities within the portfolio have returns that: a. vary directly with the rest of the portfolio b. vary proportionally with the rest of the portfolio c. are largely uncorrelated with the rest of the portfolio d. are perfectly correlated with the market portfolio

c. are largely uncorrelated with the rest of the portfolio

For a firm that repurchases its stock, firm value is most easily estimated by discounting _______________ a. dividends plus repurchases per share b. repurchases rather than dividends c. free cash flows d. pre-repurchase earnings per share

c. free cash flows

it is possible to ignore cash dividends that occur very far into the future because those dividends: a. will most likely be paid to a different investor b. will most likely not be paid c. have an insignificant present value d. have a minimal, if any, potential rate of growth

c. have an insignificant present value

a good way to reduce macro risk in a stock portfolio is to invest in stocks that: a. have only specific risks b. have diversified away the macro risk c. have low exposure to business cycles d. pay guaranteed dividends

c. have low exposure to business cycles

the value of common stock will likely decrease if: a. the investment horizon decreases b. the growth rate of dividends increases c. the discount rate increases d. dividends are discounted back to the present

c. the discount rate increases

which statement is correct ? a. stock repurchases invalidate the dividend discount model b. stock repurchases do not add value to a business and can be ignored c. when there are repurchases, it is simpler to value a business by discounting the free cash flow d. stock repurchases increase the number of shares and make it difficult to forecast dividends per share.

c. when there are repurchases, it is simpler to value a business by discounting the free cash flow

what is the minimum amount shareholders should expect to receive in the event of a complete corporate liquidation ? a. market value of equity b. book value of equity c. zero d. shareholders may be required to pay to be liquidated

c. zero

An investor holds a stock for one year. She then receives a dividend of $10 and sells the stock for $120. if her return was 16% at what price did she buy the stock? a. $103.45 b. $64.8-0 c. $139.20 d. $112.07

d. $112.07

Hunter Corporation just paid a dividend of D0= $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company's beta is 0.75, the required return on the market is 10.50% and the risk-free rate is 4.50%. what is the company 's current stock price? a. $27.80 b. $28.76 c. $31.63 d. $31.95 e. $33.23

d. $31.95

Pat O'Neill has a $100,000 invested in a 2- stock portfolio. $32,500 is invested in stock X and the remiander is invested in stock Y. X's beta is 1.50 and Y's beta is 0.70. what is the portfolio's beta? a. 1.06 b. 1.25 c. 0.72 d. 0.96 e. 0.77

d. 0.96

If D1-$2.25, g (which is constant) -3.5% and P0 -$52, then what is the stock's expected dividend yield for the coming year? a. 3.36% b. 3.81% c. 4.61% d. 4.48% e. 4.25%

d. 4.48%

which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio? a. variance; correlation coefficient b. standard deviation; correlation coefficient c. beta; variance d. coefficient of variation; beta e. beta; beta

d. coefficient of variation; beta

the required return on an equity security is comprised of a : a. dividend yield and ROE b. current yield and a terminal value c. sustainable growth rate and a plowback yield d. dividend yield and a capital gains yield

d. dividend yield and a capital gains yield

Stock A's beta is 1.5 and Stock By beta is 0.5. Which of the following statements must be true, assuming the CAPM is correct? a. when held in isolation, Stock A has more risk than stock B b. stock b would be a more desirable addition to a portfolio than a c. stock a would be a more desirable addition to a portfolio then stock b d. in equilibrium the expected return on stock a will be greater than that on b e. in equilibrium, the expected return on stock b will be greater than that on stock a

d. in equilibrium the expected return on stock a will be greater than that on b

an increase in a firm's expected growth rate would cause its required rate of return to a. increase b. decrease c. fluctuate less than before d. possibly increase, possibly decrease, or possibly remain constant

d. possibly increase, possibly decrease, or possibly remain constant

which one of the following situations is most likely to occur today for a stock that went down in price yesterday? a. the stock will increase in price b. the stock will decrease in price c. the stock has a 30% chance of decreasing in price d. the stock has no predictable price-change pattern

d. the stock has no predictable price-change pattern

Investors are willing to purchase stocks having high P/E ratios because: a. they expect these shares to sell for a lower price. b. they expect these shares to offer higher dividend payments. c. these shares are accompanied by guaranteed earnings. d. they expect these shares to have greater growth opportunities

d. they expect these shares to have greater growth opportunities

Tyson Mining is expected to pay a dividend of $1.25 per share at the end of the year (D1= $1.25). The stock sells for $22.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate? a. 5.88% b. 4.25% c. 4.30% d. 4.90% e. 4.94%

e. 4.94%

If D1 - $1.25, g (which is constant) - 5.5% and P0- $36, then what is the stock's expected total return for the coming year? a. 7.99% b. 7.00% c. 7.54% d. 8.88% e. 8.97%

e. 8.97%

If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium. a. The expected return on the stock is 5% a year. b. The stock's dividend yield is 5%. c. The price of the stock is expected to decline in the future. d. The stock's required return must be equal to or less than 5%. e. The stock's price one year from now is expected to be 5% above the current price.

e. The stock's price one year from now is expected to be 5% above the current price.