Finance 3050 Test 3

An investment will make one payment of $22,500 nine years from now. What is the current value of this investment if the nominal rate of return is 4.8%?

A) $14,754.72

Sony hasbeta of 0.92 and just paiddividend of55 cents per share.Its dividends are expected to grow atrate of 12 percent.If the risk-free rate is 2.2 percent and the market risk premium is 11.74 percent, what is the fair price ofshare of Sony stock?

A) $61.60

Collectibles Corp. has a beta of 2.5 and a standard deviation of returns of 20%. The return on the market portfolio is 15% and the risk-free rate is 4%. According to CAPM, what is the required rate of return on Collectible's stock?

A) 31.5%.

Roku just paiddividend of $6 per share which are expected to increaseͶpercent per year.If Roku's stock is valued at $156 per share using the Gordon Growth Model, what is Roku's cost of capital?

A) 8.0 percent

A coupon bond that pays interest annually is selling at a par value of $1,000, matures in five years, and has a coupon rate of 9%. The yield to maturity on this bond is

A) 9.0%

If you are a risk-averse investor, which one is the better choice? (SEE #1) A) Stock A B) Stock B C) Either stock would be acceptable D) It depends on the return on the market portfolio E) Cannot be determined with information given

A) Stock A

Which one of the following statements is correct concerning discount bonds? A) The current yield is less than the yield to maturity. B) Only zero-coupon bonds sell at a discount. C) The bonds will be redeemed at maturity for less than face value. D) The clean price is greater than the dirty price. E) The coupon rate is greater than the current yield.

A) The current yield is less than the yield to maturity.

On a reward/risk chart, where will a security's data point be located in relation to the security market line (SML) if it is considered to be a "buy" because it is underpriced? A) above the SML B) on or above the SML C) on the SML D) below the SML . E) on or below the SML

A) above the SML

The Gordon Growth Model can be used only when the ________. A) growth rate is less than the required return B) growth rate is greater than the required return C) growth rate is less than or equal to the required return D) growth rate is greater than or equal to the required return E) all of the above

A) growth rate is less than the required return

A discount bond: A) has a face value that exceeds the market value. B) has a rating of C or less. C) has a par value that is less than $1,000. D) pays a variable coupon payment. E) has a market price in excess of face value.

A) has a face value that exceeds the market value.

Bond prices and bond yields are: A) inversely related. B) directly related. C) independent of each other. D) positively related. E) uncorrelated.

A) inversely related.

The Container Store's stock has an expected return of 13.25% and a beta of 1.4. The market return is 10.75% and the risk-free rate is 4.5%. This stock is ________ because the CAPM return for the stock is ________%. A) priced correctly; 13.25 B) overvalued; 14.91 C) undervalued; 12.91 D) undervalued; 16.50 E) overvalued; 16.50

A) priced correctly; 13.25

Each of two stocks,and B, is expected to paydividend of $7 in the upcoming year. The expected growth rate of dividends is 6% for both stocks. You requirereturn of 10% on stockand a return of 12% on stock B. Using the Gordon Growth Model, the intrinsic value of stock________. A) will be higher than the intrinsic value of stock B B) will be less than the intrinsic value of stock B C) will be the same as the intrinsic value of stock B D) it depends on general market conditions E) The answer cannot be determined from the information given.

A) will be higher than the intrinsic value of stock B

You want to earnreturn of 10% on each of two stocks,and B. Each of the stocks is expected to paydividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the Gordon Growth Model, the intrinsic value of stock________. A) will be higher than the intrinsic value of stock B B) will be less than the intrinsic value of stock B C) will be the same as the intrinsic value of stock B D) it depends on general market conditions E) the answer cannot be determined from the information given.

A) will be higher than the intrinsic value of stock B

You want to earnreturn of 11% on each of two stocks,and B. Stockis expected to pay a dividend of $3 in the upcoming year, while stockis expected to paydividend of $2 in the upcoming year. The expected growth rate of dividends for both stocks is 4%. Using the Gordon Growth Model, the intrinsic value of stock________. A) will be higher than the intrinsic value of stock B B) will be less than the intrinsic value of stock B C) will be the same as the intrinsic value of stock B D) it depends on general market conditions E) The answer cannot be determined from the information given.

A) will be higher than the intrinsic value of stock B

Precision Engineering recently announced that its next annual dividend will be $1.20 per share with later dividends increasing by 2.5 percent annually. What is the current value of this stock to you if you expect the return to be 12 percent?

B) $12.63

You are considering two bonds. Both have semiannual, 8% coupons, $1,000 face values, and yields to maturity of 7.5%. Bond S matures in 4 years and Bond L matures in 8 years. What is the difference in the current prices of these bonds?

B) $12.67

The Fish House increases its dividend each year. The next annual dividend is expected to be $2.32share. Future dividends will increase by 4.0 percent annually. What is the current value of this stock if its expected return isͺpercent?

B) $58.00

You want to purchase a security that will pay you $1,000 six years from now. If you want to earn an annual nominal rate of 5.35%, how much should you pay for this investment today?

B) $731.46

Westinghouse has bonds outstanding with a par value of $1,000 and a 6% coupon. The bonds mature in 9 years and pay interest semiannually. What is the current value of these bonds if the yield to maturity is 7%?

B) $934.05

What is the Beta of Roland Corporation? (SEE #3)

B) 0.69

Which one of the following betas represents the greatest level of systematic risk? A) 0.05 B) 1.27 C) 0.68 D) 1.00 E) 1.19

B) 1.27

What is the beta of a 5-asset portfolio consisting of the following? (SEE #2)

B) 1.39

Travel Pro's stock has a beta of 1.2. If the expected risk-free return is 4% and the expected market risk premium is 9%, what is the expected return on Travel Pro's stock?

B) 14.8%

Marvell Technology Group [MRVL] has a beta of 1.27 and a Treynor Ratio of 0.1043. If the risk-free rate is 2%, what is the expected return on MRVL?

B) 15.25%

The expected return on Morehouse Enterprises was 11%, while the realized return was 28%. What is Jensen's Alpha for Morehouse Enterprises?

B) 17%.

You are considering an investment in First Allegiance Corp. The firm has a beta of 1.6. Currently, U.S. Treasury bills are yielding 2.75% and the expected return for the S & P 500 is 14%. What rate of return should you expect for your investment in First Allegiance?

B) 20.75%.

A bond pays semiannual interest payments of $35.25. What is the coupon rate if the par value is $1,000?

B) 7.05%

A coupon bond that pays interest semiannually is selling at a par value of $1,000, matures in seven years, and has a coupon rate of 8.6%. The yield to maturity on this bond is

B) 8.6%

The stock of Whole Foods has a beta of 0.88. The risk-free rate is 3.8% and the market return is 9.6%. What is the expected return on Whole Foods' stock?

B) 8.90%

The yield-to-maturity assumes which one of the following? A) The bond is a pure discount bond. B) All coupon payments are reinvested at the yield-to-maturity rate. C) The bond is purchased at par value. D) All interest payments earn the latest rate of market interest. E) The bond has no interest rate risk.

B) All coupon payments are reinvested at the yield-to-maturity rate.

Which asset has the most total risk? (SEE #4) A) Moe B) Miney C) Meenie D) Eenie E) Cannot be determined from the given information

B) Miney

Which of the following is false regarding the Gordon Growth Model? A) It value company's stock using an assumption of constant dividend growth. B) The company's growth rate must be greater than its expected return. C) It is method to calculate the intrinsic value of stock. D) It can be used to identify stocks that are over and under valued. E) Stocks that do not pay dividends will have zero value.

B) The company's growth rate must be greater than its expected return.

Which of the following investments is considered the least risky? A) Treasury bonds B) Treasury bills C) Low beta stocks D) commercial paper E) AAA corporate bonds

B) Treasury bills

Which one of the following is the risk that market rates may increase causing the price of a bond to decline? A) inflation risk B) interest rate risk C) reinvestment risk D) default risk E) yield risk

B) interest rate risk

Three years ago, General Motors issued 10-year bonds with a 10% coupon and semiannual interest payments. What is the market price of a $1,000 bond if the yield to maturity is 9%?

C) $1,051.11

What is the beta of a risk-free security? A) 2.00 B) 1.50 C) 0.00 D) 0.50 E) 1.00

C) 0.00

A risky asset has a beta of 0.90 and an expected return of 7.4%. What is the Treynor Ratio if the riskfree rate is 2.69%? A) 0.0841 B) 0.0404 C) 0.0523 D) 0.1159 E) 0.0651

C) 0.0523

The model used to valuestock that paysdividend which increases atconstant rate forever is referred to as which one of the following? Assume the growth rate is less than the discount rate. A) irregular growth perpetual model B) increasing valuation growth model C) Gordon Growth Model D) two-stage growth model E) diminishing valuation growth model

C) Gordon Growth Model

Which asset has the highest expected return? (SEE #4) A) Eenie B) Miney C) Moe D) Meenie E) Cannot be determined from the given information

C) Moe

Which one of the following statements is correct concerning premium bonds? A) The coupon rate is less than the current yield. B) The par value exceeds the face value. C) The yield to maturity is less than the coupon rate. D) The premium increases when interest rates increase. E) As the time to maturity decreases, the premium increases.

C) The yield to maturity is less than the coupon rate.

Which one of the following has the highest expected risk premium? A) mutual fund with a beta of 0.89 B) portfolio with a beta of 1.06 C) individual stock with a beta of 1.46 D) U.S. Treasury bill E) individual stock with a beta of 0.94

C) individual stock with a beta of 1.46

H&M's stock has a return of 11.00% and a beta of 1.4. The market return is 10.75% and the risk-free rate is 4.0%. This stock is ________ because the CAPM return for the stock is ________%. A) undervalued; 13.45 B) priced correctly; 13.25 C) overvalued; 13.45 D) overvalued; 12.91 E) undervalued; 12.91

C) overvalued; 13.45

The yield to maturity is the: A) rate computed by dividing the annual interest by the par value. B) rate computed as the annual interest divided by the market value. C) rate that equates a bond's price with the present value of its future cash flows. D) rate used to compute the amount of each interest payment. E) rate you will earn if your bond is converted to common stock.

C) rate that equates a bond's price with the present value of its future cash flows.

Hillshire Farms' stock has a beta of .84 and a return of 7.8%. The risk-free rate is 2.6% and the market risk premium is 6%. This stock is ________ because the CAPM return for the stock is ________%. A) overvalued; 7.64 B) undervalued; 7.34 C) undervalued; 7.64 D) overvalued; 7.34 E) undervalued; 7.49

C) undervalued; 7.64

A bond has 8 years to maturity, a 7% coupon, a $1,000 face value, and pays interest semiannually. What is the bond's current price if the yield to maturity is 6%?

D) $1,062.81

Blue Water Tours just paid an annual dividend of 80 cents per share. The firm haspolicy of increasing the dividend by 3.5 percent annually. What is the current value of this stock if its expected return is 10 percent?

D) $12.74

A zero-coupon bond has a yield to maturity of 9% and a par value of $1,000. If the bond matures in eight years, what should be the bond's price today?

D) $501.87

You want to purchase a security that will pay you $1,000 five years from now. If you want to earn an annual nominal rate of 5.5%, how much should you pay for this investment today?

D) $765.13

What is the average return on Roland? (SEE #3)

D) 14.8%.

If we are able to fully diversify, what is the appropriate measure of risk to use? A) Expected Return B) Risk-free Rate of Return C) Standard Deviation D) Beta E) Treynor Ratio

D) Beta

Which asset has the least market risk? (SEE #4) A) Meenie. B) Miney. C) Moe. D) Eenie. E) Cannot be determined from the given information.

D) Eenie.

Which one of the following statements applies to diversifiable risk? A) This risk is related to expected returns on well-diversified portfolios. B) Investors receive a risk premium as compensation for accepting this risk. C) It is a type of risk that applies to all securities. D) It can be eliminated through portfolio diversification. E) It is also called market risk.

D) It can be eliminated through portfolio diversification.

Which one of the following will occur if a bond's discount rate is lowered? A) Face value will increase. B) Coupon payment amount will decrease. C) Current yield will increase. D) Market price will increase. E) Coupon rate will decrease.

D) Market price will increase.

Which one of the following is computed by dividing a portfolio's risk premium by the portfolio beta? A) Raw Return B) Sharpe Ratio C) Jensen's Alpha D) Treynor Ratio E) Value-at-Risk

D) Treynor Ratio

At issue, coupon bonds typically sell: A) at a value unrelated to par. B) below par value. C) above par value. D) at or near par value. E) None of the answers are correct.

D) at or near par value.

Which one of the following terms is used to identify the evaluation method that determines the value ofstock by reviewingfirm's financial statement in conjunction with other financial and economic information? A) prediction valuation B) conceptual analysis C) discounted valuation D) fundamental analysis E) technical analysis

D) fundamental analysis

A premium bond is defined as a bond that: A) has a face value that exceeds its market value. B) is selling for less than face value. C) has a rating of B or higher. D) has a market price that exceeds par value. E) has less interest rate risk.

D) has a market price that exceeds par value.

The capital asset pricing model: A) provides a risk-return trade-off in which risk is measured in terms of market volatility. B) depicts the total risk of a security. C) measures risk as the coefficient of variation between security and market return. D) provides a risk-return trade-off in which risk is measured in terms of beta. E) none of the above.

D) provides a risk-return trade-off in which risk is measured in terms of beta.

You have a naively diversified portfolio containing three stocks which have betas of 1.16, 1.34, and 1.02. You would like to add a fourth security such that your portfolio beta will match that of the market. Given this, the new security should have a beta of:

E) 0.48

What is the average return on the market? (SEE #3)

E) 14.0%.

Which one of the following terms is another name for systematic risk? A) Diversifiable Risk B) Firm Risk C) Unique Risk D) Asset-specific Risk E) Market risk

E) Market risk

Which market index is most widely used as a proxy for the market portfolio in CAPM? A) Jansen Fund B) U.S. Treasury Bill C) Dow Jones Industrial Average D) Wilshire 5000 E) S&P 500

E) S&P 500

You are comparing three securities and discover they all have identical Treynor Ratios. Given this information, which one of the following must be true regarding these three securities? A) They have the same rates of return. B) They have identical betas. C) They have identical Sharpe Ratios. D) They earn identical rewards per unit of total risk. E) They earn identical rewards per unit of systematic risk.

E) They earn identical rewards per unit of systematic risk.

Which one of the following is the best indication that a security is correctly priced according to the Capital Asset Pricing Model? A) a Beta of 0.0 B) an Alpha of 1.0 C) an Alpha of −1.0 D) a Beta of 1.0 E) an Alpha of 0.0

E) an Alpha of 0.0

Systematic risk: A) can almost be eliminated by investing in 30 diverse securities. B) has little, if any, impact on the actual realized returns for a diversified portfolio. C) can be cut in half by investing in 10 stocks provided each stock is in a different industry. D) should be ignored by investors. E) remains constant regardless of the number of securities held in a portfolio.

E) remains constant regardless of the number of securities held in a portfolio.