Fin Section 3

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? $6,222 $7,432 $8,150 $8,260

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

Sarah earned a 2.9 percent real rate of return on her investments for the past year. During that time, the risk-free rate was 4.1 percent and the inflation rate was 3.6 percent. What was her nominal rate of return?

(1 + Nominal Rate) = (1 + real rate)(1+inflation rate) (1 + Nominal Rate) = (1.029)(1.036) = 1.066044 Nominal rate = 0.066044 = 6.6%

What is the variance of the returns on a portfolio that is invested 65 percent in stock Q and 35 percent in stock R? State of EconomyProbability of State of EconomyReturns if State OccursStock QStock RBoom25%15%8%Normal75%9%12%

.000117

Given the following information, what is the variance of the returns on this stock? State of Economy Probability of State of Economy Rate of ReturnBoom0.180.29Normal0.770.14Recession0.05-0.45 Group of answer choices0.021387 0.021449 0.021506 0.021538

0.021449

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

1,2, and 4 only

? The risk-free rate of return is 3.9 percent and the market risk premium is 6.2 percent. What is the expected rate of return on a stock with a beta of 1.21?

11.40 percentE(r) = 0.039 + (1.21?0.062) = 11.40 percent

One year ago, you bought a stock for $36.48 a share. You received a dividend of $1.62 per share last month and sold the stock today for $41.18 a share. What is the capital gains yield on this investment? 2.86 percent 4.70 percent 12.88 percent 15.62 percent

12.88 percent 41.18 = Purchase price 36.48. = Capital Gain = 41.18 - 36.48 = 4.70 Capital Gain Yield = 4.70/36.48 = 12.88%

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? 11.27 percent 13.05 percent 13.59 percent 15.08 percent

13.05 percent

What is the standard deviation of the returns on a $40,000 portfolio which consists of stocks C and D? Stock C is valued at $22,000. State of Economy Probability of State of Economy Returns if State OccursStock CStock DBoom20%15%4%Normal70%9%6%Recession10%-2%5% Group of answer choices1.16 percent1.61 percent2.31 percent2.61 percent

2.31 percent

Given the following information, what is the standard deviation of the returns on this stock? State of Economy Probability of State of Economy Rate of ReturnBoom0.040.26Normal0.740.17Recession0.22-0.44 Group of answer choices19.90 percent22.41 percent23.79 percent25.52 percent

25.52 percent

Kim's Bridal Shoppe has 15,000 shares of common stock outstanding at a price of $11 a share. It also has 2,000 shares of preferred stock outstanding at a price of $34 a share. There are 50 bonds outstanding that have a 7.5 percent semiannual coupon. The bonds mature in six years, have a face value of $1,000, and sell at 96 percent of par. What is the capital structure weight of the common stock? 24.20 percent 31.68 percent 53.15 percent 58.72 percent

= 15,000 shares * $ 11 + 2,000 shares * $ 34 + 50 bonds * ($ 1,000 * 96%) = $ 165,000 + $ 68,000 + $ 48,000 = $ 281,000 Value of Common Stock on issue = 15,000 shares * $ 11 = $ 165,000 Weight of Common Stock in Capital Structure = $ 165,000 / $ 281,000 = 58.72%

?? Julie wants to create a $5,000 portfolio. She also wants to invest as much as possible in a high risk stock with the hope of earning a high rate of return. However, she wants her portfolio to have no more risk than the overall market. Which one of the following portfolios is most apt to meet all of her objectives? Invest the entire $5,000 in a stock with a beta of 1.0 Invest $2,500 in a stock with a beta of 1.98 and $2,500 in a stock with a beta of 1.0 Invest $2,500 in a risk-free asset and $2,500 in a stock with a beta of 2.0 Invest $2,500 in a stock with a beta of 1.0, $1,250 in a risk-free asset, and $1,250 in a stock with a beta of 2.0

? Invest $2,500 in a risk-free asset and $2,500 in a stock with a beta of 2.0

A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock? An increase in the rate of return in a recessionary economy An increase in the probability of an economic boom A decrease in the probability of a recession occurring A decrease in the probability of an economic boom

A decrease in the probability of an economic boom

What is the beta of the following portfolio? Stock Value Beta J $21,600 1.48 K 13,000 1.13 L 46,000 0.99 M 19,800 1.08

A. 1.13 Portfolio value = $21,600 + $13,000 + $46,000 + $19,800 = $100,400 βP = ($21,600/$100,400)(1.48) + ($13,000/$100,400)(1.13) + ($46,000/$100,400)(0.99) + ($19,800/$100,400)(1.08) = 1.13

Electronic Products has 35,000 bonds outstanding that are currently quoted at 102.3. The bonds mature in 11 years and carry a 9 percent annual coupon. What is the firm's aftertax cost of debt if the applicable tax rate is 30 percent? 4.79 percent 6.07 percent 6.98 percent 8.67 percent

Annual interest = $100 * 0.09 = $9 $102.3 = $9 × (1 − (1+r)-11 / r) + $100 / (1+r)11 Solving this equation for r, we get r = 8.67% After tax cost of debt = 8.67% * (1 - 0.30) = 6.069% i.e. 6.07%

Bob's firm is a retail chain of specialty hardware stores. The firm has 21,000 shares of stock outstanding that are currently valued at $68 a share and provide a 13.2% rate of return. The firm also has 500 coupon bonds outstanding that have a face value of $1,000, a market price of $1,068, mature in 6 years and have a YTM of 5.648%. The tax rate is 35%. 5.6% 7.2% 9.5% 10.6%

Answer 1: Cost of debt = YTM of Bonds = 5.648% Answer 2: Cost of Equity = Rate of return on shares = 13.20% Answer 3: Market value of equity = Number of shares of stock outstanding * share price = 21000 * $68 = $1,428,000 Market value of debt = Number of bond outstanding * Price of bond = 500 * $1068 = $534,000 Total value = 1428000 + 534000 = $1,962,000 WACC: WACC = Cost of Equity * Weight of Equity + Cost of Debt * (1 - Tax rate) * Weight of debt = 13.20% * 1428000 / 1962000 + 5.648% * (1 - 35%) * 534000 / 1962000 = 10.61% WACC = 10.61%

Musical Charts just paid an annual dividend of $2.45 per share. This dividend is expected to increase by 3.3 percent annually. Currently, the firm has a beta of 1.09 and a stock price of $36 a share. The risk-free rate is 4.2 percent and the market rate of return is 12.6 percent. What is the cost of equity capital for this firm? 10.28 percent 11.84 percent 12.29 percent 13.42 percent

Answer is the average of the two methods (10.33+13.356)/2= 11.84%

Which one of the following is the slope of the security market line? A. Risk-free rate B. Market-risk premium C. Beta coefficient D. Risk premium on an individual asset

B. Market-risk premium Market risk premium is equal to the slope of the security market line (SML), a graphical representation of the capital asset pricing model (CAPM). Market Risk Premium = Market rate of return - Risk free return

Western Electric has 23,000 shares of common stock outstanding at a price per share of $57 and a rate of return of 14.2 percent. The firm has 6,000 shares of 7 percent preferred stock outstanding at a price of $48 a share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $350,000 and currently sells for 102 percent of face. The yield-to-maturity on the debt is 8.49 percent. What is the firm's weighted average cost of capital if the tax rate is 34 percent 12.69 percent 13.44 percent 14.19 percent 14.92 percent

Common Stock: 23,000 * $57 = $1,311,000Preferred Stock: 6,000 * $48 = $288,000Debt: $350,000 * 1.02 = $357,000Value = $1,956,000WACC = (1,311,000 / 1,956,000)(0.142) + (288,000 / 1,956,000)(0.07 * 100/48) + (357,000 / 1,956,000)(0.0849)(1 - 0.34) WACC = 12.69%

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?

Debt / Equity = 0.40 Wt of Debt = 0.40 / ( 0.4 + 1 ) = 0.4 / 1.4 = 0.2857 Wt of Equity = 1 - 0.2857 = 0.7143 WACC = [ We * Ke ] + [ Wd * Kd ( 1 - T ) ] Where We & Wd are weights of Equity and Debt respectively Ke & Kd are cost of Equity and debt respectively T = Tax Rate WACC = [ We * Ke ] + [ Wd * Kd ( 1 - T ) ] = [ 0.7143 * 15.8% ] + [ 0.2857 * 7.7% ( 1 - 0.35 ) ] = 11.29% + 1.43% = 12.72%

Which one of the following combinations will always result in an increased dividend yield? -Increase in the stock price combined with a lower dividend amount -Increase in the stock price combined with a higher dividend amount -Decrease in the stock price combined with a lower dividend amount -Decrease in the stock price combined with a higher dividend amount

Decrease in the stock price combined with a higher dividend amount

The 7.5 percent preferred stock of Home Town Brewers is selling for $45 a share. What is the firm's cost of preferred stock if the tax rate is 35 percent and the par value per share is $100?

Dividend per share of preferred stock = Par value per share x Dividend percentage = $100 x 7.50% = $7.50 per share Cost of preferred stock = Dividend per share / Market price per share = $7.50 / $45 = 0.1667 or 16.67

The common stock of Alpha Manufacturers has a beta of 1.14 and an actual expected return of 15.26 percent. The risk-free rate of return is 4.3 percent and the market rate of return is 12.01 percent. Which one of the following statements is true given this information?

Expected return = risk free rate + Beta (market rate -risk free rate) = 0.043 + 1.14 (0.1201-0.043) = 13.09% The actual expected stock return indicates the stock is currently underpriced as the actual expected return is above the CAPM return.

What is the expected return on a portfolio which is invested 25 percent in stock A, 55 percent in stock B, and the remainder in stock C? State of Economy Probability of State of Economy Returns if State OccursStock AStock BStock CBoom5%19%9%6%Normal45%11%8%13%Recession50%-23%5%25%

Expected return on stock A = 19% * 0.05 + 11% * 0.45 + -23% * .50 = -5.6% Expected return on stock B = 9% * 0.05 + 8% * 0.45 + 5% * .50 = 6.55 % Expected return on stock C = 6% * 0.05 + 13% * 0.45 + 25% * .50 = 18.65% Expected return on a portfolio if invested 25 percent in stock A, 55 percent in stock B, and the remainder in stock C = -5.6% * 0.25 + 6.55% * 0.55 + 18.65 * 0.20 = 5.93% ANSWER = A) 5.93%

Titans, Inc. has 6 percent bonds outstanding that mature in 14 years. The bonds pay interest semiannually and have a face value of $1,000. Currently, the bonds are selling for $993 each. What is the firm's pretax cost of debt? 5.97 percent 6.08 percent 6.14 percent 6.40 percent

FV 1000 Coupon Rate 6% Compounding Periods Per Yr 2 PMT 30 PV 993 N 14 NPER 28 Rate(NPER,PMT,PV,FV)*2 6.08%

What is the expected return on a portfolio comprised of $6,200 of stock M and $4,500 of stock N if the economy enjoys a boom period? StateProbability of StateReturn if State OccursStock MStock NBoom14%20%5%Normal80%13%9%Recession6%-31%18%

Portfolio Return is Equal to weighted average return = 20%*6,200/(6,200+4,500) + 5%*4,500/(6,200+4,500) = 13.69%

You own a portfolio that is invested as follows: $11,400 of Stock A, $8,800 of Stock B, $14,900 of Stock C, and $3,200 of Stock D. What is the portfolio weight of Stock C? Group of answer choices38.47 percent38.90 percent39.80 percent41.94 percent

Portfolio Weight of Stock C = Value Invested in Stock C/Total Portfolio Value*100 = 14900/(11400 + 8800 + 14900 + 3200)*100 = 38.90% Option B (38.90%) is the correct answer.

Your portfolio has a beta of 1.12. The portfolio consists of 40 percent U.S. Treasury bills, 30 percent stock A, and 30 percent stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta of stock B? 1.52 1.69 1.84 2.73

Portfolio beta = 0.3*beta of A + 0.3*beta of B => beta of B = (Portfolio beta - 0.3*beta of A)/0.3 = (1.12 - 0.3*1)/0.3 = 2.73

Jerilu Markets has a beta of 1.09. The risk-free rate of return is 2.75 percent and the market rate of return is 9.80 percent. What is the risk premium on this stock? 6.47 percent 7.03 percent 7.68 percent 8.99 percent

Risk premium = 1.09 (9.80%-2.75%) =7.68 percent

***** Swizer Industries has two separate divisions. Division X has less risk so its projects are assigned a discount rate equal to the firm's WACC minus 0.5 percent. Division Y has more risk and its projects are assigned a rate equal to the firm's WACC plus 1 percent. The company has a debt-equity ratio of 0.45 and a tax rate of 35 percent. The cost of equity is 14.7 percent and the aftertax cost of debt is 5.1 percent. What discount rate should be assigned for Division X and for Division Y? X: 11.72%; Y: 12.72% X: 11.22%; Y: 12.72% X: 14.2%; Y: 15.7% X: 4.6%; Y: 6.1%

Solution- Accept X and reject Y Calculation- X: 11.22%; Y: 12.72% WACC = (1/1.48)(0.154) + (0.48/1.48)(0.054) = 0.12156 Division X: Required return = 0.12156 - 0.0075 = 11.40 percent Division X's return is more than the Required return of 11.40 percent so project is accepted. Division Y: Required return = 0.12156 + 0.01 = 13.56 percent Division Y's return is less than the Required return of 13.56 percent so project is rejected.

***** Noah's Landing stock is expected to produce the following returns given the various states of the economy. What is the expected return on this stock? State of Economy....Probability of State of Economy.....Rate of Return Recession 0.3 - 0.27 Normal 0.65 0.16 Boom 0.05 0.35

Statement showing computation of returnState of EconomyProbabilityRate of returnExpected ReturnRecession 0.30-27%-8.10%Normal 0.6516%10.40%Boom 0.0535%1.75% 1.004.05% Expected Return is 4.05%

For the period 1926-2011, which one of the following had the smallest risk premium? Large-company stocks Small-company stocks Long-term corporate bonds U.S. Treasury bills

Treasury Bills have had the lowest risk premium during the period. This is so because they have US Government backing. During the period these treasuries has lowest yields because of which investors got attracted to riskier securities with high yeilds.

Consider a portfolio comprised of four risky securities. Assume the economy has three states with varying probabilities of occurrence. Which one of the following will guarantee that the portfolio variance will equal zero? A. The portfolio beta must be 1.0. B. The portfolio expected rate of return must be the same for each economic state. C. The portfolio risk premium must equal zero. D. There must be equal probabilities that the state of the economy will be a boom or a bust.

Variance formula = sum of (probability x (r - mean)^2) r= expected return if the expected return would be same for each economic state then the mean would equal to expected return which ultimately will give variance zero ( as r-mean would be 0). Hence the correct option is B. The portfolio expected rate of return must be the same for each economic state.

Alpha Industries uses the subjective approach to assign discount rates to projects. For a particular project, the subjective adjustment is +1.5 percent. The firm has a pretax cost of debt of 8.6 percent and a cost of equity of 13.7 percent. The debt-equity ratio is 0.65 and the tax rate is 35 percent. What discount rate should Alpha Industries use for this project? .1051 .1151 .1201 .1251

WACC = (0.65/1.65)(1 - 0.35)(0.086) + (1/1.65)(0.137) WACC = 0.1051 With Subjective Adjustment of +1.5% Discount Rate = 0.1051 + 0.015 Discount Rate = 0.1201

Which one of the following is the best example of unsystematic risk? Group of answer choices Inflation exceeding market expectations A warehouse fire Decrease in corporate tax rates Decrease in the value of the dollar

Warehouse Fire

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 are the arithmetic average return and the geometric average return for this period?

arithmetric average return = 8.6+14.2 - 3.7 +12.0 / 4 = 7.775% we have to take percentages as power of 1. 8.6% will become 1.086 14.2 = 1.142 -3.7 = 0.963 12 = 1.12 geometric average return = [(1.12 x 0.963 x 1.142 x 1.086)^1/4 -1] = 0.0754 so it will be 7.54%

over the last 5 years, a stock returned 8.3%, -32.5%, -2.2%, 46.9%, and 11.8%. what is the variance of these returns?

average return = add all up then divide by number of returnsvariance = [(return-ave. return)^2 + (return-ave. return)^2 (etc)] * 4ave. return ave. return = (.083-.325-.022+.0469_.118)/5 = .0649 variance=.081504

?? The risk-free rate is 4.2 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.2 and an expected return of 13.1 percent. Stock B has a beta of 0.75 and an expected return of 11.4 percent. Are these stocks correctly priced? Why or why not? No, Stock A is underpriced and Stock B is overpriced. No, Stock A is overpriced and Stock B is underpriced. No, Stock A is overpriced but Stock B is correctly priced. Yes, both stocks are correctly priced.

expected return of A according to CAPM= 4.2% + 1.2*(12.3%-4.2%) = 13.92% expected return of B according to CAPM= 4.2% + 0.75*(12.3%-4.2%) = 10.28% No, Stock A is overpriced and Stock B is underpriced. No these stocks are not correctly priced In both cases, expected return according to CAPM do not match the given expected return.

If the financial markets are semistrong form efficient, then: only the most talented analysts can determine the true value of a security. only individuals with private information have a marketplace advantage. technical analysis provides the best tool to use to gain a marketplace advantage. every security offers the same rate of return.

only individuals with private information have a marketplace advantage. Only individuals with private information have a marketplace advantage because semi-strong efficiency suggests that security prices fully reflect all public information.

A bond has an average return of 6.3 percent and a standard deviation of 3.8 percent. What range of returns would you expect to see 68 percent of the time on this security?

probabilty = 68% Range of return = 2.52% to 10.08% Comment More Answers sucess2all answered thisWas this answer helpful?407,602 answers probabilty = 68% value of z is identified through Z table or normal distribution table Z in the higher side = 0.995 Z in the lowe side = - 0.995 Z= X-Mean/SD higher side range 0.995 =( x-6,3)/3.8 => X = 10.08% or 10.1% Lower side range -0.995 = ( x-6,3)/3.8 => X = 2.52% or 2.5% Range of return = 2.52% to 10.08% Range of return (if rounded to 1 decimal )= 2.5% to 10.1%