FIN300 Final Exam

What is the beta of the following portfolio?

1.10

When calculating a firm's weighted average cost of capital, the capital structure weights:

are based on the market values of the outstanding securities

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?

$2,808; Total dollar return= Dividend Income + Capital gain (or loss)

What is the variance of the returns on a portfolio comprised of $4,200 of Stock G and $5,300 of Stock H?

.000000

Which one of the following statements related to market efficiency tends to be supported by current evidence?

Markets tend to respond quickly to new information

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?

The capital gains yield is positive.

To convince investors to accept greater volatility, you must:

increase the risk premium

Assume a firm has a debt-equity ratio of .36. The firm's cost of equity:

is affected by both a change in the firm's beta and the firm's projected rate of growth

One year ago, you purchased 100 shares of Bailey Homes stock at a price of $37.78 per share. The company pays a quarterly dividend of $1.85 per share. Today, you sold for the shares for $28.30 per share. What is your total percentage return on this investment?

-5.5%; Dividend Yield+ Capital Gains Yield

Consider the following information on three stocks: A portfolio is invested 45 percent each in Stock A and Stock B, and 10 percent in Stock C. The expected T-bill rate is 3.2 percent. What is the expected risk premium on the portfolio?

5.55%

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?

6.71%

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 decrease in the risk-free rate

Which one of the following statements is accurate?

A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio.

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

I, II, III, and IV

Which of the following statements are accurate? I. Diversifiable risks can be essentially eliminated by investing in 30 unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk.

I, II, and III only

Which of the following are assumptions of the capital asset pricing model (CAPM)? I. A risk-free asset has no systematic risk. II. Beta is a reliable estimate of total risk. III. The reward-to-risk ratio is constant. IV. The market rate of return can be approximated.

I, III and IV only

Of the options listed below, which is the best example of systematic risk?

Investors panic causing security prices around the globe to fall precipitously

Which of the following statements is true of a portfolio's standard deviation?

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

Which of the following statements regarding a firm's pretax cost of debt is accurate?

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

Which one of the following correctly describes the dividend yield?

Next years annual dividend divided by todays stock proce

With respect to returns, which one of the following statements is accurate?

Over time the average unexpected return will be zero

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?

Risk premium

The historical record for the period 1926-2019 supports which one of the following statements?

Small company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year

Which of the following statements best describes the principle of diversification?

Spreading an investment across many diverse assets will eliminate some of the TOTAL risk

The capital structure of Pendekanti Products is 58 percent common stock, 2 percent preferred stock, and 40 percent debt. The firm maintains a dividend payout ratio of 24 percent, has a beta of 1.08, and has an income tax rate of 21 percent. Given this information, which one of the following statements is accurate?

The cost of equity is unaffected by a change in the company's tax rate

Assume a stock experiences an actual return that is above the security market line. An analyst can safely conclude that the stock has:

a higher return than expected for the level of risk assumed

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:

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

When utilizing the capital asset pricing model approach to value equity, the outcome:

assumes the reward-to-risk ratio is constant.

The slope of the security market line is the:

market risk premium

To determine a firm's cost of capital, one must include

the returns currently required by both debtholders and stockholders

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.

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?

10.06%

Kelley Couriers just paid its annual dividend of $5.25 per share. The stock has a market price of $58.25 and a beta of 1.2. The return on the U.S. Treasury bill is 1 percent and the market risk premium is 8.5 percent. What is the cost of equity?

11.2%

Suppose a stock had an initial price of $30 per share, paid a dividend of $5 per share during the year, and had an ending share price of $33.40. What was the capital gains yield?

11.3%

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?

16.37%

The Shoe Outlet has paid annual dividends of $.58, $.66, $.72, and $.75 per share over the last four years, respectively. The stock is currently selling for $10.08 per share. What is the cost of equity?

17.13%

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

3.75; 1.72

Decline, Incorporated, is trying to determine its cost of debt. The firm has a debt issue outstanding with 13 years to maturity that is quoted at 105.2 percent of face value. The issue makes semiannual payments and has an embedded cost of 6 percent annually. What is the aftertax cost of debt if the tax rate is 21 percent?

4.30%

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?

5.13%

The stock of Yakir Development has a beta of 1.31. The risk-free rate of return is 1.5 percent and the market rate of return is 8 percent. What is the risk premium on this stock?

8.5%

Deep Mines has 43,800 shares of common stock outstanding with a beta of 1.54 and a market price of $51 per share. There are 10,000 shares of 7 percent preferred stock outstanding with a stated value of $100 per share and a market value of $83 per share. The 8 percent semiannual bonds have a face value of $1,000 and are selling at 96 percent of par. There are 5,000 bonds outstanding that mature in 13 years. The market risk premium is 7.5 percent, T-bills are yielding 3.6 percent, and the tax rate is 21 percent. What discount rate should the firm apply to a new project's cash flows if the project has the same risk as the company's typical project?

9.30%

Which one of the following statements best defines the efficient market hypothesis?

All securities in an efficient market are zero net present value investments

When evaluating any capital project proposal, the cost of capital:

depends upon how the funds raised for that project are going to be spent

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:

expected return

Which one of the following is a correct ranking of securities based on the volatility of their annual returns over the period of 1926-2019? Rank from highest to lowest.

long term government bonds, long term corporate bonds, intermediate term government bonds

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:

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

Given a well-diversified stock portfolio, the variance of the portfolio:

may be less than the variance of the least risky stock in the portfolio

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.

overestimate; underestimate

If the market is efficient and securities are priced fairly, all securities will have the same:

reward-to-risk ratio

The ________ is a positively sloped linear function that plots securities' expected returns against their betas.

security market line

_______ measures total risk, and ________ measures systematic risk.

standard deviation; beta

Inside information has the least value when financial markets are:

strong form efficient