Ch 12-14 MC

One year ago, you purchased a stock at a price of $32.15. The stock pays quarterly dividends of $.20 per share. Today, the stock is selling for $33.09 per share. What is your capital gain on this investment?

$.94

One year ago, you purchased 400 shares of SL Industries stock at a price of $26.15a share. The stock pays an annual dividend of $1.34 per share. Today, you sold all of your shares for $28.20 per share. What is your total dollar return on this investment?

$1,356

You have a $12,000 portfolio which is invested in stocks A and B, and a risk-free asset. $5,000 is invested in stock A. Stock A has a beta of 1.76 and stock B has a beta of 0.89. How much needs to be invested in stock B if you want a portfolio beta of 1.10?

$4,943.82

Travis & Sons has a capital structure that is based on 40 percent debt, 5 percent preferred stock, and 55 percent common stock. The pre-tax cost of debt is 7.5 percent, the cost of preferred is 9 percent, and the cost of common stock is 13 percent. The tax rate is 39 percent. The company is considering a project that is equally as risky as the overall firm. This project has initial costs of $325,000 and annual cash inflows of $87,000, $279,000, and $116,000 over the next three years, respectively. What is the projected net present value of this project?

$76,011.23

What is the beta of the following portfolio? Stick Amount Invested Security Beta A $6,700 1.41 B 3,000 1.23 C 8,500 0.79

1.09

You recently purchased a stock that is expected to earn 30 percent in a booming economy, 9 percent in a normal economy, and lose 33 percent in a recessionary economy. There is a 5 percent probability of a boom and a 75 percent chance of a normal economy. What is your expected rate of return on this stock?

1.65 percent

Southern Home Cooking just paid its annual dividend of $.75 a share. The stock has a market price of $16.80 and a beta of 1.14. The return on the U.S. Treasury bill is 2.7 percent and the market risk premium is 7.1 percent. What is the cost of equity?

10.79 percent

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 percent

What is the expected return on this portfolio? Stock Excepted Return # of Shares Stock Price A 12% 300 $28 B 7 500 10 C 15 600 19

12.37 percent

Over the past four years a stock had prices of $15.40, $15.85, $16.30, and $15.70, respectively. The stock pays an annual dividend of $.50 a share. What is the geometric average return on this stock?

3.80 percent

Hydro Systems has 15-year bonds outstanding with a coupon rate of 6 percent. Interest is paid annually. The face amount of each bond is $1,000. What is the company's pre-tax cost of debt if the bonds currently sell for $1,080?

5.22 percent

A stock has annual returns of 5.4 percent, 12.9 percent, -3.8 percent, and 9.4 percent for the past four years. The arithmetic average of these returns is _____ percent while the geometric average return for the period is _____ percent.

5.98; 5.79

Chelsea Fashions is expected to pay an annual dividend of $1.10 a share next year. The market price of the stock is $21.80 and the growth rate is 4.5 percent. What is the firm's cost of equity?

9.55 percent

Phillips Equipment has 75,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 7.5 percent. The company also has 750,000 shares of 6 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $64 a share. The common stock has a beta of 1.21 and sells for $44 a share. The U.S. Treasury bill is yielding 2.3 percent and the return on the market is 11.2 percent. The corporate tax rate is 34 percent. What is the firm's weighted average cost of capital?

9.69 percent

A stock with an actual return that lies above the security market line has:

A higher return than expected for the level of risk assumed.

The expected return on a stock computed using economic probabilities is:

A mathematical expectation based on a weighted average and not an actual anticipated outcome.

All else constant, which one of the following will increase a firm's cost of equity if the firm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2.

A reduction in the risk-free rate.

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

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

The capital structure weights used in computing a firm's weighted average cost of capital:

Are based on the market values of the firm's debt and equity securities.

Preston Industries has two separate divisions. Each division is in a separate line of business. Division A is the largest division and represents 70 percent of the firm's overall sales. Division A is also the riskier of the two divisions. Division B is the smaller and least risky of the two. When management is deciding which of the various divisional projects should be accepted, the managers should:

Assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values.

The subjective approach to project analysis:

Assigns discount rates to projects based on the discretion of the senior managers of a firm.

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?

Beta

The primary purpose of portfolio diversification is to:

Eliminate asset-specific risk.

Incorporating flotation costs into the analysis of a project will:

Increase the initial cash outflow of the project.

To convince investors to accept greater volatility, you must:

Increase the risk premium

Which one of the following is an example of systematic risk?

Investors panic causing security prices around the globe to fall precipitously.

Which one of the following is represented by the slope of the security market line?

Market Risk Premium

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

When a manager develops a cost of capital for a specific project based on the cost of capital for another firm that has a similar line of business as the project, the manager is utilizing the _____ approach.

Pure Play

The excess return is computed as the:

Return on a risky security minus the risk-free rate

Which one of the following earned the highest risk premium over the period 1926-2013?

Small-company stocks

The principle of diversification tells us that:

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

The weighted average cost of capital for a firm can depend on all of the following except the:

Standard deviation of the firm's common stock.

The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than _____ form efficient.

Strong

Which one of the following statements related to WACC is correct for a firm that uses debt in its capital structure?

The WACC should decrease as the firm's debt-equity ratio increases.

Efficient financial markets fluctuate continuously because

The markets are continually reacting to new information

Which one of the following statements related to the capital asset pricing model approach to equity valuation is correct? Assume the firm uses debt in its capital structure.

The model is dependent upon a reliable estimate of the market risk premium.

The discount rate assigned to an individual project should be based on the:

The risks associated with the use of the funds required by the project.

Standard deviation measures which type of risk?

Total

Which one of the following statements related to unexpected returns is correct?

Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.

A news flash just appeared that caused about a dozen stocks to suddenly drop in value by 20 percent. What type of risk does this news flash best represent?

Unsystematic

Which one of the following is most indicative of a totally efficient stock market?

Zero net present values for all stock investments