FIN 300 Final Practice Exam

Dollar Return Capital Gain (Loss) Component Formula

(End - Beg. price per share) x # of shares

Percentage Return Capital Gains Yield Component Formula

(End. price - beg. price) / beg. price

Percentage Return Dividend Yield Component Formula

Dividend per share / Price per share

Dollar Return Income Component Formula

Dividend per share x # of shares

Percentage Return Formula

Dividend yield + Capital gains yield

Dollar Return Formula

Income Component + Captial Gain (Loss) Component

Arithmetic Average Return Formila

Same as normal average add then divide by n

Geometric Average Return Formula

[(1 + Rate of return for year 1) x (1 + rate of return for year n)]....^1/n -1

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? a. 16.37% b. 13.37% c. 48.86% d. 5.98% e. 2.68%

a. 16.37%

Boom Probability: 0.15 - Normal Probability: 0.65 - Bust Probability: 0.20 Stock A Boom ROR: 0.27 Normal ROR: 0.14 Bust ROR: -0.19 Stock B Boom ROR: 0.15 Normal ROR: 0.11 Bust ROR: -0.06 Stock C Boom ROR: 0.11 Normal ROR: 0.09 Bust ROR: 0.05 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? a. 5.55% b. 12.38% c. 1.67% d. 4.29% e. 8.75%

a. 5.55%

Of the options listed below, which is the best example of systematic risk? a. Investors panic causing security prices around the globe to fall precipitously. b. A flood washes away a firm's warehouse. c. A city imposes an additional one percent sales tax on all products. d. A toymaker has to recall its top-selling toy. e. Corn prices increase due to increased demand for alternative fuels.

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

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? a. Risk premium b. Geometric average return c. Arithmetic average return d. Standard deviation e. Variance

a. Risk premium

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? a. −5.5% b. 26.1% c. 4.9% d. 19.6% e. −7.3%

a. −5.5%

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? a. 18.74% b. 17.13% c. 10.38% d. 19.53% e. 11.79%

b. 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. a. 3.75; 17.46 b. 3.75; 1.72 c. 17.75; 4.27 d. 17.75; 17.46 e. 3.75; 4.27

b. 3.75; 1.72

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? a. .9% b. 8.5% c. 6.5% d. 6.7% e. 5.0%

b. 8.5%

When calculating a firm's weighted average cost of capital, the capital structure weights: a. are based on the book values of debt and equity. b. are based on the market values of the outstanding securities. c. depend upon the financing obtained to fund each specific project. d. remain constant over time unless new securities are issued or outstanding securities are redeemed. e. are restricted to debt and common stock.

b. are based on the market values of the outstanding securities.

To convince investors to accept greater volatility, you must: a. decrease the risk premium. b. increase the risk premium. c. decrease the real return. d. decrease the risk-free rate. e. increase the risk-free rate.

b. increase the risk premium.

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. a. overestimate; overestimate b. overestimate; underestimate c. underestimate; overestimate d. underestimate; underestimate e. accurately estimate; accurately estimate

b. overestimate; underestimate

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? a. The after-tax cost of debt will be greater than the current yield to maturity on the company's outstanding bonds. b. The company's cost of preferred is most likely less than the company's actual cost of debt. c. The cost of equity is unaffected by a change in the company's tax rate. d. The cost of equity can be estimated only by using the capital asset pricing model. e. The weighted average cost of capital will remain constant as long as the company's capital structure remains constant.

c. 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. more systematic risk than the overall market. b. more risk than that warranted by CAPM. c. a higher return than expected for the level of risk assumed. d. less systematic risk than the overall market. e. a return equivalent to the level of risk assumed.

c. a higher return than expected for the level of risk assumed.

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: a. arithmetic return. b. historical return. c. expected return. d. geometric return. e. required return.

c. expected return.

Assume a firm has a debt-equity ratio of .36. The firm's cost of equity: a. tends to remain static even as the company's level of risk increases. b. increases as the unsystematic risk of the company's stock increases. c. is affected by both a change in the firm's beta and the firm's projected rate of growth. d. equals the risk-free rate plus the market risk premium. e. equals the company's pretax weighted average cost of capital.

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

Which one of the following statements best defines the efficient market hypothesis? a. Efficient markets limit competition. b. Security prices in efficient markets remain steady as new information becomes available. c. Mispriced securities are common in efficient markets. d. All securities in an efficient market are zero net present value investments. e. All securities provide the same positive rate of return when the market is efficient.

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

The ________ is a positively sloped linear function that plots securities' expected returns against their betas. a. reward-to-risk matrix b. portfolio weight graph c. normal distribution d. security market line e. market real returns

d. security market line

Inside information has the least value when financial markets are: a. weak form efficient. b. semi-weak form efficient. c. semi-strong form efficient. d. strong form efficient. e. inefficient.

d. strong form efficient.

To determine a firm's cost of capital, one must include: a. only the return required by the firm's current shareholders. b. only the current market rate of return on equity shares. c. the weighted costs of all future funding sources. d. the returns currently required by both debtholders and stockholders. e. the company's original debt-equity ratio.

d. the returns currently required by both debtholders and stockholders.

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? a. 10.2% b. 16.7% c. 4.2% d. 15.0% e. 11.3%

e. 11.3%

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? a. 9.59% b. 8.72% c. 9.17% d. 8.28% e. 9.30%

e. 9.30%

Variance Formula

standard deviation squared or calculator

Standard Deviation Formula

the square root of the variance or calculator

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 after-tax cost of debt if the tax rate is 21 percent? a. 4.30% b. 4.92% c. 4.17% d. 5.43% e. 5.58%

a. 4.30%

Which of the following statements regarding a firm's pretax cost of debt is accurate? a. It is based on the current yield to maturity of the company's outstanding bonds. b. It is equal to the coupon rate on the latest bonds issued by the company. c. It is equivalent to the average current yield on all of a company's outstanding bonds. d. It is based on the original yield to maturity on the latest bonds issued by a company. e. It must be estimated as it cannot be directly observed in the market.

a. 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? a. Next year's annual dividend divided by today's stock price b. This year's annual dividend divided by today's stock price c. This year's annual dividend divided by next year's expected stock price d. Next year's annual dividend divided by this year's annual dividend e. The increase in next year's dividend over this year's dividend divided by this year's dividend

a. Next year's annual dividend divided by today's stock price

Which one of the following statements is accurate? a. Portfolio betas range between −1.0 and +1.0. b. A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio. c. A portfolio beta cannot be computed from the betas of the individual securities comprising the portfolio because some risk is eliminated via diversification. d. A portfolio of U.S. Treasury bills will have a beta of +1.0. e. The beta of a market portfolio is equal to zero.

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

Given a well-diversified stock portfolio, the variance of the portfolio: a. will equal the variance of the most volatile stock in the portfolio. b. may be less than the variance of the least risky stock in the portfolio. c. must be equal to or greater than the variance of the least risky stock in the portfolio. d. will be a weighted average of the variances of the individual securities in the portfolio. e. will be an arithmetic average of the variances of the individual securities in the portfolio.

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

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? a. $1,488 b. $1,492 c. $2,808 d. $936 e. $496

c. $2,808

Probability Boom: 0.18 - Probability Normal: 0.82 Stock G Boom ROR: 0.18 Normal ROR: 0.14 Stock H Boom ROR: 0.08 Normal ROR: 0.11 What is the variance of the returns on a portfolio comprised of $4,200 of Stock G and $5,300 of Stock H? a. .000209 b. .000248 c. .000000 d. .001324 e. .000168

c. .000000

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. a. I and III only b. II and IV only c. I, III, and IV onlyterm-31 d. II, III, and IV only e. I, II, III, and IV

c. I, III, and IV only

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. a. Large-company stocks, U.S. Treasury bills, long-term government bonds b. Small-company stocks, long-term corporate bonds, large-company stocks c. Long-term government bonds, long-term corporate bonds, intermediate-term government bonds d. Large-company stocks, small-company stocks, long-term government bonds e. Intermediate-term government bonds, long-term corporate bonds, U.S. Treasury bills

c. Long-term government bonds, long-term corporate bonds, intermediate-term government bonds

If the market is efficient and securities are priced fairly, all securities will have the same: a. variance. b. standard deviation. c. reward-to-risk ratio. d. beta value. e. market risk premium.

c. reward-to-risk ratio.

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. a. I and III only b. II and IV only c. I and IV only d. I, II, and III only e. I, II, III, and IV

d. I, II, and III only

The historical record for the period 1926-2019 supports which one of the following statements? a. When large-company stocks have a negative return, they will have a negative return for at least two consecutive years. b. The return on U.S. Treasury bills exceeds the inflation rate by at least .5 percent each year. c. There was only one year during the period when double-digit inflation occurred. d. Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year. e. The inflation rate was positive each year throughout the period.

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

________ measures total risk, and ________ measures systematic risk. a. Beta; alpha b. Beta; standard deviation c. Alpha; beta d. Standard deviation; beta e. Standard deviation; variance

d. Standard deviation; beta

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? a. The dividend yield is expressed as a percentage of the par value. b. The capital gain would have been less had Vanessa not received the dividends. c. The total dollar return per share is $.55. d. The capital gains yield is positive. e. The dividend yield is greater than the capital gains yield.

d. The capital gains yield is positive.

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? a. 8.8% b. 10.0% c. 10.2% d. 8.5% e. 11.2%

e. 11.2%

Which one of the following statements related to market efficiency tends to be supported by current evidence? a. It is easy for investors to earn abnormal returns. b. Short-run price movements are easy to predict. c. Markets are most likely only weak form efficient. d. Mispriced stocks are easy to identify. e. Markets tend to respond quickly to new information.

e. Markets tend to respond quickly to new information.

With respect to returns, which one of the following statements is accurate? a. The unexpected return is always negative. b. The expected return minus the unexpected return is equal to the total return. c. Over time, the average return is equal to the unexpected return. d. The expected return includes the surprise portion of news announcements. e. Over time, the average unexpected return will be zero.

e. Over time, the average unexpected return will be zero.

Which of the following statements best describes the principle of diversification? a. Concentrating an investment in two or three stocks will eliminate all of the unsystematic risk. b. Concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. c. Spreading an investment across multiple diverse companies will not lower the total risk. d. Spreading an investment across many diverse assets will eliminate all of the systematic risk. e. Spreading an investment across many diverse assets will eliminate some of the total risk.

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

When evaluating any capital project proposal, the cost of capital: a. is determined by the overall risk level of the firm. b. is dependent upon the source of the funds obtained to fund that project. c.is dependent upon the firm's overall capital structure. d. should be applied as the discount rate for all other projects considered by the firm. e. depends upon how the funds raised for that project are going to be spent.

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