FIN300 Final Exam Homework Questions

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst? A) Perfect B) Semi-weak C) Strong D) Weak E) Semi-strong

D) Weak

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2019? A) Small-company stocks B) Long-term government bonds C) Long-term corporate bonds D) Large-company stocks E) U.S. Treasury bills

E) U.S. Treasury bills

To convince investors to accept greater volatility, you must: A) increase the risk premium. B) decrease the risk-free rate. C) increase the risk-free rate. D) decrease the real return. E) decrease the risk premium.

A) increase the risk premium.

If the market is efficient and securities are priced fairly, all securities will have the same: A) reward-to-risk ratio. B) beta value. C) market risk premium. D) variance. E) standard deviation.

A) reward-to-risk ratio.

Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions? A) Riskless market B) Efficient capital market C) Zero volatility market D) Evenly distributed market E) Blume's market

B) Efficient capital market

The market risk premium equals the: A) inflation rate minus the risk-free rate of return. B) market rate of return minus the risk-free rate of return. C) risk-free rate of return plus the inflation rate. D) risk-free rate of return plus the market rate of return. E) risk-free rate of return multiplied by the market beta.

B) market rate of return minus the risk-free rate of return.

Given a well-diversified stock portfolio, the variance of the portfolio: A) must be equal to or greater than the variance of the least risky stock in the portfolio. B) may be less than the variance of the least risky stock in the portfolio. C) will equal the variance of the most volatile 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.

Most financial securities have some level of ________ risk. A) unsystematic B) systematic C) diversifiable D) asset-specific E) industry

B) systematic

Which one of the following statements related to capital gains is correct? A) The capital gains yield is expressed as a percentage of a security's total return. B) The capital gains yield includes only realized capital gains. C) An increase in an unrealized capital gain will increase the capital gains yield. D) The capital gains yield must be either positive or zero. E) The capital gains yield represents the total return earned by an investor.

C) An increase in an unrealized capital gain will increase the capital gains yield.

Which one of the following statements is accurate? A) Standard deviation is a measure of unsystematic risk. B) Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk. C) Eliminating unsystematic risk is the responsibility of the individual investor. D) Beta measures the level of unsystematic risk inherent in an individual security. E) An investor should expect to be rewarded for assuming unsystematic risk.

C) Eliminating unsystematic risk is the responsibility of the individual investor.

Generally speaking, which of the following best correspond to a wide frequency distribution? A) Small risk premium, low standard deviation B) Small risk premium, high rate of return C) High standard deviation, large risk premium D) Low rate of return, large risk premium E) High standard deviation, low rate of return

C) High standard deviation, large risk premium

Which one of the following statements related to market efficiency tends to be supported by current evidence? A) Mis-priced stocks are easy to identify. B) Markets are most likely only weak form efficient. C) Markets tend to respond quickly to new information. D) Short-run price movements are easy to predict. E) It is easy for investors to earn abnormal returns.

C) Markets tend to respond quickly to new information.

With respect to risk, which of the following statements is accurate? A) Adding an additional stock to a diversified portfolio will lower the portfolio's beta. B) Stocks that move in tandem with the overall market have beta values of zero. C) The systematic risk of a portfolio can be lowered by adding T-bills to the portfolio. D) The beta of a portfolio will increase when a stock with a high standard deviation is added to the portfolio. E) Every portfolio that contains 15 or more securities is free of unsystematic risk.

C) The systematic risk of a portfolio can be lowered by adding T-bills to the portfolio.

A ________ is the market's measure of systematic risk. A) standard deviation of 1 B) standard deviation of 0 C) beta of 1 D) variance of 1 E) beta of 0

C) beta of 1

Evidence seems to support the view that studying public information to identify mis-priced stocks is: A) ineffective only in strong form efficient markets. B) effective as long as the market is only semi-strong form efficient. C) ineffective. D) effective only in strong form efficient markets. E) effective provided the market is only weak form efficient.

C) ineffective.

To determine a firm's cost of capital, one must include: A) only the current market rate of return on equity shares. B) only the return required by the firm's current shareholders. C) the returns currently required by both debt-holders and stockholders. D) the company's original debt-equity ratio. E) the weighted costs of all future funding sources.

C) the returns currently required by both debt-holders and stockholders.

With respect to unexpected returns, which one of the following statements is accurate? A) All announcements by a firm affect that firm's unexpected returns. B) Unexpected returns are relatively predictable in the short term. C) Unexpected returns generally cause the actual return to vary significantly from the expected return over the long term. D) Unexpected returns can be either positive or negative in the short term but tend to be zero over the long term. E) Unexpected returns over time have a negative effect on the total return of a firm.

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

The return earned in an average year over a multiyear period is called the _____ average return. A) real B) variant C) standard D) arithmetic E) geometric

D) arithmetic

The slope of the security market line is the: A) market standard deviation. B) beta coefficient. C) expected return of the market. D) market risk premium. E) risk-free interest rate.

D) market risk premium.

A stock has a beta of 1.06, the expected return on the market is 12 percent, and the risk-free rate is 3.5 percent. What must the expected return on this stock be?

E(Ri) = .035 + (.12 − .035)(1.06) E(Ri) = .1251, or 12.51%

A stock has a beta of 1.65, the expected return on the market is 14 percent, and the risk-free rate is 5.6 percent. What must the expected return on this stock be?

E(Ri) = 0.056 + (0.14 − 0.056)(1.65) E(Ri) = 0.1946, or 19.46%

You own a portfolio that has $1,500 invested in Stock A and $3,850 invested in Stock B. If the expected returns on these stocks are 13 percent and 15 percent, respectively, what is the expected return on the portfolio?

E(Rp) = ($1,500/$5,350)(0.13) + ($3,850/$5,350)(0.15) E(Rp) = 0.1444, or 14.44%

Of the options listed below, which is the best example of a diversifiable risk? A) Interest rates increase B) Federal income taxes increase C) Energy costs increase D) Core inflation increases E) A firm's sales decrease

E) A firm's sales decrease

Assume you are an analyst monitoring Okello stock. Which one of the following would be reflected in Okello's expected return? A) The labor union representing Okello's employees unexpectedly called a strike. B) The price of Okello stock suddenly declined in value because researchers accidentally discovered that one of the firm's products can be toxic to household pets. C) The board of directors made an unprecedented decision to give sizeable bonuses to the firm's internal auditors for their efforts in uncovering wasteful spending. D) The chief financial officer of Okello unexpectedly resigned. E) This morning Okello confirmed that, as expected, the CFO is retiring at the end of the year.

E) This morning Okello confirmed that, as expected, the CFO is retiring at the end of the year.

Assume a firm utilizes its WACC as the discount rate for every capital project it implements. Accordingly, the firm will tend to: A) reject all high-risk projects. B) favor low-risk projects over high-risk projects. C) reject all negative net present value projects. D) accept all positive net present value projects. E) increase the average risk level of the company over time.

E) increase the average risk level of the company over time.

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. A) expected B) non-diversifiable C) portfolio D) market E) unsystematic

E) unsystematic

Too Young, Incorporated, has a bond outstanding with a coupon rate of 7.1 percent and semiannual payments. The bond currently sells for $1,891 and matures in 17 years. The par value is $2,000. What is the company's pretax cost of debt?

Financial Calculator: N = 34 PV = -1891 PMT = 71 FV = 2000 CPT I/Y = 3.84 3.84 x 2 = 7.68%

Galvatron Metals has a bond outstanding with a coupon rate of 6.5 percent and semiannual payments. The bond currently sells for $951 and matures in 23 years. The par value is $1,000 and the company's tax rate is 21 percent. What is the company's aftertax cost of debt?

Financial Calculator: N = 46 PV = -951 PMT = 32.50 FV = 1000 CPT I/Y = 3.4645 3.4645 x 2 = 6.929 6.929(1-.21) = 5.47%

Suppose a stock had an initial price of $52 per share, paid a dividend of $1.85 per share during the year, and had an ending share price of $61. Compute the percentage total return.

R = [($61 − 52) + 1.85]/$52 R = 0.2087, or 20.87%

Suppose a stock had an initial price of $76 per share, paid a dividend of $1.30 per share during the year, and had an ending share price of $93. Compute the percentage total return.

R = [($93 − 76) + 1.3]/$76 R = 0.2408, or 24.08%

The Tribiani Company just issued a dividend of $2.55 per share on its common stock. The company is expected to maintain a constant 5.3 percent growth rate in its dividends indefinitely. If the stock sells for $51 a share, what is the company's cost of equity?

RE = [$2.55(1.053)/$51] + .053 RE = .1057, or 10.57%

The Tribiani Company just issued a dividend of $2.75 per share on its common stock. The company is expected to maintain a constant 5.7 percent growth rate in its dividends indefinitely. If the stock sells for $55 a share, what is the company's cost of equity?

RE = [$2.75(1.057)/$55] + .057 RE = .1099, or 10.99%

The Two Dollar Store has a cost of equity of 10.7 percent, the YTM on the company's bonds is 5.3 percent, and the tax rate is 21 percent. If the company's debt-equity ratio is .42, what is the weighted average cost of capital?

WACC = (1/1.42)(10.7%) + (.42/1.42)(5.3%)(1 − .21) WACC = 8.77%

Shinedown Company needs to raise $45 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Flotation costs for issuing new common stock are 7 percent, for new preferred stock, 4 percent, and for new debt, 2 percent. What is the true initial cost figure the company should use when evaluating its project?

We first need to find the weighted average flotation cost. Doing so, we find: fT = .60(.07) + .05(.04) + .35(.02) fT = .051, or 5.1% And the total cost of the equipment including flotation costs is: Amount raised(1 − .051) = $45,000,000 Amount raised = $45,000,000/(1 − .051) Amount raised = $47,418,335

You own a stock portfolio invested 20 percent in Stock Q, 20 percent in Stock R, 20 percent in Stock S, and 40 percent in Stock T. The betas for these four stocks are 1.34, 0.94, 1.36, and 0.92, respectively. What is the portfolio beta?

βp = 0.2(1.34) + 0.2(0.94) + 0.2(1.36) + 0.4(0.92) βp = 1.1