Finance quiz 5
An analyst gathered the following data for a company: Assuming a 40% tax rate, what after tax rate must the company earn on its investments? A. 14.2% B. 13.0% C. 10.0% D. None of these are correct E. 12.4%
13.0%
Your companies after tax cost of debt is 3.6%. The yield to maturity, coupon rate and current yield of its outstanding bonds are 4.5%, 4.8%, and 4.24%, respectively. What must be your companies tax rate? A. 20% B. 75% C. 25% D. 80% E. 15%
20%
A company has a bond issue. Outstanding that has an 8% coupons, pay semi annual interest, mature, and seven years at a face value of $1000. The bond currently trades at a price of $940. The companies tax rate is 40% and its stock beta is 1.3. The risk free rate is 3% and the risk premium is 7%. For purposes of estimating it weighted average cost of capital, what after tax cost of debt, should the company use? A. None of these are correct B. 4.59% C. 9.18% D. 8.00% E. 5.51%
5.51%
The beta of an investment in U.S. Treasury bills is: A. 0.0 B. 1.0 C. -1.0 D. meaningless; only common stocks have betas E. None of these are correct
A. 0.0
What is the beta for a portfolio equally weighted in four assets: A, the market portfolio; B, which has half the risk of A; C, which has twice the risk of A; and D, which is risk free? A. 0.875 B. None of these are correct C. It depends on what beta the market portfolio has D. 1.000 E. 0.219
A. 0.875
What is the standard deviation of a portfolios return if the main return is 15%, the variance of returns is 0.0184, and there are three stocks in the portfolio? A. 13.56% B. 6.78% C. None of these are correct D. 0.92% E. 9.59%
A. 13.56%
Most of the beneficial effects of diversification will have been received by the time a portfolio of common stocks contains ______ stocks. A. 25 B. 50 C. None of these are correct D. 5 E. 2
A. 25
Your companies cost of debt is calculated as the simple average of the yield to maturity of two outstanding bonds. Bond has a yield to maturity of 6%. Bond B, priced at $980 today, is a four-year bond with a 5% coupon, page semi annually with a tax rate of 34%. What is your after tax cost of debt? A. 3.82% B. 3.96% C. 2.90% D. Not enough information to solve this problem E. 3.67%
A. 3.82%
Tobin's Barbeque has a bank loan at 8% interest and an after tax cost of debt of 6%. What will the after tax cost of debt be if a new loan with annual interest rate of 11% is taken out? A. 8.25% B. 13.33% C. 7.52% D. It cannot be determined because the tax rate is not given. E. None of these options are true.
A. 8.25%
Cost of debt 5%; cost of preferred = 8%; cost of equity = 10%. What is the weight average cost of capital? A. 8.6% B. None of these are correct C. 6.4% D. 9.4% E. 7.5%
A. 8.6%
The weighted average cost of capital, after tax, for a firm with 65/35 debt/equity split, 8% cost of debt, 15% cost of equity, and a 35% tax rate would be: A. 8.63% B. 7.02% C. 10.80% D. None of these are correct E. 13.80%
A. 8.63%
Billick Brothers is estimating its WACC. The company has collected the following information: · Its capital structure consists of 40 percent debt and 60 percent common equity. · The company has 20-year bonds outstanding with a 9 percent annual coupon that are trading at par. · The company's tax rate is 40 percent. · The risk-free rate is 5.5 percent. · The market risk premium is 5 percent. · The stock's beta is 1.4. What is the company's WACC? A. 9.66% B. 8.94% C. 10.26% D. 5.88% E. None of these are correct
A. 9.66%
A stock and Buster owns a diversified portfolio of 15 stocks. What will be the likely effect on portfolio return standard deviation from adding one more stock? A. A slight decrease will occur. B. A large increase will occur. C. A large decrease will occur. D. None of these are correct. E. A slight increase will occur.
A. A slight decrease will occur.
Given the following historical returns, what is the standard deviation? Year 1= 30%, year 2 = 15%, year 3 = -10%, year 4 = 18%, year 5 = -2%? A. About 16% B. None of these are correct. C. About 10% D. About 32% E. About 3%
A. About 16%
Given the following information, what is your best estimate for the firms cost of equity on January 2, 2012, if the stock sells for $42 on that day? A. About 23% B. About 22% C. About 16% D. None of these are correct E. Cannot be determined
A. About 23%
Select the statement that is most correct A. Calculating the cost of debt, accompany needs to adjust for taxes, because interest payments are tax deductible B. When calculating the cost of preferred stock, accompany needs to adjust for taxes, preferred stock dividends are tax deductible C. And increase in the corporate tax rate, all other factors held constant, should lead to an increase in a firms, weighted average cost of capital. (WACC) D. The WACC represents the historical cost of capital and is usually calculated on a before tax basis. E. Even if project risks very widely within an affirm, a project cash flows should always be discounted at the corporate cost of capital (WACC)
A. Calculating the cost of debt, accompany needs to adjust for taxes, because interest payments are tax deductible
Bradshaw steel has a capital structure with 30% debt and 70% common equity. The coupon rate of the companies long-term is 8% in the bond of selling at a premium. The firm estimates that it's overall composite WACC is 10%. The risk free rate of interest is 5.5%, the market risk premium is 5%, companies tax rate is 40%. A. Cannot be solved because not enough information is provided B. 1.07 C. 1.35 D. 0.64 E. None of these are correct
A. Cannot be solved because not enough information is provided
Which of the following would decrease a portfolio systematic risk? A. Common stock with positive beta is sold in replaced with Treasury bills. B. Stocks with a beta equal to the market portfolio beta are added to a portfolio of Treasury Bills C. The portfolio beta is less than one and the risk free rate declines. D. Low beta stocks are sold in replaced with high beta stocks. E. A stock is sold in favor of a different stock with the same beta.
A. Common stock with positive beta is sold in replaced with Treasury bills.
By efficiently diversifying, an investor can A. Eliminate most unsystematic risk B. Eliminate most risk C. Eliminate most systematic risk D. None of these are correct E. Eliminate no risk
A. Eliminate most unsystematic risk
Which of the following would be considered an example of systematic risk? A. Greater unemployment rate than expected. B. None of these are correct C. Quarterly profit from GM equals expectations. D. Lower quarterly sales for IBM than expected. E. Report record sales.
A. Greater unemployment rate than expected.
Which of the following are examples of the diversifiable risk? I. An earthquake damages an entire town II. The federal government imposes a $100 fee on all business entities. III. Employment taxes increased nationally. IV. All toymakers are required to improve their safety standards. A. I and IV only B. I and III only C. II and IV D. I, III, and IV only E. II and III only
A. I and IV only
Analysts worldwide have provides their projections for Datron Corp. they announced in a press release at the expect return on Datron shares is 8%, and Datron's required rate of return is 6%. This should result in: A. Investors will buy Datron, pushing up its stock price until its expected return equals the 6% required return. B. Investors will sell Datron shares, thereby increasing its stock price until its expected return equals the 6% required return. C. Stock price will not react to the press release. D. She will be sold in the stock price will decline until the expected. Return equals the 6% required return. E. Investors will buy Datron, pushing its stock price down until it's expected. Return equals the 6% required return.
A. Investors will buy Datron, pushing up its stock price until its expected return equals the 6% required return.
What will happen to a stock that offers a low risk premium then predicted by the CAPM? A. It's price will increase until the expected return is increased. B. It's beta will increase. C. Its price will increase until the expected return is reduced. D. None of these are correct. E. It's beta will decrease.
A. It's price will decrease until the expected return is increased.
You can choose to invest in two different portfolios. Portfolio one include StockX with an expected return of 12% and t bills earned 2%. Portfolio to invest 20% info, 30%, healthcare, and 50% in financials. These three sectors have an expected return of 12%, 9% and 10% per respectively. How much must you invest in stock so that portfolio is the same expected return of portfolio to? A. None of these choices are correct B. 76% C. 84% D. 65% E. 92%
A. None of these choices are correct
Which of the following statements related to risk is correct? A. Portfolio beta can be effectively lowered by adding T-bills to the portfolio. B. Adding five additional stocks to a diversified portfolio must lower the portfolio's beta. C. The beta a portfolio must increase when a stock with a high returned. Standard deviation is added to the portfolio. D. None of these are correct E. Every portfolio that contains 25 or more securities is free of unsystematic risk.
A. Portfolio beta can be effectively lowered by adding T-bills to the portfolio.
The principle of diversification tells us that: A. Spreading an investment across many diverse assets will eliminate some of the risk. B. Concentrating and investment in two or three large stocks will eliminate all of your risk. C. Spreading an investment across many diverse assets cannot (in an efficient market) eliminate any risk. D. None of these are correct E. Spreading an investment across many diverse assets will eliminate all of risk.
A. Spreading an investment across many diverse assets will eliminate some of the risk.
Which of the following risks would be classified as a nonsystematic risk for an auto manufacturer? A. Steel prices B. None of these are correct C. Foreign exchange rates D. Interest rates E. Business cycles
A. Steel prices
Assume that the Security Market Line (SML) is based on a risk free rate of 5% and a market return of 11%. What will happen to the SML if the forecast of risk-free rate increases and investors become more risk averse? A. The SML will shift up and have a steeper slope B. The SML will shift down and have a steeper slope C. The SML will shift down and have a less steep slope D. The SML will shift up and have a less steep slope E. The SML will shift down and have the same slope
A. The SML will shift up and have a steeper slope
The common stock of Alpha Manufacturers has a beta of 1.24 and an actual expected return of 13.25 percent. The risk-free rate of return is 3.7 percent and the market rate of return is 11.78 percent. Which one of the following statements is true given this information? A. The actual expected stock return indicates the stock is currently overpriced. B. To be correctly priced according to CAPM, the stock should have an expected return of 13.56 percent. C. The stock is currently under priced. D. The actual expected stock return will graph above the security market line. E. The stock has less systematic risk than the overall market.
A. The actual expected stock return indicates the stock is currently overpriced.
What is the typical relationship between the return standard deviation of an individual common stock in the return standard deviation of a diversified portfolio with common stocks? A. The individual stocks return standard deviation is lower. B. None of these are correct C. The individual stocks, return standard deviation higher. D. The standard deviation should be equal. E. There is no way to predict this relationship.
A. The individual stocks return standard deviation is lower.
Suppose that the federal reserve takes actions that caused the risk free rate to fall. All else the same (that is the market risk premium and stock beta remain unchanged) , we would expect a firms cost equity to _______. A. decrease if we are using the SML B. increase if we are using the SML C. increase expected return on the market decreases D. either increased or decreased if we are using the SML, but we can't determine which without more information. E. decrease if the firms bet increases
A. decrease if we are using the SML
The ___ the beta coefficient the ____ the expected return, on average. A. higher; higher B. lower; higher C. None of these are correct D. lower; lower or higher (depending on the level of the risk free rate) E. higher; lower
A. higher; higher
The key to efficient diversification is to build a portfolio of securities that are: A. less than perfectly correlated with one another. B. None of these are correct C. perfectly correlated with one another. D. highly positively correlated with one another E. in the same industry
A. less than perfectly correlated with one another.
The expected rate of return on a stock portfolio is a weighted average of expected return me of each stock in the portfolio, where the weighs are based on the : A. market value of the investment in each stock B. market price per share of each stock C. number of shares owned of each stock D. cost per share of each stock held E. original amount invested in each stock
A. market value of the investment in each stock
Assets whose returns are negatively correlated A. reduce the return standard deviation of the portfolio. B. should be avoided in the same portfolio. C. increase the possible losses of the portfolio. D. none of the choices. E. are generally in the same industry.
A. reduce the return standard deviation of the portfolio.
The company cost of capital (WACC) may be an inappropriate discount rate for the capital, budgeting proposal if: A. the proposal has a different degree of risk. B. WACC is inappropriate discount rate for all projects of the firm. C. the company has unique risk. D. the company expects to earn more than the risk free rate. E. it calculates a negative NPV for the proposal.
A. the proposal has a different degree of risk.
The variance of an investments returns is a measure of the: A. volatility of the rates of return. B. average value of the investment. C. none of these are correct D. historic return, overlong periods. E. probability of a negative return.
A. volatility of the rates of return.
What is the approximate variance of returns if over the past three years and investment return to 8.0%, -12.0%, and 15.0%? A. Cannot be determined due to lack of information B. 0.0196 C. 0.0367 D. 0.0393 E. 0.1401
B. 0.0196
Your friend is asking you for help. He would like to know the standard deviation of the returns of his portfolio. However, a couple daily returns are missing as shown below. Based on the information, which of the following might be the return, standard deviation of your friends portfolio over the 10 day period? A. It is impossible to answer the question due to lack of information. B. 1.5% C. None of these choices are correct. D. -1.7% E. 0.0%
B. 1.5%
In a year in which common stocks offered an average return of 18%, treasury bonds offered 10% and treasury bills offered 7%, the risk of premium for common stocks was: A. 8% B. 11% C. None of these are correct D. 1% E. 3%
B. 11%
What is the expected return on asset a if it has a beta of 0.6, the expected market return is 15%, and the risk free rate is 6%? A. 15.0% B. 11.4% C. 9.6% D. None of these are correct E. 5.4%
B. 11.4%
Treasury bills currently have a return of 2.5% in the market risk premium is 7%. If a firm has a beta of 1.4, what is the cost of equity? A. 9.5% B. 12.3% C. None of these are correct D. 8.8% E. 10.5%
B. 12.3%
You're coming use cost of debt is calculated as a simple average of the yield to the maturity of two outstanding bonds. Bond has a yield to maturity of 6%. Bond be, priced at $980 today, is a four year bond with a five coupon, paid semi annually. With the tax rate of 34%, what is your firms after tax cost of debt? A. 2.90% B. 3.82% C. 3.96% D. Not enough information to solve this problem E. 3.67%
B. 3.82%
What is the percentage return on a stock that was purchased for $50.00, paid a $3.00 dividend after one year and then was sold for $49.00? A. None of these are correct B. 4% C. -2% D. 2% E. 6%
B. 4%
You would like to combine a risky stock with a bet of 1.76 with US treasury bills, and such a way that the risk of the portfolio is equivalent to the risk of the overall market. Approximately what percentage of the portfolio should be invested in the risky stock? A. Not enough information to solve this problem B. 57% C. 24% D. 43% E. 76%
B. 57%
A firm has $100 million in equity and $300 million in debt. The firm recently issued bonds at the market required rate of return of 9%. The firm's beta is 1.125, the risk-free rate is 6%, and the expected return in the market is 14%. Assume the firm is at their optimal capital structure and the firm's tax rate is 40%. What is the firm's weighted average cost of capital (WACC)? A. 5.40% B. 7.80% C. 8.60% D. None of these are correct E. 9.40%
B. 7.80%
What is the after tax cost of preferred stock that sells for $10.00 per share and offers of $1.20 annual dividend when the tax rate is 35% percent? A. 12.00% B. 8.33% C. None of these are correct D. 4.2% E. 7.8%
B. 8.33%
Suppose the common stock of United industries has a beta of 1.28 and unexpected return of 15.47%. The risk free rate of return is 3.7% while the inflation rate is 4.2%. What is the expected market risk premium? A. 12.90% B. 9.20% C. 11.77% D. 7.57% E. 12.09%
B. 9.20%
Investments with low return, variances usually: A. Have very high returns B. Have realized returns close to expected returns. C. Have a high standard deviation. D. Have realized returns higher than expected returns. E. None of these are correct
B. Have realized returns close to expected returns.
The expected return on a portfolio: I. Can never exceed the expected return of the best performing security in the portfolio. II. Can never be lower than the expected return of the worst performing security in the portfolio. III. Is independent of the unsystematic risks of the individual securities held in the portfolio. IV. This independent of the allocation of the portfolio amongst individual securities. A. None of the above B. I, II, III only C. I and III only D. II and IV only E. I, II, III, and IV
B. I, II, and III only
A firm is considering an investment in a project, whose risk is greater than the current risk of the firm, based on any method for assessing risk. In evaluating this asset, the decision-maker should A. Increase the NPV of the asset to reflect the greater risk. B. Increase the cost of used to evaluate the project to reflect the projects higher risk. C. None of these are correct D. Reject the asset, since its acceptance would increase the firms risk. E. Increase the IRR of the asset to reflect the greater risk.
B. Increase the cost of used to evaluate the project to reflect the projects higher
Mr. Right just started investing and is not yet familiar with the concept of this diversification. He is considering the following stocks to formula three Stock portfolio. Which of the following investment portfolio is least diversified? A. Walmart, Microsoft, and Walt Disney B. Intel, Apple, and Microsoft C. Bank of America, Walmart, and General Motors D. Walmart, Apple, and McDonalds E. US Steel, Intel, and Bank of America
B. Intel, Apple, and Microsoft
If the beta of your portfolio is between 0.5 and 0.9, what does this imply about your portfolio systematic risk relative to that of the market portfolio? A. Same as the systemic risk of the market portfolio B. Lower than the systemic risk of the market portfolio C. None of these answers are correct D. Higher than the systemic risk of the market portfolio E. The systemic risk of the portfolios cannot be compared
B. Lower than the systemic risk of the market portfolio
What is the expected return on the market portfolio at a time when treasury bills yield 6%, and the stock with a beta of 1.4 is expected to yield 18%? A. 10.8% B. None of these are correct C. 8.6% D. 17.1% E. 12.9%
B. None of these are correct
Which one of the following statements is correct concerning a portfolio beta? A. Portfolio betas range between -1.0 and +1.0. B. None of these are correct C. A portfolio of U.S. Treasury bills will have a beta of +1.0. D. The beta of a market portfolio is equal to zero. E. A portfolio beta cannot be computed from the beta of the individual securities compromising the portfolio because some risk is eliminated via diversification.
B. None of these are correct
Which one of the following statements is correct concerning unsystematic risk? A. On systematic risk is rewarded when it exceeds the market level of unsystematic risk. B. None of these are correct C. Beta measures the level of unsystematic risk inherent in an individual security. D. An investor is rewarded for assuming unsystematic risk. E. Standard deviation is a measure of unsystematic risk.
B. None of these are correct
Steve has invested in 12 different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following? A. Portfolio return of Wise Man Foods B. Portfolio weight of Wise Man Foods C. Portfolio composition of Wise Man Foods D. Portfolio percentage of Wise Man Foods E. None of these are correct
B. Portfolio weight of Wise Man Foods
Datem Corp. has an expected return of 11%. With a risk-free rate of 3%, a market risk premium of 7% and a beta of 0.8, you can estimate its required return. What is the required return, and would Datem plot above or below the security market line (SML)? A. None of these are correct B. Required return = 8.6%, plots above the SML C. Required return = 10%, plots below the SML D. Required return = 10%, plots above the SML E. Required return = 8.6%, plots below the SML
B. Required return = 8.6%, plots above the SML
Bud is an under diversified investor in his considering two alternative stocks for purchase. Stock a has a beta of 0.85 in stock B has a beta of 1.6. If Bud expects the stock market to boom next year (strong bull market) which stock should he purchase? A. It does not matter; both are equally good. B. Stock B C. The one with the highest return standard deviation D. The one with the most total risk. E. Stock A
B. Stock B
What is the typical relationship between the return standard deviation of an individual common stock and the return standard deviation of a diversified portfolio of common stocks? A. None of these are correct. B. The individual stocks return standard deviation is higher. C. The individual stocks return standard deviation is lower. D. The return standard deviation should be equal E. There is no way to predict the relationship
B. The individual stocks return standard deviation is higher.
If treasury bills are yielding, 10% at a time on the market was premium is 6%, then the: A. market portfolio should yield 6% B. market portfolio should yield 16% C. market portfolio should yield 4% D. market portfolio should yield 22% E. None of these are correct
B. market portfolio should yield 16%
Assume a firm uses a constant WACC to select investment projects rather than adjusting the projects for risk. If so, the firm will tend to: A. accept profitable, low risk projects and reject unprofitable, high risk projects B. reject profitable, low risk projects in accept unprofitable, high risk projects C. None of these are correct D. accept profitable, will risk projects in except unprofitable, high risk projects E. accept profitable, high risk project, and reject unprofitable, risk projects
B. reject profitable, low risk projects in accept unprofitable, high risk projects
The market risk premium can be found by: A. None of these are correct B. subtracting the risk-free rate of return from the market of return. C. multiplying the risk-free rake of return by a beta of 1.0. D. subtracting the inflation rate from the market rate of return. E. adding the risk-free rate of return to the market rate id return.
B. subtracting the risk-free rate of return from the market of return.
You have $21,600 to invest in a stock portfolio. Your choices are stock X with an expected return of 4.3% in stock with an expected return of 8.1%. Your goal is to create a portfolio with an expected return of 12.5%. All money must be invested. How much will you invest in stock X? A. $15,800 B. $18,273 C. $15,329 D. $6,271 E. None of these are correct
C. $15,329
Ferryville Radar Technologies has five-year, 7.5% bonds outstanding that trade at a yield to maturity of 6.8%. The company's marginal tax rate is 35%. Ferryville plans to issue new five-year notes to finance an expansion. Ferryville's after-tax cost of debt capital is closest to: A. 6.8% B. None of these are correct C. 4.4% D. 4.9% E. 7.5%
C. 4.4%
The expected return on JK stock is 6.28% while they expected return on the market is 11.97%. The stock beta is 1.63. What is the risk free rate of return? A. 4.31% B. 2.64% C. 5.13% D. 3.23% E. None of these are correct
C. 5.13%
An investor is forming a portfolio by investing $50,000 in stock a that has a beta of 1.50, and $25,000 in stock B that has a beta of 0.90. The return on the market is equal to 6 percent and treasury bill has yield of 4 percent. What is the required rate of return on investors portfolio? A. None of these are correct B. 7.8% C. 6.6% D. 11.8% E. 6.4%
C. 6.6%
What is the total return to an investor who buys a bond for $1100 when the bond has 9% coupon rate and five years remaining until maturity, then sells the bond after one year for $1085? A. None of these are correct B. 6.91% C. 6.82% D. 7.64% E. 9.00%
C. 6.82%
A company has the following data associated with it: -A target structure of 10% -Outstanding 20 year bond with 6% -com,Stock selling for 45 per share -The preferred stock pays $5 - The companies tax rate is 40% What is WACC A. 9.58% B. 10.90% C. 8.46% D. 10.30% E. 7.41%
C. 8.46%
You have an $80,000 investment portfolio of Apple and Amazon stocka with an expected return of 8.5% and 6%, respectively. The portfolio expected return is 7%. What is the dollar value of each stock in the portfolio? A. Apple = $40,000; Amazon = $60,000 B. Apple = $48,000; Amazon = $32,000 C. Apple = $32,000; Amazon = $48,000 D. None do these choices are correct E. Apple = $60,000; Amazon = $40,000
C. Apple = $32,000; Amazon = $48,000
Debreu Beverages has an optimal capital structure that is 70% common equity, 20% debt, and 10% preferred stock. Debreu's pretax cost of equity is 9%. Its pretax cost of preferred equity is 7%, and its pretax cost of debt is also 5%. If the corporate tax rate is 35%, what is the weighted average cost of capital? A. Between 10% and 12% B. Between 9% and 10% C. Between 7% and 8% D. None do the choices E. Between 8% and 9%
C. Between 7% and 8%
Forming a well-diversified portfolio can reduce which of the following: I. Idiosyncratic risk II. Market risk III. Liquidity risk IV. Systematic risk V. Non-systematic risk A. All of the selections B. I, III, and V C. I and V D. II and III E. I and IV
C. I and IV
Which of the following statements is most correct? Statement A: if the market risk premium increases by one percentage point, then the required return on all stocks will rise by one percentage point. Statement B: if the market risk premium increases by one percentage point, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0 Statement C. If the market risk premium increases by one percentage point, then the required return will increase by one percentage point for a stock that has a beta equal to 1.0. A. Statement B only B. Statement A and C only C. Statement C only D. None of the statements are correct E. Statement A only
C. Statement C only
Which of the following statements is FALSE? A. The risk of a financial asset can be decomposed into two components: systematic and nonsystematic risk. B. None of the choices are FALSE. C. Systematic risk can be almost eliminated and a well diversified portfolio. D. High inflation is an example of non-diversifiable risk. E. A goal of diversification is to minimize nonsystematic risk.
C. Systematic risk can be almost eliminated and a well diversified portfolio.
In calculating the weighted average cost of (WACC), which of the following statements is least accurate? A. Different methods for estimating the cost of common equity, might produce different results B. The weights used in calculating WACC are based on the market values of each components C. The cost of debt is equal to one minus the marginal, tax rate, multiplied by the coupon rate on outstanding debt D. None of these are correct E. The cost of preferred equity capital is the preferred dividend divided by the price of preferred shares
C. The cost of debt is equal to one minus the marginal, tax rate, multiplied by the coupon rate on outstanding debt
If the market portfolio is expected to offer, return returns of 16%, then what can be said about a portfolio expected to return 13%? A. Part of the portfolio is invested in treasury bills. B. It plots below the security market line. C. The portfolio's beta is less than 1.0. D. None of these are correct E. The portfolio is not diversified.
C. The portfolio's beta is less than 1.0.
Assume that company ABC currently has 30,000 shares of stock outstanding that trade at $40 per share. It also has 25,000 units of bond outstanding and trading at 95% of par value. Management decides to issue 5,000 shares of new stock. A. Cannot tell due to lack of information. B. Weight of debt remains unchanged; weight of equity decreases. C. Weight of debt increases; weight of equity decreases. D. Weight of debt remains unchanged; weight of equity increases. E. Weight of debt decreases; and weight of equity increases.
C. Weight of debt increases; weight of equity decreases.
Within the capital asset pricing model A. the risk free rate is usually higher than the expected market return. B. the higher, the beta, the lower the required rate of return of an asset. C. beta measures the risk of an individual stock relative to the market index. D. dividends are considered in calculations. E. None of these options are true.
C. beta measures the risk of an individual stock relative to the market index.
The return standard deviation of a portfolio: A. can never be less than the return standard deviation of the most risky security in the portfolio. B. None of these are correct C. can be less the return standard deviation of the least risky security in the portfolio. D. must equal to or greater than the lowest returned, inner deviation of any single security held in the portfolio. E. is in arithmetic of the standard deviations of the individual securities which compromise the portfolio
C. can be less the return standard deviation of the least risky security in the portfolio.
A stock's risk premium is equal to the: A. tone of these are correct. B. treasury bill yield plus expected market return. C. expected market risk premium times beta. D. expected market return times beta. E. risk free rate plus expected market risk, premium.
C. expected market return times beta.
If a stock portfolio is well diversified, then the portfolio returned variance: A. must be equal to or greater than the return variance of the least risky stock in the portfolio. B. will be a weighted average of the return variances of the individual securities in the portfolio. C. may be less than the return variance of the least risky stock in the portfolio. D. will equal the return variance of the most volatile stock in the portfolio. E. will be in medic average of the return variances of the individual securities in the portfolio.
C. may be less than the return variance of the least risky stock in the portfolio.
The primary purpose of a portfolio diversification is to: A. minimize systematic risk. B. lower both returns and risks. C. minimize idiosyncratic risk. D. increase returns and risks. E. eliminate all risks
C. minimize idiosyncratic risk.
The major benefit of diversification is to: A. remove negative risk assets from the portfolio B. increase the expected return C. reduce the expected risk D. increase social benefit of the portfolio E. reduce the portfolios systematic risk
C. reduce the expected risk
Which of the following statements is true for a stock that sells now for $60, pays an annual dividend of four dollars, and experienced 20% return on investment over the past year? Its price one year ago was: A. $42.00 B. $46.15 C. None of these are correct D. $53.33 E. $48.46
D. $53.33
A companies zero coupon bond issue matures in 16 years and has a yield to maturity of 10.60%. Each zero has a face value of $1000 and there are $4000 of the bonds outstanding. If the market values the equity at $1,800,000, what structure for debt would you use in calculating the WACC, assuming the firms only debt consists of zeros? A. 0.693 B. 0.106 C. None of these are correct D. 0.299 E. 0.690
D. 0.299
You own a portfolio equally invested in a risk, free asset, and two stocks. One of the stocks has a beta of 0.9 and the total portfolio is half as risky as the market. What is the beta of the second stock? A. Not enough information to solve this problem B. 0.1 C. 0.5 D. 0.6 E. 0.3
D. 0.6
Your firm sold the 25 year bond at par value 19 years ago. The bond has a $1000 face value and a coupon rate of 6%. The coupons are paid annually. The bond currently sells for $825. What is the Firm before tax cost of debt? A. 8.2% B. 6.0% C. 11.3% D. 10.0% E. 9.5%
D. 10.0%
Calculate the risk premium on stock C given the following information: risk free rate = 5%, market return = 13%, stock C beta = 1.3 A. None of these are correct B. 15.4% C. 8.0% D. 10.4% E. 16.9%
D. 10.4%
What is the portfolio expected return and the portfolio beta if you universe 35% in a, 45% and B, and 20% in the risk free asset? A. None of these are correct B. Cannot be determined because the market risk premium is not provided C. Cannot be determined, because the beta of the risk free asset is not provided D. 11.8%; 0.78 E. 11.0%; 0.98
D. 11.8%; 0.78
Company X has 2 million shares of common stock outstanding at a book value of $2 per share. The stock trades for $3 per share. It also has $2 million in face value of debt that trades at 90% of par. What is the weight of debt for WACC purposes? A. 76.9% B. None of these are correct C. 31.0% D. 23.1% E. 13.9%
D. 23.1%
A firm sold a 10 year bond issued three years ago. The bond has a 6.45% annual coupon and a $1000 face value. The coupons are paid semi annually. If the current market price of the bond is $951.64 and the tax rate is 35%, what is the after tax cost of debt? A. 4.46% B. 7.14% C. 7.36% D. 4.77% E. 6.45%
D. 4.77%
Which of the following is a characteristic of beta? A. A beta is always equal to 1.0. B. None of the choices. C. Beta measures only the volatility of returns on an individual bond relative to a bond market index. D. A beta of less than 1.0 has less risk than the market. E. A beta of 1.0 has zero risk.
D. A bit of less than 1.0 has less risk than the market.
Which one of the following is the best example of diversifiable risk? A. None of these are correct B. Interest rates increase C. Taxes decrease D. A firm's sales decrease E. Core inflation increases
D. A firm's sales decrease
R.K. Boats Inc. is in the process of making some major investments for growth and is interested in calculating its cost of equity to correctly estimate its adjusted WACC. A. About 11% B. About 14% C. None of the choices D. About 13% E. About 12%
D. About 13%
As a senior financial advisor at a major brokerage firm, you are reviewing the investment portfolios of five clients. You find the portfolio beta of your clients portfolios as follows. A. Bobby B. Cindy C. Eddy D. Debby E. Amy
D. Debby
You invested 40% of your money in a void diversified mutual fund, 50% in a stock called macrohard, and the rest and treasury securities. After reviewing your investment portfolio, a financial advisor informs you that the portfolio has higher systematic risk than the market, which of the following could be the beta of macrohard? I. 1.93 II. 1.54 III. 1.20 IV. 1.11 A. I, II, and III B. I, II, III, and IV C. III only D. I and II E. There is not enough information to determine the beta
D. I and II
What happens to expected portfolio return if the portfolio data increases from 1.0 to 1.5, the risk rate decreases from 5% to 4%, in the market risk premium increases from 8% to 9%? A. Increases from 12 to 14.0%. B. None of these are correct C. It increases from 14 to 21.0%. D. It increases from 13 to 17.5%. E. It remains unchanged.
D. It increases from 13 to 17.5%.
Which one of the following is an example of unsystematic risk? A. Adoption of the national sales tax B. An across-the-board increase and income taxes C. An increase in feeling of global prosperity D. National decrease in consumer spending on entertainment E. Decrease in the national level of inflation.
D. National decrease in consumer spending on entertainment
Under the constant dividend growth, model for common stock, if the price of a stock (P0) goes up ( and nothing else changes), A. Then estimated cost of equity may increase or decrease, depending on the dividend growth rate. B. Then estimated cost of equity remains unchanged. C. Then estimated cost of equity goes up. D. Then estimated cost of equity goes down. E. None of these options are true.
D. Then estimated cost of equity goes down.
Leavenworth Industries has the following capital structure on December 31, 2006: what are the weights on debt and preferred stock in the firms structure? A. Weight on debt: 0.40; Weight on preferred stock: 0.06 B. Weight on debt: 0.40; Weight on preferred stock: 0.10 C. None of these are correct D. Weight on debt: 0.41; Weight on preferred stock: 0.06 E. Weight on debt: 0.41; Weight on preferred stock; 0.10
D. Weight on debt: 0.41; Weight on preferred stock: 0.06
The weighted average of Betis of all individual assets is: A. greater than 1 B. unknown; betas are continually changing. C. between 0 and 1 D. exactly 1 E. exactly 0
D. exactly 1
The common stock of Jenson Shipping has an expected return of 15.4%. The return on the market is 11.2%, the inflation rate is 3.1%, and the risk rate of return is 3.6%. What is the date of the stock? A. 2.03 B. 1.38 C. 1.14 D. 1.05 E. 1.55
E. 1.55
Company A's stock has an estimated beta of 1.4, and its required rate of return is 13%. Company B's stock has a beta of 0.8, and the risk rate is 6%. Determine the required rate of return on company B's stock. A. 10.6% B. 9.8% C. 10.2% D. 10.4% E. 10.0%
E. 10.0%
What is the WACC for a firm using 55% equity with a required return of 15%, 35% debt with required return of 8%, 10% preferred stock with required return of 10%, and tax rate of 35% A. 10.72% B. 11.70% C. None of these are correct D. 12.05% E. 11.07%
E. 11.07%
You own a portfolio that has $2800 invested in stock, a and 3250 invested in stock B they expected returns on the stock stocks are 14.7% and 9.3%, respectively. What is the expected return on the portfolio? A. 12.0% B. 14.7% C. None of these are correct D. 9.3% E. 11.8%
E. 11.8%
A firm is expected to pay a dividend of $3.50 per share in one year. This dividend, along with the firm earnings, is expected to grow at a rate of 7% forever. If the current market price for a share is $67, what is the cost of equity? A. 13.46% B. 7.00% C. 14.00% D. 15.64% E. 12.22%
E. 12.22%
You would like to create an equally weighted portfolio of stock, X, stock, Y, and stock Z. Stock X has an expected return of 11% in stock z's expected return is 10.5%. You have a total of $60,000 to invest. What must be the expected return of stock Y, so that the portfolio has an expected return of 12%. A. None of these choices are correct. B. 13.5% C. 13% D. 12% E. 14.5%
E. 14.5%
A company has the following capital structure: -Target weights: 30% debt - Tax rate 35% - The firm can issue $1000 - A preferred stock issue that pays The company's weighted average cost of capital is closest to : A. 10.53% B. 9.28% C. None of these are correct D. 11.03% E. 9.84%
E. 9.84%
The company has a target capital structure of 40% debt and 60% equity.Bonds pay 10% coupon (semi-annual payout), mature in 20 years, and sell for $849.54.The company stock beta is 1.2. The companies marginal tax rate is 40%. The risk free rate is 4%. The market risk premium is 10%. The cost of equity using capital assets pricing model (CAPM) and the constant growth model is: A. CAPM: 16.0%, CGM: 15.4% B. CAPM: 11.2%, CGM: 15.4% C. None of these are correct D. CAPM: 11.2%, CGM: 16.0% E. CAPM: 16.0%, CGM: 16.0%
E. CAPM: 16.0%, CGM: 16.0%
Which of the following choices best describes the rule of taxes on the after tax cost of capital in the US from different sources? A. Common equity: decreases; preferred equity: decreases; debt: no effect B. Common equity: no effect; preferred equity: decrease; debt: decrease C. Common equity: decrease; preferred equity: decrease; debt: decrease D. None of these are correct E. Common equity: no effect; preferred equity: no effect; debt: decrease
E. Common equity: no effect; preferred equity: no effect; debt: decrease
You are considering forming a portfolio of the following six assets. Your goal is to create a portfolio with the bet of 1.0 which of the following are possible options for you to achieve this goal? I. 33% in stock A, 55% in stock B, and 21% in stock D II. 100% in mutual fund III. 25% in stock B, 50% in the mutual, 25% in stock C IV, 30% in stock A, 50% in stock C, 20% in US treasury bill A. I and II B. II, III, and IV C. Only II D. I, II, and IV E. II and III
E. II and III
Why is the after tax cost of debt normally lower than the after tax cost of preferred stock? A. Preferred stock dividends are tax deductions. B. Preferred stock dividends must be paid before common stock dividends. C. Common stock dividends are not tax deductible. D. None of these options are true. E. Interest on debt tax deductible.
E. Interest on debt is tax deductible.
Which of the following is most directly affected by the level of systematic risk in a security? A. Risk free rate B. Standard deviation of its returns C. Market risk premium D. Variance of its returns E. It's expected rate of return
E. It's expected rate of return
Over the past 75 years, which of following investments has provided the largest average return? A. Corporate bonds B. Common stocks C. Treasury bonds D. Treasury bills E. Small company stocks
E. Small company stocks
You were given the following information: Which stock has a higher total risk? A. Stock B because his highest return is 2.5%, what were the highest return of stock A (6%) B. The two stocks have the same total risk because their mean returns are the same. C. Stock A because its lowest return is -10%, worse then the lowest return of stock B (-2%) D. Stock B because its return standard deviation is higher. E. Stock A because its return standard deviation is higher.
E. Stock a because its return standard deviation is higher.
Which of the following portfolios might be expected to exhibit less unsystematic risk? A. Three random stocks; portfolio beta = 1.2 B. Ten random stocks; portfolio beta = 1.0 C. Five random stocks; portfolio beta = .8 D. Not enough information to answer this question E. Thirty's random stocks; portfolio bets unknown
E. Thirty's random stocks; portfolio bets unknown
Unsystematic risk: A. is compensated for by the risk premium. B. is related to the overall economy. C. is measured by beta. D. Is measured by return standard deviation. E. can be effectively eliminated by portfolio diversification.
E. can be effectively eliminated by portfolio diversification.
A stock has been held for one year, during which time its dividend yield was greater than its capital gains yield. For this stock, the percentage return: A. is zero. B. equals the dividend yield. C. is negative D. less than dividend yield E. cannot be determined.
E. cannot be determined
Julius, Inc., is in a 40% marginal tax bracket. The firm can raise as much capital as needed in the bond market at a cost of 10% yield to maturity. The preferred stock has a fixed dividend of $4.00. The price of preferred stock is $31.50. The after-tax costs of debt and preferred stock are closest to: A. None do these are correct B. debt: 10%, preferred stock: 12.7% C. debt: 6.0%; preferred stock: 7.6% D. debt: 10.0%, preferred stock: 7.6% E. debt: 6.0%; preferred stock: 12.7%
E. debt: 6.0%; preferred stock: 12.7%
Holding all else, equal, if the beta of a stock increases, the stock price will: A. None of these are correct B. Increase C. increase or decrease D. remain unchanged E. decrease
E. decrease
By officially diversifying, an investor can: A. eliminate most systematic risk. B. eliminate most risks. C. eliminate no risk at all. D. None of these are correct E. eliminate most unsystematic risk.
E. eliminate most unsystematic risk.
Assume that a company has equal amounts of debt, common stock, and preferred stock. An increase in the corporate tax rate of a thermal cause its weighted average cost of capital (WACC) to A. None of these are correct B. either fall or rise, depending on the riskiness of the company's debt C. rise D. remain unchanged E. fall
E. fall
Regarding diversification, _____________________________. A. there is no limit to the amount of risk that can be eliminated through this process B. the portfolio returns are reduced, and the standard deviation of that portfolio remains unchanged C. None of these are correct. D. it is the process of increasing the riskiness as associated with individual assets by spreading an investment across numerous assets E. most of the benefits are realized with about 20 to 30 stocks
E. most of the benefits are realized with about 20 to 30 stocks
With the subjective approach to divisional cost of capital, the firms weighted average cost of capital is applied to projects with A. lower-than-average risk. B. none of the choices. C. higher-than-average risk. D. no risk. E. normal or average risk.
E. normal or average risk.
If a security plots below the security line, it is: A. None of these are correct B. a defensive security, which expects to offer low returns. C. not rewarding the investor for its nonsystematic risk. D. underpriced, a situation that should be temporary. E. offering too little return to justify its risk.
E. offering too little return to justify its risk.
___________ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings. a. Capital structure b. Cost of capital c. Working capital management d. NPV
a. Capital structure
The type of risk that we can diversify away is ____________ a. Unsystematic risk b. Systematic risk c. Nondiversifiable risk d. Market risk
a. Unsystematic risk
All else the same, a higher corporate tax rate _______________. a. will decrease the WACC of a firm with some debt in its capital structure b. will increase the WACC of a firm with some debt in its capital structure c. will not affect the WACC of a firm with some debt in its capital structure d. will decrease the WACC of a firm with no debt in its capital structure
a. will decrease the WACC of a firm with some debt in its capital structure
Both assets A and B plot on the SML. Asset A has an expected return of 15% and a beta of 1.7, and asset B has an expected return of 12% and a beta of 1.1. What is the risk-free rate of return? a. 5.0% b. 6.5% c. 11.5% d. It cannot be determined from this information
b. 6.5%
Which of the following is false regarding the estimation of a firm's cost of equity capital? a. There are models that will provide reasonable estimates. b. The cost of equity is equal to the weighted average cost of capital. c. The cost of equity depends on the systematic risk of the firm's equity. d. All of the above
b. The cost of equity is equal to the weighted average cost of capital.
Which of the following describes a stock that plots above the security market line? a. The price of the stock is too high b. The expected return of the stock is too high c. The stock's beta is too high. d. The stock provides a return that is less than the average return on the market
b. The expected return of the stock is too high
Which of the following is false regarding risk and return? a. The risk-free asset earns the lowest expected rate of return. b. The reward for bearing risk is known as the standard deviation. c. Based on historical data, there are rewards for bearing risk. d. An increase in the risk of an investment will result in an increased risk premium.
b. The reward for bearing risk is known as the standard deviation.
When firms develop a WACC for individual projects based on the cost of capital for other firms in similar lines of business as the project, the firm is utilizing a: a. subjective risk approach b. pure play approach c. divisional cost of capital approach d. capital adjustment approach
b. pure play approach
Your firm has preferred stock outstanding that pays a current dividend of $3.00 per year and has a current price of $39.50. You anticipate the economy will grow steadily at a rate of 3.00% per year for the foreseeable future. What is the market required rate of return on your firm's preferred stock? a. 10.82% b. 10.59% c. 7.60% d. There is not enough information to answer this question
c. 7.60%
Takelmer Industries has a different WACC for each of three types of projects. Low-riskprojects have an 8% WACC, average-risk projects a 10% WACC, and high-risk projects a12% WACC. Which of the following projects do you recommend that the firm accept? a. A, B, C, D, and G b. B, C, E, F, and G c. A, D, E, F, and G d. A, B, C, D, E, F, and G
c. A, D, E, F, and G
Which of the following is false concerning diversification? Assume that the securities being considered for selection into a portfolio are not perfectly correlated. a. As more securities are added to the portfolio, the unsystematic risk of the portfolio declines. b. As more securities are added to the portfolio, the total risk of the portfolio declines. c. As more securities are added to the portfolio, the systematic risk of the portfolio declines. d. As more securities are added to the portfolio, the portfolio risk eventually approaches the level of systematic risk in the market.
c. As more securities are added to the portfolio, the systematic risk of the portfolio declines.
A firm that uses its WACC as a cutoff without consideration of project risk: a. Tends to become less risky over time. b. Tends to reject more negative NPV projects over time. c. Likely will see its WACC rise over time. d. Will only accept projects where the IRR is equal to the WACC.
c. Likely will see its WACC rise over time.
Stock A has a beta coefficient of 0.9, and stock B has a beta coefficient of 1.2. Which of the following statements is false regarding these two stocks? a. Stock A is less risky from the market's perspective than a typical stock, and stock B is more risky than a typical stock. b. Stock B, if purchased, will increase the market risk of a portfolio more than stock A would(if purchased). c. Stock A necessarily must have a lower standard deviation of returns than stock B. d. Stock B must have a higher expected return than stock A if both of them are priced properly
c. Stock A necessarily must have a lower standard deviation of returns than stock B.
The relevant risk for the fair market pricing of financial securities is the __________ . a. standard deviation of the investment's return b. total risk c. systematic risk d. non-systematic risk
c. systematic risk
Which of the following would likely have the greatest amount of systematic risk? a. A portfolio of the common stocks of 100 randomly-selected companies. b. The market portfolio. c. A portfolio half invested in the market portfolio and half invested in Treasury bills. d. A portfolio half invested in the market portfolio and half invested in stocks with betas = 1.50
d. A portfolio half invested in the market portfolio and half invested in stocks with betas = 1.50
The cost of debt capital for a firm _________ . a. is equal to the current yield (not YTM) on the firm's outstanding bonds b. can be calculated by estimating the beta of the firm's equity and then using the SML c. can be calculated by looking at the coupon rates on existing bonds of similar risk d. can be estimated even if the firm's bonds are not publicly traded, by looking at the yield to maturity on bonds outstanding from peer group firms with similar ratings and maturity
d. can be estimated even if the firm's bonds are not publicly traded, by looking at the yield to maturity on bonds outstanding from peer group firms with similar ratings and maturity
Standard deviation is one of the most common measures of __________________. a. the normal distribution b. the inflation rate c. the risk premium d. return volatility
d. return volatility