FIN 300- Quiz 6 and 7
True
"Risk aversion" implies that investors require higher expected returns on riskier than on less risky securities. True False
True
A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock. Proxies can be important tools relating to control of firms. True False
b. $11.98
A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 14.2%, then what is the stock price? a.$10.66b.$11.98c.$12.10d.$14.61e.$12.70
False
A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio. True False
False
A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms. True False
True
According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio. True False
False
According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock. True False
True
According to the nonconstant growth model discussed in the textbook, the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period. True False
c.possibly increase, possibly decrease, or possibly remain constant.
An increase in a firm's expected growth rate would cause its required rate of return to a.fluctuate less than before.b.decrease.c.possibly increase, possibly decrease, or possibly remain constant.d.fluctuate more than before.e.increase
a
Assume that investors have recently become more risk averse, so the market risk premium has increased. Also, assume that the risk-free rate and expected inflation have not changed. Which of the following is most likely to occur? a.The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium. b.The required rate of return will decline for stocks whose betas are less than 1.0. c.The required rate of return on the market, rM, will not change as a result of these changes. d.The required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market risk premium. e.The required rate of return on a riskless bond will decline.
b
Assume that the risk-free rate is 5%. Which of the following statements is CORRECT? a.If a stock's beta doubled, its required return under the CAPM would also double. b.If a stock has a negative beta, its required return under the CAPM would be less than 5%. c.If a stock's beta were 1.0, its required return under the CAPM would be 5%. d.If a stock's beta were less than 1.0, its required return under the CAPM would be less than 5%. e.If a stock's beta doubled, its required return under the CAPM would more than double.
a
Assume that the risk-free rate is 6% and the market risk premium is 5%. Given this information, which of the following statements is CORRECT? a.An index fund with beta = 1.0 should have a required return of 11%. b.If a stock has a negative beta, its required return must also be negative. c.If a stock's beta doubles, its required return must also double. d.An index fund with beta = 1.0 should have a required return less than 11%. e.An index fund with beta = 1.0 should have a required return greater than 11%.
a
Assume that the risk-free rate remains constant, but the market risk premium declines. Which of the following is most likely to occur? a.The required return on a stock with a positive beta < 1.0 will decline. b.The return on "the market" will remain constant. c.The required return on a stock with beta = 1.0 will not change. d.The required return on a stock with beta > 1.0 will increase. e.The return on "the market" will increase.
b
Assume that the risk-free rate, r RF, increases but the market risk premium, (r M - r RF), declines with the net effect being that the overall required return on the market, r M, remains constant. Which of the following statements is CORRECT? a.The required return of all stocks will increase by the amount of the increase in the risk-free rate. b.The required return will increase for stocks that have a beta less than 1.0 but decline for stocks that have a beta greater than 1.0. c.Since the overall return on the market stays constant, the required return on each individual stock will also remain constant. d.The required return of all stocks will fall by the amount of the decline in the market risk premium. e.The required return will decline for stocks that have a beta less than 1.0 but will increase for stocks that have a beta greater than 1.0.
a
For a stock to be in equilibrium—that is, for there to be no long-term pressure for its price to change—the a.expected future return must be equal to the required return. b.expected future return must be less than the most recent past realized return. c.past realized return must be equal to the expected return during the same period. d.required return must equal the realized return in all periods. e.expected return must be equal to both the required future return and the past realized return.
8.13
If D 0 = $1.75, g (which is constant) = 3.6%, and P 0 = $40.00, then what is the stock's expected total return for the coming year? a.8.13%b.6.42%c.9.92%d.7.64%e.7.48%
true
The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond. True False
True
The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities. True False
False
The corporate valuation model can be used only when a company doesn't pay dividends. True False
False
The corporate valuation model cannot be used unless a company pays dividends. True False
