finance 4020 exam 2 practice exam!!! (math only)

34) Your opinion is that CSCO has an expected rate of return of 0.13. It has a beta of 1.3. The risk-free rate is 0.04 and the market expected rate of return is 0.115. According tothe Capital Asset Pricing Model, this security is A) fairly priced. B) underpriced. C) overpriced. D) Cannot be determined from data provided.

c

35) Your opinion is that CSCO has an expected rate of return of 0.15. It has a beta of 1.3. The risk-free rate is 0.04 and the market expected rate of return is 0.115. According tothe Capital Asset Pricing Model, this security is A) fairly priced. B) overpriced. C) underpriced. D) Cannot be determined from data provided. E) None of the options are correct.

c

29) The market portfolio has a beta of A) 0.5. B) 0. C) -1. D) 1.

d

104) You wish to earn a return of 13% on each of two stocks, X and Y. Stock X is expected to pay a dividend of $3 in the upcoming year while stock Y is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for bothstocks is 7%. The intrinsic value of stock X A) will be less than the intrinsic value of stock Y. B) will be the same or greater than the intrinsic value of stock Y. C) will be the same as the intrinsic value of stock Y. D) will be greater than the intrinsic value of stock Y. E) None of the options are correct.

a

105) You wish to earn a return of 11% on each of two stocks, C and D. Stock C is expected to pay a dividend of $3 in the upcoming year while stock D is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for bothstocks is 7%. The intrinsic value of stock C A) will be less than the intrinsic value of stock D. B) will be the same as the intrinsic value of stock D. C) will be greater than the intrinsic value of stock D. D) will be the same or greater than the intrinsic value of stock D. E) None of the options.

a

108) Light Construction Machinery Company has an expected ROE of 11%. The dividend growth rate will be ________ if the firm follows a policy of paying 25% of earnings in the form of dividends. A) 8.25% B) 3.0% C) 4.8% D) 9.0%

a

109) A preferred stock will pay a dividend of $3.00 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 9% on thisstock. Use the constant growth DDM to calculate the intrinsic value of this preferredstock. A) $33.33 B) $0.27 C) $56.25 D) $31.82

a

120) Consider the free cash flow approach to stock valuation. Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000 of operating cashflow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market-capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The projected free cash flow of Utica Manufacturing Company for the coming year is A) $180,000. B) $380,000. C) $150,000. D) $300,000.

a

16) Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 40 stocks in order to construct a mean-variance efficient portfolio constrained by 40 investments. They will need to calculate ________ expected returns and ________ variances of returns. A) 40; 40 B) 100; 100 C) 4950; 4950 D) 4950; 100 E) None of the options are correct.

a

20) Suppose the following equation best describes the evolution of over time: t =0.3+0.2t -1 If a stock had a of 0.8 last year, you would forecast the to be ________ in the coming year. A) 0.46 B) 0.94 C) 0.70 D) 0.60

a

23) If a firm's beta was calculated as 1.35 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of A) between 1.0 and 1.35. B) zero or less. C) between 0.0 and 1.0. D) equal to 1.35. E) greater than 1.35.

a

53) Consider the one-factor APT. The standard deviation of returns on a well-diversified portfolio is 18%. The standard deviation on the factor portfolio is 16%. The beta of the well-diversified portfolio is approximately A) 1.13. B) 1.56. C) 0.80. D) 1.25.

a

116) The market-capitalization rate on the stock of Flexsteel Company is 12%. The expected ROE is 13%, and the expected EPS are $3.60. If the firm's plowback ratio is 75%, theP/E ratio will be A) 9.09. B) 11.11. C) 7.69. D) 8.33. E) None of the options are correct.

b

118) Exercise Bicycle Company is expected to pay a dividend in year 1 of $1.20, a dividend in year 2 of $1.50, and a dividend in year 3 of $2.00. After year 3, dividends areexpected to grow at the rate of 10% per year. An appropriate required return for thestock is 14%. The stock should be worth ________ today. A) $55.00 B) $40.68 C) $39.86 D) $33.00 E) $66.00

b

119) Antiquated Products Corporation produces goods that are very mature in their product life cycles. Antiquated Products Corporation is expected to pay a dividend in year 1 of$1.00, a dividend of $0.90 in year 2, and a dividend of $0.85 in year 3. After year 3,dividends are expected to decline at a rate of 2% per year. An appropriate required rate of return for the stock is 8%. The stock should be worth A) $20.00. B) $8.98. C) $10.57. D) $22.22.

b

123) A firm has a return on equity of 20% and a dividend-payout ratio of 30%. The firm's anticipated growth rate is A) 10%. B) 14%. C) 20%. D) 6%.

b

18) Consider the single-index model. The alpha of a stock is 0%. The return on the market index is 10%. The risk-free rate of return is 3%. The stock earns a return that exceedsthe risk-free rate by 11%, and there are no firm-specific events affecting the stock performance. The of the stock is A) 1.50. B) 1.57. C) 0.75. D) 1.33. E) 1.17.

b

19) Suppose the following equation best describes the evolution of over time: t =0.4+0.6t -1. If a stock had a of 0.9 last year, you would forecast the to be ________ in the coming year. A) 0.70 B) 0.94 C) 0.45 D) 0.60

b

22) The index model has been estimated for stocks A and B with the following results: RA = 0.01 + 0.8RM + eA.RB = 0.02 + 1.1RM + eB.M = 0.30 (eA) = 0.20 (eB) = 0.10. The covariance between the returns on stocks A and B is A) 0.0050. B) 0.0792. C) 0.0406. D) 0.0384. E) 0.1920.

b

33) Your personal opinion is that a security has an expected rate of return of 0.11. It has a beta of 1.5. The risk-free rate is 0.05 and the market expected rate of return is 0.09. According to the Capital Asset Pricing Model, this security is A) overpriced. B) fairly priced. C) underpriced. D) Cannot be determined from data provided.

b

47) A security has an expected rate of return of 0.15 and a beta of 1.25. The market expected rate of return is 0.10, and the risk-free rate is 0.04. The alpha of the stock is A) 8.3%. B) 3.5%. C) 1.7%. D) -1.7%.

b

62) Consider the single-factor APT. Stocks A and B have expected returns of 12% and 14%, respectively. The risk-free rate of return is 5%. Stock B has a beta of 1.2. Ifarbitrage opportunities are ruled out, stock A has a beta of A) 1.30. B) 0.93. C) 1.69. D) 0.67.

b

63) Consider the one-factor APT. The standard deviation of returns on a well-diversified portfolio is 19%. The standard deviation on the factor portfolio is 12%. The beta of the well-diversified portfolio is approximately A) 1.25. B) 1.58. C) 1.13. D) 0.76.

b

65) Consider a single factor APT. Portfolio A has a beta of 2.0 and an expected return of 22%. Portfolio B has a beta of 1.5 and an expected return of 17%. The risk-free rate ofreturn is 4%. If you wanted to take advantage of an arbitrage opportunity, you shouldtake a short position in portfolio ________ and a long position in portfolio ________. A) B; B B) B; A C) A; A D) A; the riskless asset E) A; B

b

81) Suppose on August 27, there were 1,455 stocks that advanced on the NYSE and 1,553 that declined. The volume in advancing issues was 852,581, and the volume indeclining issues was 1,058,312. The trin ratio for that day was ________, and technical analysts were likely to be ________. A) 0.87; bearish B) 1.15; bearish C) 0.87; bullish D) 1.15; bullish

b

9) Assume that stock market returns do follow a single-index structure. An investment 9) fund analyzes 125 stocks in order to construct a mean-variance efficient portfolio constrained by 125 investments. They will need to calculate ________ estimates ofexpected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor. a. 7750; 125 b. 125; 125 c. 125; 15225 d. 15625; 125

b

97) Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy enters a recession, the tax of firm C will be A) $1,680,000. B) $204,000. C) $750,000. D) $510,000.

b

98) Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger.Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy is strong, the tax of firm C will be A) $204,000. B) $420,000. C) $750,000. D) $510,000.

b

107) Music Doctors Company has an expected ROE of 14%. The dividend growth rate will be ________ if the firm follows a policy of paying 60% of earnings in the form of dividends. A) 4.8% B) 7.2% C) 5.6% D) 6.0%

c

111) You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $1.25 in dividends and $32 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is ________ if you wanted to earn a 10% return. A) $26.52 B) $27.50 C) $30.23 D) $24.11 E) None of the options are correct.

c

115) Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%.Analysts expect the price of Sure Tool Company shares to be $22 a year from now. Thebeta of Sure Tool Company's stock is 1.25. What is the intrinsic value of Sure's stock today? A) $12.12 B) $20.00 C) $20.60 D) $22.00

c

117) The market-capitalization rate on the stock of Fast Growing Company is 20%. The 117) expected ROE is 22%, and the expected EPS are $6.10. If the firm's plowback ratio is90%, the P/E ratio will be A) 7.69. B) 11.11. C) 50. D) 8.33. E) 9.09.

c

122) A firm has a return on equity of 14% and a dividend-payout ratio of 60%. The firm's anticipated growth rate is A) 14%. B) 20%. C) 5.6%. D) 10%.

c

17) Assume that stock market returns do follow a single-index structure. An investment fund analyzes 60 stocks in order to construct a mean-variance efficient portfolio constrained by 60 investments. They will need to calculate ________ estimates ofexpected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor. A) 200; 19,900 B) 19,900; 19.900 C) 60; 60 D) 200; 200 E) None of the options are correct.

c

24) Suppose you held a well-diversified portfolio with a very large number of securities, and that the single index model holds. If the of your portfolio was 0.24 and M was 0.18, the of the portfolio would be approximately A) 1.25. B) 0.64. C) 1.33. D) 1.56.

c

36) Your opinion is that Boeing has an expected rate of return of 0.112. It has a beta of 0.92. The risk-free rate is 0.04 and the market expected rate of return is 0.10. Accordingto the Capital Asset Pricing Model, this security is A) fairly priced. B) overpriced. C) underpriced. D) Cannot be determined from data provided.

c

6) The beta of Exxon stock has been estimated as 1.6 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of a. 1.32 b. 1.13 c. 1.40 d. 1.20

c

8) Assume that stock market returns do follow a single-index structure. An investment 8) fund analyzes 175 stocks in order to construct a mean-variance efficient portfolio constrained by 175 investments. They will need to calculate ________ estimates ofexpected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor. a. 15,225; 15,225 b. 125; 15225 c. 175;175 d. 15225; 175

c

99) If a firm's sales decrease by 15%, and profits decrease by 20% during a recession, the firm's operating leverage is A) 5. B) 0.75. C) 1.33. D) 5.

c

1. As diversification increases, the unsystematic risk of a portfolio approaches a. infinity b. 1 c. (n-1) x n d. 0

d

112) You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $2.50 in dividends and $28 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is ________ ifyou wanted to earn a 15% return. A) $23.91 B) $27.50 C) $24.11 D) $26.52 E) None of the options are correct.

d

114) Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%.Analysts expect the price of Sure Tool Company shares to be $22 a year from now. Thebeta of Sure Tool Company's stock is 1.25. The market's required rate of return on Sure's stock is A) 14.0%. B) 15.25%. C) 17.5%. D) 16.5%. E) None of the options are correct.

d

124) The growth in dividends of ABC, Inc. is expected to be 15% per year for the next three years, followed by a growth rate of 8% per year for two years. After this five-yearperiod, the growth in dividends is expected to be 3% per year, indefinitely. The requiredrate of return on ABC, Inc. is 13%. Last year's dividends per share were $1.85. What should the stock sell for today? A) $25.21 B) $40.00 C) $8.99 D) $27.74 E) None of the options are correct.

d

21) Suppose you forecast that the market index will earn a return of 12% in the coming year. Treasury bills are yielding 4%. The unadjusted of Mobil stock is 1.50. Areasonable forecast of the return on Mobil stock for the coming year is ________ if youuse a common method to derive adjusted betas. A) 15.0% B) 16.0% C) 15.5% D) 14.7%

d

25) Suppose you held a well-diversified portfolio with a very large number of securities, and that the single index model holds. If the of your portfolio was 0.14 and M was 0.19, the of the portfolio would be approximately A) 1.56. B) 0.80. C) 1.25. D) 0.74.

d

38) As a financial analyst, you are tasked with evaluating a capital-budgeting project. You were instructed to use the IRR method, and you need to determine an appropriate hurdle rate. The risk-free rate is 5%, and the expected market rate of return is 10%. Yourcompany has a beta of 0.67, and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past. According to CAPM, the appropriate hurdle rate would be A) 0.67%. B) 28.35%. C) 10%. D) 8.35%. E) 5%.

d

54) Consider the multifactor APT with two factors. The risk premiums on the factor 1 and factor 2 portfolios are 5% and 6%, respectively. Stock A has a beta of 1.2 on factor-1,and a beta of 0.7 on factor-2. The expected return on stock A is 17%. If no arbitrage opportunities exist, the risk-free rate of return is A) 6.5%. B) 6.0%. C) 7.4%. D) 6.8%.

d

7) Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio constrained by 100 investments. They will need to calculate ________ covariances. A) 10,000 B) 45 C) 100 D) 4,950

d

10) The index model has been estimated for stocks A and B with the following results: RA = 0.01 + 0.5RM + eA. RB = 0.02 + 1.3RM + eB M = 0.25; (eA) = 0.20; (eB) = 0.10. The covariance between the returns on stocks A and B is a. 0.0384 b. 0.1920 c. 0.0050 d. 0.4000 e. 0.0406

e

110) A preferred stock will pay a dividend of $7.50 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 10% on thisstock. Use the constant growth DDM to calculate the intrinsic value of this preferredstock. A) $7.50 B) $56.25 C) $64.12 D) $0.75 E) None of the options are correct.

e

113) Paper Express Company has a balance sheet which lists $85 million in assets, $40 million in liabilities, and $45 million in common shareholders' equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. Themarket share price is $90. What is Paper Express's market value per share? A) $2.60 B) $60.71 C) $32.14 D) $1.68 E) None of the options are correct.

e

37) As a financial analyst, you are tasked with evaluating a capital-budgeting project. You were instructed to use the IRR method, and you need to determine an appropriate hurdle rate. The risk-free rate is 4%, and the expected market rate of return is 11%. Yourcompany has a beta of 0.67, and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past. According to CAPM, the appropriate hurdle rate would be A) 0.75%. B) 15%. C) 4%. D) 11%. E) 8.69%.

e

71) On November 22, the stock price of WalMart was $69.50, and the retailer stock index was 600.30. On November 25, the stock price of WalMart was $70.25, and the retailerstock index was 605.20. Consider the ratio of WalMart to the retailer index onNovember 22 and November 25. WalMart is ________ the retail industry, and technical analysts who follow relative strength would advise ________ the stock. A) outperforming; selling B) underperforming; buying C) underperforming; selling D) equally performing; neither buying nor selling E) outperforming; buying

e