Official

Suppose a stock had an initial price of $69 per share, paid a dividend of $1.95 per share during the year, and had an ending share price of $53. What is the percentage total return for the year? Round your answer to the t basis point, or hundredth of percent. (NOTE: enter your answer as percent without the percentage sign. For example, If your answer is 5.45%, enter 5.45)

-20.35

Suppose a stock had an initial price of $69 per share, pald a dividend of $1.95 per share during the year, and had an ending share price of $53. What is the percentage total return for the year? Round your answer to the nearest basis point, or hundredth of percent. (NOTE: enter your answer as percent without the percentage sign. For example, if your answer is 5.45%, enter 5.45).

-20.35

The beta of an investment in U.S. Treasury bills is: -none of these are correct -1.0 -meaningless only common stock have betas -0.0 - -1.0

0.0

An investor divides her portfolio equally into three parts, with one part in Treasury bills, one part in a market index, and one part in a diversified portfolio with beta of 1,50. What is the beta of the investor's overall portfolio? -2.50 -1.00 -0.83 -1.25 -0.50

0.83

Assume a portfolio is made up of the following three stocks: Selecting the closest answer, the beta for this portfolio is: -0.92 -1.0 -1.1 -none of these are correct -1.02

0.92

What should be the beta of a replacement stock if an investor wishes to achieve a portfolio beta of 1.0 by replacing stock C in the following equally weighted portfolio: stock A = .9 beta; stock B = 1.1 beta; stock C=1.35 beta? -none of these are correct -0.93 -1.08 -1.00 -1.15

1.00

You hold a diversified portfolio worth $10.000. The portfolio consists of 20 different common stocks. The portfolio beta is equal to 1.2. You have decided to sell one of your stocks that has a beta equal to 1.4. You plan to us the proceeds to purchase another stock that has a beta equal to 0.7. What can possibly be the beta of the new portfolio? -1.235 -1.250 -1.165 -cannot be determined -none of the above

1.165

You own a stock portfolio invested 25 percent in Stock Q. 20 percent in Stock R. 15 percent in Stock S, and 40 percent in Stock . The betas for these four stocks are 9, 1.4, 1.1 and 1.8, respectively. What is the portfolio beta? Round vour answer to the nearest hundredth

1.39

You own a stock portfolio invested 25 percent in Stock Q. 20 percent in Stock R. 15 percent in Stock S, and 40 percent in Stock T. The betas for these four stocks are .9, 1.4, 1.1 and 1.8, respectively. What is the portfolio beta? your answer to the nearest hundredth.

1.39

Company A's stock has an estimated beta of 1.3, and its required rate of return is 11.8 percent. Company B'° stock has a required rate of return of 13.0 percent. If the expected return on the market is 10 percent determine the beta of Company B's stock -1.55 -1.50 -1.40 -1.35 -1.45

1.50

The common stock of Jensen Shipping has an expected return of 154 percent. The return on the market is 11.2 percent the inflation rate is 3.1 percent, and the risk-free rate of return is 3.6 percent. What is the beta of this -1.55 -2.03 -1.14 -1.38 -1.05

1.55

Company As stock has an estimated beta of 1.4, and its required rate of return is 13 percent. Company B's stock has a beta of 0.8, and the risk-free rate is 6 percent. Determine the required rate of return on Company B's stock. -10% -10.6% -10.4% -9.8% -10.2%

10%

Your firm sold a 25-year bond at par value 19 years ago. The bond has a $1,000 face value and a coupon rate of 6%. The coupons are pald annually. The bond currently sells for $825. What is the firms before-tax cost of debt? -10% -8.2% -6.0% -9.5% -11.3%

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. -none of these are correct -15.4% -16.9% -10.4% -8.0%

10.4%

A stock has an expected return of 10 percent, its beta is 9 and the risk-free rate is 6 percent. What must the expected return on the market be? Round your answer to the nearest basis point, or hundredth of percent. (NOTE enter your answer as percent without the percentage sign. For example, if your answer is 5.45%, enter 5.45).

10.45

What is the WACC for a firm using 55% equity with a required return of 15%, 35% debt with a required return of 8%. 10% preferred stock with a required return of 10%, and a tax rate of 35%? -12.05% -11.07% -10.72% -none of these are correct -11.70%

11.07%

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%? -5.4% -9.6% -11.4% -15.0% -none of these are correct

11.4%

What is the portfolio expected return and the portfolio beta if you invest 35% in A, 45% in B, and 20% in the risk-free asset? -Cannot be determined because the market risk premium is not provided -11%, .098 -11.8% : .078 -Cannot be determined because the beta of the risk-free asset is not provided -none of these are correct

11.8 , 0.78

What is the portfolio expected return and the portfolio beta if you invest 35% in A, 45% in B, and 20% in the risk-free asset? -none of these are correct -Cannot be determined because the beta of the risk-free asset is not provided -11.0%; 0.98 -Cannot be determined because the market risk premium is not provided -11.8%; 0.78

11.8%; 0.78

What is the after-tax cost of preferred stock that sells for $10.00 per share and offers a $1.20 annual dividend when the tax rate is 35%? -8.33% -7.8% -12.00% -None of these are correct -4.2%

12.00%

A firm is expected to pay a dividend of $3.50 per share in one year. This dividend, along with the firm's 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? -15.64% -7.00% -14.00% -13.46% -12.22%

12.22

Treasury bills currently have a return of 2.5% and the market risk premium is 7%. If a firm has a beta of 1.4, what is its cost of equity? -10.5% -9.5% -none of these are correct -8.8% -12.3%

12.3%

Using the following data, calculate the standard deviation of returns of X. Round your answer to the nearest basis point, or hundredth of percent. (NOTE: enter your answer as percent without the percentage sign. For example, if your answer is 5.45%, enter 5.45).

12.7

You owm a portfolio that is 50 percent invested in Stock X 30 percent in Stock y, and 20 percent in Stock 2. The returns on these three stocks are 10 percent. 18 percent, and 13 percent respectively. What is the return on the portfolio? Round your answer to the nearest basis point, or hundredth of percent. (NOTE: enter your answer as percent without the percentage sign. For example, if your answer is 5.45%, enter 5.45)

13

Stock in Parrothead industries has a beta of 1.10. The market risk premium is 8 percent, and T-bills are currently yielding 5.5 percent. Parrothead's most recent dividend was $2.20 per share, and dividends are expected to grow at a 5 percent annual rate indefinitely. if the stock sells for $32 per share, what is your best estimate of Parrotheads cost of equity? Round your answer to the nearest basis point or hundredth of percent. (NOTE: enter your answer as percent without the percentage sign. For example, if your answer is 5.45%, enter 5.45).

13.25

Stock in Parrothead industries has a beta of 1.10. The market risk premlum is 8 percent, and T-bills are currently yielding 5.5 percent. Parrotheads most recent dividend was $2.20 per share, and dividends are expected to grow at a 5 percent annual rate indefinitely. if the stock sells for $32 per share, what is your best estimate of Parrotheads cost of equity? Round your answer to the nearest basis point, or hundredth of percent. (NOTE: enter your answer as percent without the percentage sign. For example, if your answer is 5.45%, enter 5.45).

13.25

What is the standard deviation of a portfolio's returns if the mean return is 15%, the variance of returns is 0.0184, and there are three stocks in the portfolio? -none of these are correct -13.56% -0.92% -9.59% -6.78%

13.56

What is the approximate standard deviation of returns if over the past 4 years an investment returned 8.0%, -12.0%, -12.0%, and 16.0%? -6% -0% -cannot be determined due to lack of information -2% -14%

14%

Suppose Massey Lid. just issued a dividend of S.68 per share on its common stock. The company paid dividends of $ 40, $ 45, S.52 and S.60 per share in the last four years. If the stock currently sells for $12, what is your best estimate of the equity capital? Round your answer to the nearest basis point, or hundredth of percent. (NOTE: enter your answer as percent without the percentage sign. For example, if your answer is 5.45%, enter 5.45)

20.65

Most of the beneficial effects of diversification will have been received by the time a portfolio of common stocks contains _ stocks -25 -2 -5 -none of these are correct -50

25

for is considering investing in Tawan Company for one year. He expects to receive $2 in dividends over the year and feels he can sell the stock for $30 at the end of the year. To realize a return on the investment over the year of 14% the price the investor would pay for the stock today is closest to: -29 -32 -28 -26 -27

28

Your company's capital structure has a weight of 70% in debt and 30% in equity. There are 2.5 million shares outstanding, trading at $56 per share. The price of the company bond is $910 per unit. How many units of bond -there is not enough information to tell -345,372 bond -358,974 bonds -311,249 bongs -65,934 bonds

358,974 bonds

You want to create a portfolio equally as risky as the market (le, a portfolio with beta equal to 1) and you have $1.000,000 to invest. The portfolio contains stocks A 8. C and a risk free asset. Given this information find how much must you investment in stock C. Round your answer to the nearest dollar. (NOTE: do NOT include the dollar sign in your answer). Investment Beta

365,625

What is the percentage return on a stock that was purchased for $50.00, paid a $3.00 dividend after one year, and was then sold for $49.00? -4% -2% -6% -none of these are correct - -2%

4%

The expected return on JK stock is 16.28 percent while the expected return on the market is 11.97 percent. The stock's beta is 1.63. What is the risk-free rate of return? -4.13% -2.64% -3.23% -none of these are correct -5.13%

5.13

Jimmy's Cricket Farm issued a 30-year, 9 percest anenal coopea bood 8 years ago. The bood maices coupoa paymetts semiaceally. The par valse of the bood is $1,000. The bood curreatly sells for 105 percent of its face valse. The coespany's tax rate is 35 perceck What as the after-tax cost of debe? Round your answer to the bearest basas pount, or boodedt of percent. (NOTEs cater your answer as percent without the percentage sutm For example, if woor answer is S45%. eater 5.45).

5.55

Lewis. Schultz, and Nobel Development Corp. has an after-tax cost of debt of 4.5%. With a tax rate of 21%, what is the yield to maturity on the debt? (Round your answer to the nearest hundredth percentage) -0.95% -none of these choices -5.70% -4.5% -3.56%

5.70%

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? -6.5% -11.5% -it cannot be determined from this information -5.0% -none of these are correct

6.5%

You have $10.000 to invest in a stock portfolio. Your choices are Stock X with a return of 15 percent and Stock Y with a return of 10 percent. If your goal is to create a portfollo with a return of 13.5 percent how much money will you invest in Stock X? Round your answer to the nearest dollar. (NOTE: do NOT include the dollar sign in your answer).

7,000

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 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)? -7.80 -none of these are correct -9.40 -8.60 -5.40

7.80

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? - none of these options are true -8.25% -7.52% -it cannot be determined -13.33%

8.25%

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? -It cannot be determined because the tax rate is not given. -7.52% -8.25% -13.33% -none of these options are true

8.25%

Annie would like to know her portfolio's expected rate of return based on CAPM. After doing some research she figures out the market values and betas of each of her 5 stocks (see the table below) and is told by her consultant that the risk-free rate is 3% and the market risk premium is 8% -11.00% -0% because of the assets has a negative beta -none of the other choices -8.54% -6.45%

8.54%

Suppose the common stock of United Industries has a beta of 1.28 and an expected return of 15.47 percent. The risk-free rate of return is 3.7 percent while the inflation rate is 4.2 percent. What is the expected market risk premium? -9.20% -12.90% -11.77% -12.09% -7.57%

9..20%

Suppose the common stock of United industries has a beta of 1.28 and an expected return of 15.47 percent. The risk-free rate of return is 3.7 percent while the inflation rate is 4.2 percent. What is the expected market risk -11.77% -12.09% -7.57% -12.09% -9.20%

9.20%

A company has the following capital structure: • Target weights: 30% debt, 20% preferred stock, 50% common equity. • Tax Rate: 35%. • The firm can issue $1,000 face value, 7% semi-annual coupon debt with a 15-year maturity for a price A preferred stock issue that pays a dividend of $2.80 has a value of $35 per share. • The company's common shares have a value of $40 and a dividend in year 0 of Do = $3.00. • The stock's dividend is expected to grow at a constant rate of 6% per year. The company's weighted average cost of capital is closest to: -none of these are correct -11.03% -10.53% -9.28% -9.84%

9.84%

Which one of the following is the best example of a diversifiable risk? -A firm's sales decrease -Taxes decrease -Core inflation increases -Interest rates increase -None of these are correct

A firm's sales decrease

Which of the following would likely have the greatest amount of systematic risk? -None of these are correct -The market portfolio -A portfolio half invested in the market portfolio and half invested in stocks with betas = 1.50. -A portfolio of the common stocks of 100 randomly-selected companies -A portfolio half invested in the market portfolio and half invested in Treasury bills.

A portfolio half invested in the market portfolio and half invested in stocks with betas = 1.50.

Which of the following events will reduce a company's weighted average cost of capital (WACC)? -and increase in risk free rate -none of these are correct -A reduction in the company's bond rating -a reduction in the market risk premium -A decrease in the market tax rate

A reduction in the market risk premium

A stock investor owns a diversified portfolio of 15 stocks. What will be the likely effect on portfolio return standard deviation from adding one more stock? -a large increase will occur -a large decrease will occur -a slight decrease will occur -a slight increase will occur -none of these are correct

A slight decrease occur

You have an $80.000 investment portfolio of Apple and Amazon stocks 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? -None of these choices are correct -Apple = $48,000; Amazon = $32,000 -Apple = $40,000; Amazon = $60,000 -Apple = $32,000; Amazon = $48,000 -Apple = $60,000; Amazon = $40,000

Apple = $32,000; Amazon = $48,000

Which of the following is false concerning diversification? Assume that the securities being considered for selection into a portfolio are not perfectly correlated. -none of these are correct -As more securities are added to the portfolio, the systematic risk of the portfolio declines. -As more securities are added to the portfolio, the portfolio risk eventually approaches the level of systematic risk in the market. -As more securities are added to the portfolio, the total risk of the portfolio declines -As more securities are added to the portfolio, the unsystematic risk of the portfolio declines.

As more securities are added to the portfolio, the systematic risk of the portfolio declines

Which of the following is false concerning diversification? Assume that the securities being considered for selection into a portfolio are not perfectly correlated. -As more securities are added to the portfolio, the portfolio risk eventually approaches the level of systematic risk in the market. -As more securities are added to the portfolio, the unsystematic risk of the portfolio declines. -As more securities are added to the portfolio, the unsystematic risk of the portfolio declines. -As more securities are added to the portfolio, the total risk of the portfolio declines -None of these are correct

As more securities are added to the portfolio, the systematic risk of the portfolio declines.

Which of the following statements is true? -Risk of an investment portfolio has nothing to do with asset return correlations. -Assets with returns that are totally uncorrelated, if included in an investment portfolio, provide some risk reduction. -none of the choices -Assets with returns that are totally uncorrelated, if included in an investment portfolio, provide no risk reduction. -Assets with returns that are totally uncorrelated, if included in an investment portfolio, provide no risk reduction.

Assets with returns that are totally uncorrelated, if included in an investment portfolio, provide some risk reduction.

which of the following statements is true? -Assets with returns that are totally uncorrelated, if included in an investment portfolio, completely eliminate risk. -none of the choices. -Risk of an investment portfolio has nothing to do with asset return correlations. -Assets with returns that are totally uncorrelated, if included in an investment portfolio, provide no risk reduction. -Assets with returns that are totally uncorrelated, if included in an investment portfolio, provide some risk reduction.

Assets with returns that are totally uncorrelated, if included in an investment portfolio, provide some risk reduction.

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: -is zero -cannot be determined -equals the dividend yield -less than dividend yield -is negative

Cannot be determined

_ 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. - capital structure -NPV -none of these are correct -working capital management - cost if capital

Capital structure

elmer industries has a different WACC for each of three types of projects. Low-risk projects have an 8% WACC, average.-risk projects a 10% WACC, and high-risk projects a 12% WACC. Which of the following projects do you ommend that the firm accept?

Correct: Projects A. D, E, F, and G

If a stock consistently goes down (up) by 1.6% when the market portfolio goes down (up) by 1.2%, then its beta -equals .40 -equals .75 -cannot be determined -equals 1.92 -equals 1.33

Equals 1.33

The weighted average of betas of all individual assets is: -exactly 1 -greater than 1 -unknown -exactly 0 -between 0 and 1

Exactly 1

Cash flows for a project that carries a normal amount of risk and does not affect the risk exposure of the firm should be discounted back at the -risk free rate - cost of equity -beta -none of these choices -firms weighted average cost of capital

Firma weighted average cost of capital

Investments with low return variances usually: -Have realized returns higher than expected returns. -Have realized returns close to expected returns. -Have a high return standard deviation. -Have very high returns. -None of these are correct

Have realized returns close to expected returns.

The_ beta coefficient the _ the expected return, on average. -lower; lower or higher (depending on the level of the risk-free rate) -higher higher -lower higher -none of these are correct -higher lower

Higher higher

If beta of your portfolio is between 1.5 and 1.85, what does this imply about your portfolio's systemic risk relative to that of the market portfolio? -higher than the systemic risk of the market portfolio -none of these choices are correct -lower than the systemic risk of the market portfolio -same as the systemic risk of the market portfolio -the systemic risk of the two portfolio cannot be determined

Higher than the systemic risk of the market portfolio

Which of the following statements concerning risk are correct? 1. Non-diversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for non-diversifiable risk. IV. Diversifiable risks are market risks you cannot avoid.

I AND III ONLY

You invested 40% of your money in a fully diversified mutual fund (hint: the mutual fund can be considered as a market portfolio) 50% in a stock called Macrohard, and the rest in Treasury Securities (Le. risk-free assets). After reviewing your investment portfolio, a financial advisor informs you that the portfolio has higher systemic risk than the market. which of the following could be the beta of Macrohard? 1. 1.93 II. 1.54 III. 1.20 IV. 1.11

I and II

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 -Increase the NPV of the asset to reflect the greater risk. -Reject the asset, since its acceptance would increase the firm's risk. -None of these are correct -Increase the cost of capital used to evaluate the project to reflect the pro -Increase the IRR of the asset to reflect the greater risk.

Increase the cost of capital used to evaluate the project to reflect the project's higher risk.

What would you recommend to an investor who is considering an investment that, according to its beta, plots above the security market line (SML)? -Don't invest; risk is high relative to return. -None of these are correct -Invest; return is high relative to risk. -invest; stocks above the SML have little non-systematic risk. -Don't invest; stocks revert to the SML over time.

Invest; return is high relative to risk

Which of the following is most directly affected by the level of systematic risk in a security? -market risk premium -standard deviation of its returns -it's excepted rate of return -variance of it's returns - risk free rate

Its expected rate of return

Which of the following is most directly affected by the level of systematic risk in a seturity? -Market risk premium -Standard deviation of its returns -Variance of its returns -Its expected rate of return -Risk-free rate

Its expected rate of return

Given an optimal capital structure that is 50% debt and 50% common stock calculate the weighted average cost of capital for the company given the company given the following addition information - none of the choices -more than 8% -more than 6% and less than 7% -more than 7% and less than 8% -less than 6%

More than 7% and less than 8%

Given an optimal capital structure that is 50% debt and 50% common stock, calculate the weighted average cost of capital for the company aven the following additional information -More than 8%. -More than 7% and less than 8%. -More than 6% and less than 7%. -None of the choices. -Less than 6%.

More than 7% and less than 8%.

which one of the following is an example of unsystematic risk? -national decrease in consumer spending on entertainment -adoption of national sales tax -An increased feeling of global prosperity -An across-the-board increase in income taxes -Decrease in the national level of inflation

National decrease in consumer spending on entertainment

Which one of the following statements is correct concerning unsystematic risk? -An investor is rewarded for assuming unsystematic risk. -Beta measures the level of unsystematic risk inherent in an individual security. -Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk. -none of these are correct -Standard deviation is a measure of unsystematic risk.

None of these are correct

You can choose to invest in two different portfolios. Portfolio 1 includes Stogy with an expected return of 12% and T-Bills that earn 2%. Portfolio 2 invests 20% in info Tech. 30% in Health Care, and 50% in Financials. These three sectors have an expected return of 12%, 9%, and 10%, respectively. How much must you invest in Stock X so that Portfolio 1 has the same expected return of Portfolio 2? -76% -65% -84% -none of these choices are correct -92%

None of these are correct

You can choose to invest in two different portfolios. Portfolio 1 includes Stock X with an expected return of 12% and T-Bills that earn 2%. Portfolio 2 invests 20% in info Tech, 30% in Health Care, and 50% in Financials. These three sectors have an expected return of 12%, 9%, and 10%, respectively. How much must you invest in Stock X so that Portfolio 1 has the same expected return of Portfolio 22 -none of these choices are correct -84% -76% -92% -65%

None of these choices are correct

Your company's capital structure weight of equity is higher than the weight of debt. To finance new projects. your company is going to issue new bonds. Assuming the stock and bond prices do not change in response to the new bond issuance, which of the following statements MUST be true after the bond issuance? 1. Weight of debt will exceed weight of equity. 11. Weight of equity will remain higher than weight of debt. III. The capital structure remains unchanged -statement I AND III -NONE OF THESE STATEMENTS -STATEMENT I -STATEMENT III -STATEMENT II

None of these statements

em 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 Dater plot above or below security market line (SML)? -none of these are correct -Required return = 10%, plots below the SML -Required return = 8.6%, plots above the SML -Required return = 10%, plots above the SML -Required return = 8.6%, plots below the SML

Required return = 8.6%, plots above the SML

Which of the following risks would be classified as a non-systematic risk for an auto manufacturer? -interest rates -foreign exchange rates -none of these are correct -business cycles -steel prices

Steel prices

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? - Stock A necessarily must have a lower standard deviation of returns than stock B. -Stock B must have a higher expected return than stock A if both of them are priced properly -stock B. if purchased, will increase the market risk of a portfolio more than stock A would (if purchased). -Stock A is less risky from the market's perspective than a typical stock, and stock B is more risky than a typical stock. -None of these are correct

Stock A necessarily must have a lower standard deviation of returns than stock B.

Holding everything else equal, which one of the following should earn the highest risk premium based on CAPM -A very well-diversified portfolio -Stock with a beta of 1.38 -U.s. Treasury bill -Stock with a beta of .74 -Portfolio with a beta of 1.01

Stock with a beta of 1.38

which of the following statement is FALSE? -None of the choices are FALSE. -High inflation is an example of non-diversifiable risk. -The risk of a financial asset can be decomposed into two components: systematic and non-systematic risk. -Systematic risk can be almost eliminated in a well-diversified portfolio. -A goal of diversification is to minimize non-systematic risk.

Systematic risk can be almost eliminated in a well-diversified portfolio.

Assume that the Security Market Line (SML) is based on a risksfree rate of 5% and a market return of 11%. What will happen to the SML if the risk-free rate is expected to increase and investors become more risk averse? -The SML will shift down and have a less steep slope -The SML will shift down and have a steeper slope -The SML will shift up and have a less steep slope -The SML will shift up and have a steeper slope -The SML will shift down and have the same slope

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? -The actual expected stock return indicates the stock is currently overpriced. -The stock is currently underpriced. -The stock has less systematic risk than the overall market. -To be correctly priced according to CAPM, the stock should have an expected return of 13.56 percent. -the actual expected stock return will graph above the security market line.

The actual expected stock return indicates the stock is currently overpriced.

What will happen to the expected return on a stock with a beta of 1.5 and a market risk premlum of 9% if the Treasury bill yield increases from 3 to 5%? (assuming the change in T-bil yield does not affect the market risk premium). -The expected return will increase by 2.0%. -The expected return will decrease by 1.0%. -The expected return will increase by 3.0%. -The expected return will increase by 1.0%. -The expected return will remain unchanged.

The expected return will increase by 2.0%.

When calculating the weighted average cost of capital (WACC) an adjustment is made for taxes because: -companies must pay taxes on its taxable incomes -none of these are correct -the interest on debt is tax deductible -investors suffer from double taxation problem -equity is risky

The interest on debt is tax deductible

If the market portfolio is expected to offer returns of 16%, then what can be said about a portfolio expected to return 13%? -the portfolios beta is less than 1.0 -part of the portfolio is invested in treasury bills -none of these are correct -the portfolio is not diversified -it plots bellow the security market line

The portfolio's beta is less than 1.0

Under the constant dividend growth model for common stock, if the price of a stock (Po) goes up (and nothing else changes). -then estimated cost of equity goes up. -None of these options are true. -then estimated cost of equity may increase or decrease depending on the dividend growth rate -then estimated cost of equity goes down -then estimated cost of equity remains unchanged

Then estimated cost of equity goes down

Levenworth Industries has the following capital structure on December 31, 2006: What are the weights on debt and preferred stock in the firm's capital structure? -None of these are correct -Weight on debt: 0.40; Weight on preferred stock: 0.06 -Weight on debt: 0.41; Weight on preferred stock: 0.10 -Weight on debt: 0.40; Weight on preferred stock: 0.10 -Weight on debt: 0.41; Weight on preferred stock: 0.06

Weight on debt: 0.41; Weight on preferred stock: 0.06

The last annual dividend of Comptron inc. was of $4, Its stock beta is 1.1 and its dividend is expected grow at a constant annual rate of 2%. The risk-free rate and market risk premium are 2.5% and 6%, respectively. The new CEO wants to launch new initiatives for growth. in discussing the plans with the CFO, the new initiatives boil down to an increased growth rate of dividend to 5%, but at the cost of increasing beta to 1.4. Should the initiatives be undertaken? -No--new stock price should move to $71.19, a decrease from its current price. -No--new stock price should move to $67.49, a decrease from its current price. -None of these are correct -Yes--new stock price should move to $71.19, an increase over its current price. -Yes--new stock price should move to $67.49, an increase over its current price.

Yes--new stock price should move to $71.19, an increase over its current price.

• Question 5 An all equity firm is considering the following projects: Project The T-bill rate is 5 percent, and the expected return on the market is 12 percent. Assume the company's overall WACC is 12%. Which projects would be incorrectly accepted if overall cost of capital were used as a hurdle rate? -none of these are correct -Z -X -W -Y

Z

The systematic risk of the market is measured by a: - beta of 1. -return standard deviation of 1 -beta of 0 -none of these are correct - return standard deviation of 0

a beta of 1.0

within the capital asset pricing model -dividends are considered in the calculations. -None of these options are true. -beta measures the risk of an individual stock relative to a market index. -the higher the beta, the lower the required rate of return of an asset. -the risk-free rate is usually higher than the expected market return.

beta measures the risk of an individual stock relative to a market index

Unsystematic risk: -is measured by return standard deviation. -is compensated for by the risk premium. -is related to the overall economy. -is measured by beta. -can be effectively eliminated by portfolio diversification.

can be effectively eliminated by portfolio diversification.

The return standard deviation of a portfolio: -None of these are correct -can be less than the return standard deviation of the least risky security in the portfolio. -is an arithmetic average of the return standard deviations of the individual securities which comprise the portfolio. -can never be less than the return standard deviation of the most risky security in the portfolio. -must be equal to or greater than the lowest return standard deviation of any single security held in the portfolio.

can be less than the return standard deviation of the least risky security in the portfolio.

The return standard deviation of a portfolio: -can be less than the return standard deviation of the least risky security in the portfolio. -can never be less than the return standard deviation of the most risky security in the portfolio. -is an arithmetic average of the return standard deviations of the individual securities which comprise the portfolio. -must be equal to or greater than the lowest return standard deviation of any single security held in the portafolio -None of these are correct

can be less than the return standard deviation of the least risky security in the portfolio.

Suppose that the Federal Reserve takes actions that cause the riskfree rate to fall All eke the same that k the market rick oremium and stock beta remain unchansed we would expect a firms cost of equity to _ -either increase or decrease if we are using the SML, but we can't determine which without more information -increase if expected return on the market decreases -decrease if we are using the SML -increase if we are using the SML -decrease if the firm's beta increases

decrease if we are using the SML

which of the following would be considered an example of systematic risk? -Quarterly profit for GM equals expectations. -Intel reports record sales -greater unemployment rate than expected -none of these are correct -lower quarterly sales for IBM than expected

greater unemployment rate than expected

The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks: -do not have unique risk. -have more systematic risk. -None of these are correct -have more diversifiable risk. -offer higher returns.

have more diversifiable risk.

The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks: -have more systematic risk. -have more diversifiable risk. -None of these are correct -do not have unique risk. -offer higher returns.

have more diversifiable risk.

Which one of the following is an example of systematic risk? -A toymaker has to recall its top-selling to' -Corn prices increase due to increased demand for alternative fuels -A flood washes away a firm's warehouse -Investor panic causing security prices around the globe to fall precipitously -A city imposes an additional one percent sales tax on all products

investor panic causing security prices around the globe to fall precipitously

If a stock portfolio is well diversified, then the portfolio return variance: -may be less than the return variance of the least risky stock in the portfolio. -must be equal to or greater than the return variance of the least risky stock in the portfolio. -will equal the return variance of the most volatile stock in the portfolio. -will be an arithmetic average of the return variances of the individual securities in the portfolio. -will be a weighted average of the return variances of the individual securities in the portfolio.

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

Regarding diversification, _____________________________. -the portfolio returns are reduced, and the standard deviation of that portfolio remains unchanged -None of these are correct -it is the process of increasing the riskiness associated with individual assets by spreading an investment across numerous assets -most of the benefits are realized with about 20 to 30 stocks -there is no limit to the amount of risk that can be eliminated through this process

most of the benefits are realized with about 20 to 30 stocks

With the subjective approach to divisional cost of capital, the firm's weighted average cost of capital is applied to projects with -higher-than-average risk. -no risk. -normal or average risk. -none of the choices. -lower-than-average risk.

normal or average risk.

The major benefit of diversification is to: -remove negative risk assets from the portfolio. -increase social benefit of the portfolio -reduce the expected risk. -reduce the portfolio's systematic risk. -increase the expected return.

reduce the expected risk.

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: -accept profitable, low-risk projects and accept unprofitable, high-risk projects -None of these are correct -accept profitable, low-risk projects and reject unprofitable, high-risk projects -accept profitable, high-risk project and reject unprofitable, low risk projects -reject profitable, low-risk projects and accept unprofitable, high-risk projects

reject profitable, low-risk projects and accept unprofitable, high-risk projects

The relevant risk for the fair market pricing of financial securities is the ________ -None of these are correct -non-systematic risk -total risk -systematic risk -standard deviation of the investment's return

systematic risk

For a firm paying 5% for new debt, the higher the firm's tax rate -Not enough information to judge. -the after-tax cost is unchanged. -the lower the after-tax cost of debt. -None of the choices. -the higher the after-tax cost of debt.

the lower the after-tax cost of debt.

Under the constant dividend growth model for common stock, if the price of a stock (Po) goes up (and nothing else changes). -then estimated cost of equity may increase or decrease, depending on the dividend growth rate. -then estimated cost of equity remains unchanged. -then estimated cost of equity goes down. -then estimated cost of equity goes up. -None of these options are true.

then estimated cost of equity goes down.

A company's stock plots above the security market line. This means the company is: -neither overvalued nor undervalued -overvalued and expected return is lower than the required return. -undervalued and expected return is higher than the required return. -undervalued and its expected return is less than the required return. -overvalued and its expected return exceeds the required return.

undervalued and expected return is higher than the required return.

The variance of an investment's returns is a measure of the: -probability of a negative return. -historic return over long periods. -None of these are correct -volatility of the rates of return. -average value of the investment.

volatility of the rates of return.

All else the same, a higher corporate tax rate -will decrease the WACC of a firm with some debt in its capital structure -will decrease the WACC of a firm with no debt in its capital structure -will increase the WACC of a firm with some debt in its capital structure -None of these are correct -will not affect the WACC of a firm with some debt in its capital structure

will decrease the WACC of a firm with some debt in its capital structure