Question 1

Assume that the market is in equilibrium and that Portfolio AB has 50% invested in Stock A and 50% invested in Stock B. Stock A has an expected return of 10% and a standard deviation of 20%. Stock B has an expected return of 13% and a standard deviation of 30%. The risk-free rate is 5% and the market risk premium, rM -rRF, is 6%. The returns of Stock A and Stock B are independent of one another, i.e., the correlation coefficient between them is zero. Which of the following statements is CORRECT?

Accepted Answer

A)   since the two stocks have zero correlation, portfolio ab is riskless.
B)   stock b's beta is 1.0000.
C)   portfolio ab's required return is 11%.
D)   portfolio ab's standard deviation is 25%.
E)   stock a's beta is 0.8333.F) B) and D)
G) A) and C)

Question 2

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

Accepted Answer

A)   $11,262.88
B)   $11,826.02
C)   $12,417.32
D)   $13,038.19
E)   $13,690.10F) C) and E)
G) A) and C)

Question 3

CMS Corporation's balance sheet as of today is as follows: 
  Long-term debt (bonds, at par)  $10,000,000 Preferred stock 2,000,000 Common stock ($10 par)  10,000,000 Retained earnings 4,000,000 Total debt and equity $26,000,000\begin{array}{lr}	ext { Long-term debt (bonds, at par)  } & \$ 10,000,000 \	ext { Preferred stock } & 2,000,000 \	ext { Common stock (\$10 par)  } & 10,000,000 \	ext { Retained earnings } & 4,000,000 \\hline 	ext { Total debt and equity } & \$ 26,000,000\end{array} Long-term debt (bonds, at par)   Preferred stock  Common stock ($10 par)   Retained earnings  Total debt and equity ​$10,000,0002,000,00010,000,0004,000,000$26,000,000​​ 
The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt?

Accepted Answer

A)   $5,276,731
B)   $5,412,032
C)   $5,547,332
D)   $7,706,000
E)   $7,898,650 F) A) and E)
G) None of the above

Question 4

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

Accepted Answer

A)   a 1-year bond with a 15% coupon.
B)   a 3-year bond with a 10% coupon.
C)   a 10-year zero coupon bond.
D)   a 10-year bond with a 10% coupon.
E)   an 8-year bond with a 9% coupon.F) A) and C)
G) A) and D)

Question 5

Dixon Food's stock has a beta of 1.4, while Clark Café's stock has a beta of 0.7. Assume that the risk-free rate, rRF, is 5.5% and the market risk premium, (rM σ rRF) , equals 4%. Which of the following statements is CORRECT?

Accepted Answer

A)   if the market risk premium increases but the risk-free rate remains unchanged, dixon's required return will increase because it has a beta greater than 1.0 but clark's required return will decline because it has a beta less than 1.0.
B)   since dixon's beta is twice that of clark's, its required rate of return will also be twice that of clark's.
C)   if the risk-free rate increases while the market risk premium remains constant, then the required return on an average stock will increase.
D)   if the market risk premium decreases but the risk-free rate remains unchanged, dixon's required return will decrease because it has a beta greater than 1.0 and clark's will also decrease, but by more than dixon's because it has a beta less than 1.0.
E)   if the risk-free rate increases but the market risk premium remains unchanged, the required return will increase for both stocks but the increase will be larger for dixon since it has a higher beta.F) B) and E)
G) None of the above

Question 6

Stock A's beta is 1.7 and Stock B's beta is 0.7. Which of the following statements must be true, assuming the CAPM is correct?

Accepted Answer

A)   in equilibrium, the expected return on stock b will be greater than that on stock a.
B)   when held in isolation, stock a has more risk than stock b.
C)   stock b would be a more desirable addition to a portfolio than a.
D)   in equilibrium, the expected return on stock a will be greater than that on b.
E)   stock a would be a more desirable addition to a portfolio then stock b.F) A) and B)
G) A) and C)

Question 7

Which of the following bank accounts has the highest effective annual return?

Accepted Answer

A)   an account that pays 8% nominal interest with daily (365-day)  compounding.
B)   an account that pays 8% nominal interest with monthly compounding.
C)   an account that pays 8% nominal interest with annual compounding.
D)   an account that pays 7% nominal interest with daily (365-day)  compounding.
E)   an account that pays 7% nominal interest with monthly compounding.F) B) and E)
G) A) and E)

Question 8

Nystrand Corporation's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5.00%, what is the market risk premium?

Accepted Answer

A)   5.80%
B)   5.95%
C)   6.09%
D)   6.25%
E)   6.40%F) None of the above
G) B) and C)

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   if some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.
B)   the cash flows for an ordinary (or deferred)  annuity all occur at the beginning of the periods.
C)   if a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
D)   the cash flows for an annuity due must all occur at the ends of the periods.
E)   the cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.F) A) and D)
G) C) and D)

Question 10

Managers should under no conditions take actions that increase their firm's risk relative to the market, regardless of how much those actions would increase the firm's expected rate of return.

Accepted Answer

A) True 
 B)False

Question 11

An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)   the slope of the security market line is beta.
B)   any stock with a negative beta must in theory have a negative required rate of return, provided rrf is positive.
C)   if a stock's beta doubles, its required rate of return must also double.
D)   if a stock's returns are negatively correlated with returns on most other stocks, the stock's beta will be negative.
E)   if a stock has a beta of to 1.0, its required rate of return will be unaffected by changes in the market risk premium.F) B) and D)
G) B) and E)

Question 13

Cyberhost Corporation's sales were $225 million last year. If sales grow at 6% per year, how large (in millions)  will they be 5 years later?

Accepted Answer

A)   $271.74
B)   $286.05
C)   $301.10
D)   $316.16
E)   $331.96F) B) and D)
G) B) and E)

Question 14

Which of the following bonds has the greatest interest rate price risk?

Accepted Answer

A)   a 10-year, $1,000 face value, zero coupon bond.
B)   a 10-year, $1,000 face value, 10% coupon bond with annual interest payments.
C)   all 10-year bonds have the same price risk since they have the same maturity.
D)   a 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.
E)   a 10-year $100 annuity.F) B) and E)
G) C) and E)

Question 15

Stock A has an expected return of 12%, a beta of 1.2, and a standard deviation of 20%. Stock B also has a beta of 1.2, but its expected return is 10% and its standard deviation is 15%. Portfolio AB has $300,000 invested in Stock A and $100,000 invested in Stock B. The correlation between the two stocks' returns is zero (that is, rA,B = 0) . Which of the following statements is CORRECT?

Accepted Answer

A)   the stocks are not in equilibrium based on the capm; if a is valued correctly, then b is overvalued.
B)   the stocks are not in equilibrium based on the capm; if a is valued correctly, then b is undervalued.
C)   portfolio ab's expected return is 11.0%.
D)   portfolio ab's beta is less than 1.2.
E)   portfolio ab's standard deviation is 17.5%.F) A) and C)
G) None of the above

Question 16

Connor Publishing's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal)  rate of return?

Accepted Answer

A)   6.62%
B)   6.82%
C)   7.03%
D)   7.25%
E)   7.47%F) C) and D)
G) A) and B)

Question 17

The last dividend paid by Wilden Corporation was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs)  is 12.0%. What is the best estimate of the current stock price?

Accepted Answer

A)   $37.05
B)   $38.16
C)   $39.30
D)   $40.48
E)   $41.70F) C) and D)
G) A) and B)

Question 18

Under the CAPM, the required rate of return on a firm's common stock is determined only by the firm's market risk. If its market risk is known, and if that risk is expected to remain constant, then analysts have all the information they need to calculate the firm's required rate of return.

Accepted Answer

A) True 
 B)False

Question 19

Suppose you are buying your first home for $145,000, and you have $15,000 for your down payment. You have arranged to finance the remainder with a 30-year, monthly payment, amortized mortgage at a 6.5% nominal interest rate, with the first payment due in one month. What will your monthly payments be?

Accepted Answer

A)   $741.57
B)   $780.60
C)   $821.69
D)   $862.77
E)   $905.91F) C) and D)
G) A) and C)

Question 20

You are considering investing in one of these three stocks:   Stock  Standard Deviation  Beta A20%0.59 B10%0.61C12%1.29\begin{array}{ccc}	ext { Stock } & 	ext { Standard Deviation } & 	ext { Beta } \\mathrm{A} & 20 \% & 0.59 \\mathrm{~B} & 10 \% & 0.61 \\mathrm{C} & 12 \% & 1.29\end{array} Stock A BC​ Standard Deviation 20%10%12%​ Beta 0.590.611.29​ 
If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

Accepted Answer

A)   a; b.
B)   b; a.
C)   c; a.
D)   c; b.
E)   a; a. F) C) and E)
G) A) and B)

Exam 29: Basic Financial Tools: A review

Cyberhost Corporation's sales were $225 million last year. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

Correct Answer
verified

An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.

Correct Answer
verified

Correct Answer
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Dixon Food's stock has a beta of 1.4, while Clark Café's stock has a beta of 0.7. Assume that the risk-free rate, rRF, is 5.5% and the market risk premium, (rM σ rRF) , equals 4%. Which of the following statements is CORRECT?

Correct Answer
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Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Under the CAPM, the required rate of return on a firm's common stock is determined only by the firm's market risk. If its market risk is known, and if that risk is expected to remain constant, then analysts have all the information they need to calculate the firm's required rate of return.

Correct Answer
verified

Which of the following bank accounts has the highest effective annual return?

Correct Answer
verified

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Connor Publishing's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?

Correct Answer
verified

Managers should under no conditions take actions that increase their firm's risk relative to the market, regardless of how much those actions would increase the firm's expected rate of return.

Correct Answer
verified

Which of the following bonds has the greatest interest rate price risk?

Correct Answer
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Correct Answer
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Correct Answer
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Nystrand Corporation's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5.00%, what is the market risk premium?

Correct Answer
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Stock A's beta is 1.7 and Stock B's beta is 0.7. Which of the following statements must be true, assuming the CAPM is correct?

Correct Answer
verified

The last dividend paid by Wilden Corporation was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price?

Correct Answer
verified

Exam 29: Basic Financial Tools: A review

Cyberhost Corporation's sales were $225 million last year. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

Correct AnswerverifiedShow Answer

An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Dixon Food's stock has a beta of 1.4, while Clark Café's stock has a beta of 0.7. Assume that the risk-free rate, rRF, is 5.5% and the market risk premium, (rM σ rRF) , equals 4%. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Under the CAPM, the required rate of return on a firm's common stock is determined only by the firm's market risk. If its market risk is known, and if that risk is expected to remain constant, then analysts have all the information they need to calculate the firm's required rate of return.

Correct AnswerverifiedShow Answer

Which of the following bank accounts has the highest effective annual return?

Correct AnswerverifiedShow Answer

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Connor Publishing's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?

Correct AnswerverifiedShow Answer

Managers should under no conditions take actions that increase their firm's risk relative to the market, regardless of how much those actions would increase the firm's expected rate of return.

Correct AnswerverifiedShow Answer

Which of the following bonds has the greatest interest rate price risk?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Nystrand Corporation's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5.00%, what is the market risk premium?

Correct AnswerverifiedShow Answer

Stock A's beta is 1.7 and Stock B's beta is 0.7. Which of the following statements must be true, assuming the CAPM is correct?

Correct AnswerverifiedShow Answer

The last dividend paid by Wilden Corporation was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price?

Correct AnswerverifiedShow Answer

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