Question 1

A company has a beta of 2.91. If the market return is expected to be 16 percent and the risk-free rate is 4 percent, what is the company's risk premium?

Accepted Answer

A) 11.64 percent 
B) 12.00 percent 
C) 22.91 percent 
D) 34.92 percent 
A) 11.64 percent 
B) 12.00 percent 
C) 22.91 percent 
D) 34.92 percent

Question 2

Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation?

Accepted Answer

A) market risk line 
B) probability market line 
C) security market line 
D) stock market line 
A) market risk line 
B) probability market line 
C) security market line 
D) stock market line

Question 3

ABC Inc. has a dividend yield equal to 5 percent and is expected to grow at a 12 percent rate for the next seven years. What is ABC's required return?

Accepted Answer

A) 17.0 percent 
B) 7.0 percent 
C) 6.7 percent 
D) 2.4 percent 
A) 17.0 percent 
B) 7.0 percent 
C) 6.7 percent 
D) 2.4 percent

Question 4

Which of the following is a concern regarding beta?

Accepted Answer

A) Using different market proxies will result in different estimates of beta. 
B) A company can alter its risk level which may make the beta estimate obsolete. 
C) Research indicates that a company's beta does not appear to predict its future return very well. 
D) All of these choices are correct. 
A) Using different market proxies will result in different estimates of beta. 
B) A company can alter its risk level which may make the beta estimate obsolete. 
C) Research indicates that a company's beta does not appear to predict its future return very well. 
D) All of these choices are correct.

Question 5

A company has a beta of 0.25. If the market return is expected to be 8 percent and the risk-free rate is 2 percent, what is the company's required return?

Accepted Answer

A) 1.50 percent 
B) 3.50 percent 
C) 4.00 percent 
D) 13.50 percent 
A) 1.50 percent 
B) 3.50 percent 
C) 4.00 percent 
D) 13.50 percent

Question 6

Which of the following is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc.?

Accepted Answer

A) audited financial statements 
B) generally accepted accounting principles 
C) privately held information 
D) public information 
A) audited financial statements 
B) generally accepted accounting principles 
C) privately held information 
D) public information

Question 7

The annual return on the S&P 500 Index was 18.1 percent. The annual T-bill yield during the same period was 6.2 percent. What was the market risk premium during that year?

Accepted Answer

A) 6.2 percent 
B) 11.9 percent 
C) 18.1 percent 
D) 24.3 percent 
A) 6.2 percent 
B) 11.9 percent 
C) 18.1 percent 
D) 24.3 percent

Question 8

You own $2,000 of City Steel stock that has a beta of 2.5. You also own $8,000 of Rent-N-Co (beta = 1.9) and $4,000 of Lincoln Corporation (beta = 0.25). What is the beta of your portfolio?

Accepted Answer

A) 1.51 
B) 1.55 
C) 4.65 
D) 14.00 
A) 1.51 
B) 1.55 
C) 4.65 
D) 14.00

Question 9

Which of the following statements is incorrect regarding how beta is calculated?

Accepted Answer

A) The company return is the independent variable. 
B) The market portfolio return is the dependent variable. 
C) Using the oldest data possible will yield the most accurate results. 
D) All of the statements are incorrect. 
A) The company return is the independent variable. 
B) The market portfolio return is the dependent variable. 
C) Using the oldest data possible will yield the most accurate results. 
D) All of the statements are incorrect.

Question 10

A company has a beta of 3.75. If the market return is expected to be 20 percent and the risk-free rate is 9.5 percent, what is the company's required return?

Accepted Answer

A) 33.250 percent 
B) 39.375 percent 
C) 48.875 percent 
D) 55.625 percent 
A) 33.250 percent 
B) 39.375 percent 
C) 48.875 percent 
D) 55.625 percent

Question 11

A manager believes his firm will earn a 15 percent return next year. His firm has a beta of 2.1, the expected return on the market is 6 percent, and the risk-free rate is 2 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is undervalued or overvalued.

Accepted Answer

A) 10.4 percent, undervalued 
B) 10.4 percent, overvalued 
C) 12.3 percent, undervalued 
D) 12.3 percent, overvalued 
A) 10.4 percent, undervalued 
B) 10.4 percent, overvalued 
C) 12.3 percent, undervalued 
D) 12.3 percent, overvalued

Question 12

You hold the positions in the following table. If you expect the market to earn 10 percent and the risk-free rate is 3 percent, what is the required return of the portfolio?

Accepted Answer

A) 14.83 percent 
B) 15.81 percent 
C) 28.67 percent 
D) 32.83 percent 
A) 14.83 percent 
B) 15.81 percent 
C) 28.67 percent 
D) 32.83 percent

Question 13

A stock has an expected return of 14.5 percent, the risk-free rate is 4 percent and the return on the market is 11 percent. What is this stock's beta?

Accepted Answer

A) 1.5 
B) 3.0 
C) 1.05 
D) 0.94 
A) 1.5 
B) 3.0 
C) 1.05 
D) 0.94

Question 14

Which of the following is most correct?

Accepted Answer

A) In an efficient market, investors will buy overvalued stock which will drive its price down. 
B) In an efficient market, investors will sell undervalued stock which will drive its price down. 
C) In an efficient market, investors will sell overvalued stock which will drive its price down. 
D) none of these choices are complete. 
A) In an efficient market, investors will buy overvalued stock which will drive its price down. 
B) In an efficient market, investors will sell undervalued stock which will drive its price down. 
C) In an efficient market, investors will sell overvalued stock which will drive its price down. 
D) none of these choices are complete.

Question 15

Praxair's upcoming dividend is expected to be $2.25 and its stock is selling at $65. The firm has a beta of 0.8 and is expected to grow at 10 percent for the foreseeable future. Compute Praxair's required return using both CAPM and the constant growth model. Assume that the market portfolio will earn 10 percent and the risk-free rate is 3 percent.

Accepted Answer

A) CAPM: 8.6 percent; Constant Growth Model: 13.46 percent 
B) CAPM: 9.7 percent; Constant Growth Model: 12.56 percent 
C) CAPM: 10.1 percent; Constant Growth Model: 11.46 percent 
D) CAPM: 8.2 percent; Constant Growth Model: 9.56 percent 
A) CAPM: 8.6 percent; Constant Growth Model: 13.46 percent 
B) CAPM: 9.7 percent; Constant Growth Model: 12.56 percent 
C) CAPM: 10.1 percent; Constant Growth Model: 11.46 percent 
D) CAPM: 8.2 percent; Constant Growth Model: 9.56 percent

Question 16

A manager believes his firm will earn a 12 percent return next year. His firm has a beta of 1.2, the expected return on the market is 8 percent, and the risk-free rate is 3 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is undervalued or overvalued.

Accepted Answer

A) 9 percent, undervalued 
B) 9 percent, overvalued 
C) 13.8 percent, undervalued 
D) 13.8 percent, overvalued 
A) 9 percent, undervalued 
B) 9 percent, overvalued 
C) 13.8 percent, undervalued 
D) 13.8 percent, overvalued

Question 17

A company's current stock price is $22.00 and its most recent dividend was $0.75 per share. Since analysts estimate the company will have a 12 percent growth rate, what is its expected return?

Accepted Answer

A) 3.00 percent 
B) 3.48 percent 
C) 12.00 percent 
D) 15.82 percent 
A) 3.00 percent 
B) 3.48 percent 
C) 12.00 percent 
D) 15.82 percent

Question 18

You hold the positions in the following table. What is the beta of your portfolio?

Accepted Answer

A) 1.4 
B) 2.08 
C) 2.13 
D) 5.6 
A) 1.4 
B) 2.08 
C) 2.13 
D) 5.6

Question 19

IBM has a beta of 1.0 and Apple Computer has a beta of 3.0. Which of the following statements must be correct?

Accepted Answer

A) The market risk premium for Apple must be larger than the market risk premium of IBM. 
B) If investors become more risk averse, the expected return of Apple will increase more than the expected return on IBM. 
C) Apple's expected rate of return must be three times as large as IBM's. 
D) none of these choices are complete. 
A) The market risk premium for Apple must be larger than the market risk premium of IBM. 
B) If investors become more risk averse, the expected return of Apple will increase more than the expected return on IBM. 
C) Apple's expected rate of return must be three times as large as IBM's. 
D) none of these choices are complete.

Question 20

You hold the positions in the following table. What is the beta of your portfolio? If you expect the market to earn 12 percent and the risk-free rate is 3.5 percent, what is the required return of the portfolio?

Accepted Answer

A) 14.21 percent 
B) 16.76 percent 
C) 13.97 percent 
D) 15.38 percent 
A) 14.21 percent 
B) 16.76 percent 
C) 13.97 percent 
D) 15.38 percent

A company has a beta of 2.91. If the market return is expected to be 16 percent and the risk-free rate is 4 percent, what is the company's risk premium?

Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation?

ABC Inc. has a dividend yield equal to 5 percent and is expected to grow at a 12 percent rate for the next seven years. What is ABC's required return?

Which of the following is a concern regarding beta?

A company has a beta of 0.25. If the market return is expected to be 8 percent and the risk-free rate is 2 percent, what is the company's required return?

Which of the following is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc.?

The annual return on the S&P 500 Index was 18.1 percent. The annual T-bill yield during the same period was 6.2 percent. What was the market risk premium during that year?

You own $2,000 of City Steel stock that has a beta of 2.5. You also own $8,000 of Rent-N-Co (beta = 1.9) and $4,000 of Lincoln Corporation (beta = 0.25). What is the beta of your portfolio?

Which of the following statements is incorrect regarding how beta is calculated?

A company has a beta of 3.75. If the market return is expected to be 20 percent and the risk-free rate is 9.5 percent, what is the company's required return?

You hold the positions in the following table. If you expect the market to earn 10 percent and the risk-free rate is 3 percent, what is the required return of the portfolio?

A stock has an expected return of 14.5 percent, the risk-free rate is 4 percent and the return on the market is 11 percent. What is this stock's beta?

Which of the following is most correct?

A company's current stock price is $22.00 and its most recent dividend was $0.75 per share. Since analysts estimate the company will have a 12 percent growth rate, what is its expected return?

You hold the positions in the following table. What is the beta of your portfolio?

IBM has a beta of 1.0 and Apple Computer has a beta of 3.0. Which of the following statements must be correct?

You hold the positions in the following table. What is the beta of your portfolio? If you expect the market to earn 12 percent and the risk-free rate is 3.5 percent, what is the required return of the portfolio?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters

Exam 10: Estimating Risk and Return

A company has a beta of 2.91. If the market return is expected to be 16 percent and the risk-free rate is 4 percent, what is the company's risk premium?

Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation?

ABC Inc. has a dividend yield equal to 5 percent and is expected to grow at a 12 percent rate for the next seven years. What is ABC's required return?

Which of the following is a concern regarding beta?

A company has a beta of 0.25. If the market return is expected to be 8 percent and the risk-free rate is 2 percent, what is the company's required return?

Which of the following is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc.?

The annual return on the S&P 500 Index was 18.1 percent. The annual T-bill yield during the same period was 6.2 percent. What was the market risk premium during that year?

You own $2,000 of City Steel stock that has a beta of 2.5. You also own $8,000 of Rent-N-Co (beta = 1.9) and $4,000 of Lincoln Corporation (beta = 0.25). What is the beta of your portfolio?

Which of the following statements is incorrect regarding how beta is calculated?

A company has a beta of 3.75. If the market return is expected to be 20 percent and the risk-free rate is 9.5 percent, what is the company's required return?

You hold the positions in the following table. If you expect the market to earn 10 percent and the risk-free rate is 3 percent, what is the required return of the portfolio?

A stock has an expected return of 14.5 percent, the risk-free rate is 4 percent and the return on the market is 11 percent. What is this stock's beta?

Which of the following is most correct?

A company's current stock price is $22.00 and its most recent dividend was $0.75 per share. Since analysts estimate the company will have a 12 percent growth rate, what is its expected return?

You hold the positions in the following table. What is the beta of your portfolio?

IBM has a beta of 1.0 and Apple Computer has a beta of 3.0. Which of the following statements must be correct?

You hold the positions in the following table. What is the beta of your portfolio? If you expect the market to earn 12 percent and the risk-free rate is 3.5 percent, what is the required return of the portfolio?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters