Question 1

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. 
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.

Question 2

National Advertising just paid a dividend of D0 = $0.75 per share,and that dividend is expected to grow at a constant rate of 6.50% per year in the future.The company's beta is 1.25,the required return on the market is 10.50%,and the risk-free rate is 4.50%.What is the company's current stock price?

Accepted Answer

A) $14.52 
B) $14.89 
C) $15.26 
D) $15.64 
E) $16.03 
A) $14.52 
B) $14.89 
C) $15.26 
D) $15.64 
E) $16.03

Question 3

Stock A has a beta of 0.8,Stock B has a beta of 1.0,and Stock C has a beta of 1.2.Portfolio P has 1/3 of its value invested in each stock.Each stock has a standard deviation of 25%,and their returns are independent of one another,i.e.,the correlation coefficients between each pair of stocks is zero.Assuming the market is in equilibrium,which of the following statements is CORRECT?

Accepted Answer

A) Portfolio P's expected return is equal to the expected return on Stock A. 
B) Portfolio P's expected return is less than the expected return on Stock B. 
C) Portfolio P's expected return is equal to the expected return on Stock B. 
D) Portfolio P's expected return is greater than the expected return on Stock C. 
E) Portfolio P's expected return is greater than the expected return on Stock B. 
A) Portfolio P's expected return is equal to the expected return on Stock A. 
B) Portfolio P's expected return is less than the expected return on Stock B. 
C) Portfolio P's expected return is equal to the expected return on Stock B. 
D) Portfolio P's expected return is greater than the expected return on Stock C. 
E) Portfolio P's expected return is greater than the expected return on Stock B.

Question 4

You are considering investing in one of these three stocks: $$\begin{array} { c c c } 
\text { Stock } & \text { Standard Deviation } & \text { Beta } \
\text { A } & 20 \% & 0.59 \
\text { B } & 10 \% & 0.61 \
\text { C } & 12 \% & 1.29
\end{array}$$ 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. 
A) A; B. 
B) B; A. 
C) C; A. 
D) C; B. 
E) A; A.

Question 5

Connolly Co.'s expected year-end dividend is D1 = $1.60,its required return is rs = 11.00%,its dividend yield is 6.00%,and its growth rate is expected to be constant in the future.What is Connolly's expected stock price in 7 years,i.e.,what is   ?

Accepted Answer

A) $37.52 
B) $39.40 
C) $41.37 
D) $43.44 
E) $45.61 
A) $37.52 
B) $39.40 
C) $41.37 
D) $43.44 
E) $45.61

Question 6

Burke Tires just paid a dividend of D0 = $1.32.Analysts expect the company's dividend to grow by 30% this year,by 10% in Year 2,and at a constant rate of 5% in Year 3 and thereafter.The required return on this low-risk stock is 9.00%.What is the best estimate of the stock's current market value?

Accepted Answer

A) $41.59 
B) $42.65 
C) $43.75 
D) $44.87 
E) $45.99 
A) $41.59 
B) $42.65 
C) $43.75 
D) $44.87 
E) $45.99

Question 7

Because of differences in the expected returns on different investments,the standard deviation is not always an adequate measure of risk.However,the coefficient of variation adjusts for differences in expected returns and thus allows investors to make better comparisons of investments' stand-alone risk.

Accepted Answer

A) True 
 B)False

Question 8

A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio.It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.

Accepted Answer

A) True 
 B)False

Question 9

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

Question 10

Jenna holds a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each.The portfolio's beta is 1.12.Jenna plans to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.80.What will the portfolio's new beta be?

Accepted Answer

A) 1.286 
B) 1.255 
C) 1.224 
D) 1.194 
E) 1.165 
A) 1.286 
B) 1.255 
C) 1.224 
D) 1.194 
E) 1.165

Question 11

Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc.They have a par value of $1,000 and an annual coupon of 5.5%.If the current market interest rate is 7.0%,at what price should the bonds sell?

Accepted Answer

A) $829.21 
B) $850.47 
C) $872.28 
D) $894.65 
E) $917.01 
A) $829.21 
B) $850.47 
C) $872.28 
D) $894.65 
E) $917.01

Question 12

Stock X has the following data.Assuming the stock market is efficient and the stock is in equilibrium,which of the following statements is CORRECT? Expected dividend,D1
$3)00
Current Price,P0
$50
Expected constant growth rate
6)0%

Accepted Answer

A) The stock's expected dividend yield and growth rate are equal. 
B) The stock's expected dividend yield is 5%. 
C) The stock's expected capital gains yield is 5%. 
D) The stock's expected price 10 years from now is $100.00. 
E) The stock's required return is 10%. 
A) The stock's expected dividend yield and growth rate are equal. 
B) The stock's expected dividend yield is 5%. 
C) The stock's expected capital gains yield is 5%. 
D) The stock's expected price 10 years from now is $100.00. 
E) The stock's required return is 10%.

Question 13

Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year.How much would be in the account after 8 months,assuming each month has 30 days?

Accepted Answer

A) $5,178.09 
B) $5,436.99 
C) $5,708.84 
D) $5,994.28 
E) $6,294.00 
A) $5,178.09 
B) $5,436.99 
C) $5,708.84 
D) $5,994.28 
E) $6,294.00

Question 14

Gretta's portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8.The risk-free rate is 6% and the market risk premium is 5%.Which of the following statements is CORRECT?

Accepted Answer

A) The required return on the market is 10%. 
B) The portfolio's required return is less than 11%. 
C) If the risk-free rate remains unchanged but the market risk premium increases by 2%, Gretta's portfolio's required return will increase by more than 2%. 
D) If the market risk premium remains unchanged but expected inflation increases by 2%, Gretta's portfolio's required return will increase by more than 2%. 
E) If the stock market is efficient, Gretta's portfolio's expected return should equal the expected return on the market, which is 11%. 
A) The required return on the market is 10%. 
B) The portfolio's required return is less than 11%. 
C) If the risk-free rate remains unchanged but the market risk premium increases by 2%, Gretta's portfolio's required return will increase by more than 2%. 
D) If the market risk premium remains unchanged but expected inflation increases by 2%, Gretta's portfolio's required return will increase by more than 2%. 
E) If the stock market is efficient, Gretta's portfolio's expected return should equal the expected return on the market, which is 11%.

Question 15

Suppose a Google.com bond will pay $4,500 ten years from now.If the going interest rate on safe 10-year bonds is 4.25%,how much is the bond worth today?

Accepted Answer

A) $2,819.52 
B) $2,967.92 
C) $3,116.31 
D) $3,272.13 
E) $3,435.74 
A) $2,819.52 
B) $2,967.92 
C) $3,116.31 
D) $3,272.13 
E) $3,435.74

Question 16

Martin Ortner holds a $200,000 portfolio consisting of the following stocks: $$\begin{array} { c r r } 
\text { Stock } & \text { Investment } & \text { Beta } \
 \text { A } & \$ 50,000 & 0.95 \
\text { B } & 50,000 & 0.80 \
\text { C } & 50,000 & 1.00 \
\text { D } & 50,000 & 1.20 \
\text { Total } & \$ 200,000 &
\end{array}$$ What is the portfolio's beta?

Accepted Answer

A) 0.938 
B) 0.988 
C) 1.037 
D) 1.089 
E) 1.143 
A) 0.938 
B) 0.988 
C) 1.037 
D) 1.089 
E) 1.143

Question 17

An 8-year Treasury bond has a 10% coupon,and a 10-year Treasury bond has an 8% coupon.Both bonds have the same yield to maturity.If the yield to maturity of both bonds increases by the same amount,which of the following statements would be CORRECT?

Accepted Answer

A) Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price. 
B) The prices of both bonds would increase by the same amount. 
C) One bond's price would increase, while the other bond's price would decrease. 
D) The prices of the two bonds would remain constant. 
E) The prices of both bonds will decrease by the same amount. 
A) Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price. 
B) The prices of both bonds would increase by the same amount. 
C) One bond's price would increase, while the other bond's price would decrease. 
D) The prices of the two bonds would remain constant. 
E) The prices of both bonds will decrease by the same amount.

Question 18

Suppose Randy Jones plans to invest $1,000.He can earn an effective annual rate of 5% on Security A,while Security B has an effective annual rate of 12%.After 11 years,the compounded value of Security B should be somewhat less than twice the compounded value of Security A.(Ignore risk,and assume that compounding occurs annually.)

Accepted Answer

A) True 
 B)False

Question 19

A stock is expected to pay a year-end dividend of $2.00,i.e.,D1 = $2.00.The dividend is expected to decline at a rate of 5% a year forever (g = −5%).If the company is in equilibrium and its expected and required rate of return is 15%,which of the following statements is CORRECT?

Accepted Answer

A) The company's dividend yield 5 years from now is expected to be 10%. 
B) The constant growth model cannot be used because the growth rate is negative. 
C) The company's expected capital gains yield is 5%. 
D) The company's expected stock price at the beginning of next year is $9.50. 
E) The company's current stock price is $20. 
A) The company's dividend yield 5 years from now is expected to be 10%. 
B) The constant growth model cannot be used because the growth rate is negative. 
C) The company's expected capital gains yield is 5%. 
D) The company's expected stock price at the beginning of next year is $9.50. 
E) The company's current stock price is $20.

Question 20

Your Green Investment Tips subscription is about to expire.You plan to subscribe to the magazine for the rest of your life,and you can renew it by paying $85 annually,beginning immediately,or you can get a lifetime subscription for $850,also payable immediately.Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant,how many years must you live to make the lifetime subscription the better buy?

Accepted Answer

A) 7.48 
B) 8.80 
C) 10.35 
D) 12.18 
E) 14.33 
A) 7.48 
B) 8.80 
C) 10.35 
D) 12.18 
E) 14.33

Exam 29: Basic Financial Tools: a Review

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?

You are considering investing in one of these three stocks: Stock Standard Deviation Beta A 20\% 0.59 B 10\% 0.61 C 12\% 1.29 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.

Connolly Co.'s expected year-end dividend is D1 = $1.60,its required return is rs = 11.00%,its dividend yield is 6.00%,and its growth rate is expected to be constant in the future.What is Connolly's expected stock price in 7 years,i.e.,what is ?

Burke Tires just paid a dividend of D0 = $1.32.Analysts expect the company's dividend to grow by 30% this year,by 10% in Year 2,and at a constant rate of 5% in Year 3 and thereafter.The required return on this low-risk stock is 9.00%.What is the best estimate of the stock's current market value?

A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio.It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.

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?

Jenna holds a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each.The portfolio's beta is 1.12.Jenna plans to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.80.What will the portfolio's new beta be?

Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc.They have a par value of $1,000 and an annual coupon of 5.5%.If the current market interest rate is 7.0%,at what price should the bonds sell?

Stock X has the following data.Assuming the stock market is efficient and the stock is in equilibrium,which of the following statements is CORRECT? Expected dividend,D1 $3)00 Current Price,P0 $50 Expected constant growth rate 6)0%

Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year.How much would be in the account after 8 months,assuming each month has 30 days?

Gretta's portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8.The risk-free rate is 6% and the market risk premium is 5%.Which of the following statements is CORRECT?

Suppose a Google.com bond will pay $4,500 ten years from now.If the going interest rate on safe 10-year bonds is 4.25%,how much is the bond worth today?

Martin Ortner holds a $200,000 portfolio consisting of the following stocks: Stock Investment Beta A \ 50,000 0.95 B 50,000 0.80 C 50,000 1.00 D 50,000 1.20 Total \ 200,000 What is the portfolio's beta?

An 8-year Treasury bond has a 10% coupon,and a 10-year Treasury bond has an 8% coupon.Both bonds have the same yield to maturity.If the yield to maturity of both bonds increases by the same amount,which of the following statements would be CORRECT?

A stock is expected to pay a year-end dividend of $2.00,i.e.,D1 = $2.00.The dividend is expected to decline at a rate of 5% a year forever (g = −5%).If the company is in equilibrium and its expected and required rate of return is 15%,which of the following statements is CORRECT?

An Overview of Financial Management and the Financial Environment

Risk and Return: Part I

Risk and Return: Part Ii

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Rules

Cash Flow Estimation and Risk Analysis

Real Options

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings, investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Pension Plan Management

Financial Management in Not-For-Profit Businesses

a Values of the Areas Under the Standard Normal

Filters

You are considering investing in one of these three stocks: Stock Standard Deviation Beta A 20\% 0.59 B 10\% 0.61 C 12\% 1.29 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.

Connolly Co.'s expected year-end dividend is D₁ = $1.60,its required return is r_s = 11.00%,its dividend yield is 6.00%,and its growth rate is expected to be constant in the future.What is Connolly's expected stock price in 7 years,i.e.,what is ?

Burke Tires just paid a dividend of D₀ = $1.32.Analysts expect the company's dividend to grow by 30% this year,by 10% in Year 2,and at a constant rate of 5% in Year 3 and thereafter.The required return on this low-risk stock is 9.00%.What is the best estimate of the stock's current market value?

Stock X has the following data.Assuming the stock market is efficient and the stock is in equilibrium,which of the following statements is CORRECT? Expected dividend,D₁ $3)00 Current Price,P₀ $50 Expected constant growth rate 6)0%

A stock is expected to pay a year-end dividend of $2.00,i.e.,D₁ = $2.00.The dividend is expected to decline at a rate of 5% a year forever (g = −5%).If the company is in equilibrium and its expected and required rate of return is 15%,which of the following statements is CORRECT?