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 about these securities? (Assume market equilibrium.)

Accepted Answer

A)  stock b must be a more desirable addition to a portfolio than a. 
B)  stock a must be a more desirable addition to a portfolio than b. 
C)  the expected return on stock a should be greater than that on b. 
D)  the expected return on stock b should be greater than that on a. 
E)  when held in isolation, stock a has more risk than stock b. 
A)  stock b must be a more desirable addition to a portfolio than a. 
B)  stock a must be a more desirable addition to a portfolio than b. 
C)  the expected return on stock a should be greater than that on b. 
D)  the expected return on stock b should be greater than that on a. 
E)  when held in isolation, stock a has more risk than stock b.

Question 2

What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?

Accepted Answer

A)  $1,819 
B)  $1,915 
C)  $2,016 
D)  $2,117 
E)  $2,223 
A)  $1,819 
B)  $1,915 
C)  $2,016 
D)  $2,117 
E)  $2,223

Question 3

Assume that the risk-free rate remains constant, but the market risk premium declines. Which of the following is most likely to occur?

Accepted Answer

A) the required return on a stock with beta > 1.0 will increase. B) the return on "the market" will remain constant. C) the return on "the market" will increase. D) the required return on a stock with beta < 1.0 will decline. E) the required return on a stock with beta = 1.0 will not change. A) the required return on a stock with beta > 1.0 will increase. B) the return on "the market" will remain constant. C) the return on "the market" will increase. D) the required return on a stock with beta < 1.0 will decline. E) the required return on a stock with beta = 1.0 will not change.

Question 4

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
 $\begin{array} { l c c } 
 &  X  & Y \
\text { Price } & \$ 25 & \$ 25 \
\text { Expected dividend yield } & 5 \% & 3 \% \
\text { Required return } & 12 \% & 10 \%
\end{array}$

Accepted Answer

A)  stock x pays a higher dividend per share than stock y. 
B)  one year from now, stock x should have the higher price. 
C)  stock y has a lower expected growth rate than stock x. 
D)  stock y has the higher expected capital gains yield. 
E)  stock y pays a higher dividend per share than stock x. 
A)  stock x pays a higher dividend per share than stock y. 
B)  one year from now, stock x should have the higher price. 
C)  stock y has a lower expected growth rate than stock x. 
D)  stock y has the higher expected capital gains yield. 
E)  stock y pays a higher dividend per share than stock x.

Question 5

McCurdy Co.'s Class Q bonds have a 12-year maturity, $1,000 par value, and a 5.75% coupon paid semiannually (2.875% each 6 months), and those bonds sell at their par value. McCurdy's Class P bonds have the same risk, maturity, and par value, but the P bonds pay a 5.75% annual coupon. Neither bond is callable. At what price should the annual payment bond sell?

Accepted Answer

A)  $943.98 
B)  $968.18 
C)  $993.01 
D)  $1,017.83 
E)  $1,043.28 
A)  $943.98 
B)  $968.18 
C)  $993.01 
D)  $1,017.83 
E)  $1,043.28

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)  two firms with the same expected dividend and growth rates must also have the same stock price. 
B)  it is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. 
C)  if a stock has a required rate of return rs = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
D)  the price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. 
E)  the constant growth model takes into consideration the capital gains investors expect to earn on a stock. 
A)  two firms with the same expected dividend and growth rates must also have the same stock price. 
B)  it is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. 
C)  if a stock has a required rate of return rs = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. 
D)  the price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. 
E)  the constant growth model takes into consideration the capital gains investors expect to earn on a stock.

Question 7

Sawchuck Consulting has been profitable for the last 5 years, but it has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the stock's current value?
 $\begin{array}{lccccccc}
\text { Year } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\hline \text { Growth rate } & \text { NA } & \text { NA } & \text { NA } & \text { NA } & 50.00 \% & 25.00 \% & 8.00 \% \
\text { Dividends } & \$ 0.000 & \$ 0.000 & \$ 0.000 & \$ 0.250 & \$ 0.375 & \$ 0.469 & \$ 0.506
\end{array}$

Accepted Answer

A)  $9.94 
B)  $10.19 
C)  $10.45 
D)  $10.72 
E)  $10.99 
A)  $9.94 
B)  $10.19 
C)  $10.45 
D)  $10.72 
E)  $10.99

Question 8

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 = σ5%). 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 9

A share of Lash Inc.'s common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?

Accepted Answer

A)  $16.28 
B)  $16.70 
C)  $17.13 
D)  $17.57 
E)  $18.01 
A)  $16.28 
B)  $16.70 
C)  $17.13 
D)  $17.57 
E)  $18.01

Question 10

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 11

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 12

Which of the following statements is CORRECT?

Accepted Answer

A)  diversifiable risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic) risk. 
B)  a large portfolio of randomly selected stocks will have a standard deviation of returns that is greater than the standard deviation of a 1-stock portfolio if that one stock has a beta less than 1.0. 
C)  a large portfolio of stocks whose betas are greater than 1.0 will have less market risk than a single stock with a beta = 0.8. 
D)  if you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio. 
E)  a large portfolio of randomly selected stocks will always have a standard deviation of returns that is less than the standard deviation of a portfolio with fewer stocks, regardless of how the stocks in the smaller portfolio are selected. 
A)  diversifiable risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic) risk. 
B)  a large portfolio of randomly selected stocks will have a standard deviation of returns that is greater than the standard deviation of a 1-stock portfolio if that one stock has a beta less than 1.0. 
C)  a large portfolio of stocks whose betas are greater than 1.0 will have less market risk than a single stock with a beta = 0.8. 
D)  if you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio. 
E)  a large portfolio of randomly selected stocks will always have a standard deviation of returns that is less than the standard deviation of a portfolio with fewer stocks, regardless of how the stocks in the smaller portfolio are selected.

Question 13

You plan to work for Strickland Corporation for 12 years after graduation and after that want to start your own business. You expect to save and deposit $7,500 a year for the first 6 years (t = 1 through t = 6) and $15,000 annually for the following 6 years (t = 7 through t = 12). The first deposit will be made a year from today. In addition, your grandmother just gave you a $25,000 graduation gift that you will deposit immediately (t = 0). If the account earns 9% compounded annually, how much will you have when you start your business 12 years from now?

Accepted Answer

A)  $238,176 
B)  $250,712 
C)  $263,907 
D)  $277,797 
E)  $291,687 
A)  $238,176 
B)  $250,712 
C)  $263,907 
D)  $277,797 
E)  $291,687

Question 14

After receiving a reward for information leading to the arrest of a notorious criminal, you are considering investing it in an annuity that pays $5,000 at the end of each year for 20 years. You could earn 5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Accepted Answer

A)  $50,753 
B)  $53,424 
C)  $56,236 
D)  $59,195 
E)  $62,311 
A)  $50,753 
B)  $53,424 
C)  $56,236 
D)  $59,195 
E)  $62,311

Question 15

If you randomly select stocks and add them to your portfolio, which of the following statements best describes what you should expect?

Accepted Answer

A)  adding more such stocks will increase the portfolio's expected rate of return. 
B)  adding more such stocks will reduce the portfolio's beta coefficient and thus its systematic risk. 
C)  adding more such stocks will have no effect on the portfolio's risk. 
D)  adding more such stocks will reduce the portfolio's market risk but not its unsystematic risk. 
E)  adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk. 
A)  adding more such stocks will increase the portfolio's expected rate of return. 
B)  adding more such stocks will reduce the portfolio's beta coefficient and thus its systematic risk. 
C)  adding more such stocks will have no effect on the portfolio's risk. 
D)  adding more such stocks will reduce the portfolio's market risk but not its unsystematic risk. 
E)  adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk.

Question 16

If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

Accepted Answer

A) True 
 B)False

Question 17

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
 $\begin{array} { l c c } 
& X& Y  \
\text { Price } & \$ 30 & \$ 30 \
\text { Expected growth (constant) } & 6 \% & 4 \% \
\text { Required return } & 12 \% & 10 \%
\end{array}$

Accepted Answer

A)  stock y has a higher dividend yield than stock x. 
B)  one year from now, stock x's price is expected to be higher than stock y's price. 
C)  stock x has the higher expected year-end dividend. 
D)  stock y has a higher capital gains yield. 
E)  stock x has a higher dividend yield than stock y. 
A)  stock y has a higher dividend yield than stock x. 
B)  one year from now, stock x's price is expected to be higher than stock y's price. 
C)  stock x has the higher expected year-end dividend. 
D)  stock y has a higher capital gains yield. 
E)  stock x has a higher dividend yield than stock y.

Question 18

Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%. Each bond has face value of $1,000 and makes semiannual interest payments. If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Accepted Answer

A)  $891.00 
B)  $913.27 
C)  $936.10 
D)  $959.51 
E)  $983.49 
A)  $891.00 
B)  $913.27 
C)  $936.10 
D)  $959.51 
E)  $983.49

Question 19

Your sister paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years, then an additional lump sum payment of $10,000 at the end of the 5th year. What is the expected rate of return on this investment?

Accepted Answer

A)  6.77% 
B)  7.13% 
C)  7.50% 
D)  7.88% 
E)  8.27% 
A)  6.77% 
B)  7.13% 
C)  7.50% 
D)  7.88% 
E)  8.27%

Question 20

A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?

Accepted Answer

A)  $23.11 
B)  $23.70 
C)  $24.31 
D)  $24.93 
E)  $25.57 
A)  $23.11 
B)  $23.70 
C)  $24.31 
D)  $24.93 
E)  $25.57

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 about these securities? (Assume market equilibrium.)

What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?

Assume that the risk-free rate remains constant, but the market risk premium declines. Which of the following is most likely to occur?

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? X Y Price \ 25 \ 25 Expected dividend yield 5\% 3\% Required return 12\% 10\%

Which of the following statements is 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 = σ5%). If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

A share of Lash Inc.'s common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?

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?

Which of the following statements is CORRECT?

If you randomly select stocks and add them to your portfolio, which of the following statements best describes what you should expect?

If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? X Y Price \ 30 \ 30 Expected growth (constant) 6\% 4\% Required return 12\% 10\%

Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%. Each bond has face value of $1,000 and makes semiannual interest payments. If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Your sister paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years, then an additional lump sum payment of $10,000 at the end of the 5th year. What is the expected rate of return on this investment?

A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?

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 Criteria

Capital Budgeting-Estimating Cash Flows and Analyzing Risk

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

Other Topics in Working Capital Management

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

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