Question 1

A company has a beta of 0.85.If the market return is expected to be 9 percent and the risk-free rate is 2.5 percent,what is the company's required return?

Accepted Answer

A)  7.350 percent 
B)  8.025 percent 
C)  10.150 percent 
D)  21.775 percent 
A)  7.350 percent 
B)  8.025 percent 
C)  10.150 percent 
D)  21.775 percent

Question 2

You own $9,000 of Olympic Steel stock that has a beta of 2.5.You also own $7,000 of Rent-a-Center (beta = 1.2)and $8,000 of Lincoln Educational (beta = 0.4).What is the beta of your portfolio?

Accepted Answer

A)  1.18 
B)  1.07 
C)  1.42 
D)  1.53 
A)  1.18 
B)  1.07 
C)  1.42 
D)  1.53

Question 3

Paccar's current stock price is $75.10 and it is likely to pay a $3.29 dividend next year.Since analysts estimate Paccar will have a 14.2 percent growth rate,what is its required return?

Accepted Answer

A)  15.39 percent 
B)  17.94 percent 
C)  18.58 percent 
D)  19.62 percent 
A)  15.39 percent 
B)  17.94 percent 
C)  18.58 percent 
D)  19.62 percent

Question 4

Compute the expected return given these three economic states,their likelihoods,and the potential returns:

Accepted Answer

A)  3.5 percent 
B)  7.0 percent 
C)  7.5 percent 
D)  12.5 percent 
A)  3.5 percent 
B)  7.0 percent 
C)  7.5 percent 
D)  12.5 percent

Question 5

If the Japanese stock market bubble peaked at 37,500,and two and a half years later it had fallen to 25,900,what was the percentage decline?

Accepted Answer

A)  −10.31 percent 
B)  −27.63 percent 
C)  −30.93 percent 
D)  −69.07 percent 
A)  −10.31 percent 
B)  −27.63 percent 
C)  −30.93 percent 
D)  −69.07 percent

Question 6

Hastings Entertainment has a beta of 1.24.If the market return is expected to be 10 percent and the risk-free rate is 4 percent,what is Hastings' required return?

Accepted Answer

A)  11.44 percent 
B)  12.44 percent 
C)  14.96 percent 
D)  16.40 percent 
A)  11.44 percent 
B)  12.44 percent 
C)  14.96 percent 
D)  16.40 percent

Question 7

If the risk-free rate is 10 percent and the market risk premium is 4 percent,what is the required return for the market?

Accepted Answer

A)  4 percent 
B)  7 percent 
C)  10 percent 
D)  14 percent 
A)  4 percent 
B)  7 percent 
C)  10 percent 
D)  14 percent

Question 8

You hold a diversified portfolio consisting of $1,000 investment in each of 10 different stocks.The portfolio has a beta of 0.8.You have decided to sell one of your stocks that has a beta equal to 1.1 for $1,000.You will purchase $1,000 of a new stock with a beta of 2.5.After these two transactions (sell and buy),what will be the beta of the new portfolio?

Accepted Answer

A)  1.1 
B)  0.99 
C)  0.87 
D)  0.94 
A)  1.1 
B)  0.99 
C)  0.87 
D)  0.94

Question 9

You own $1,000 of City Steel stock that has a beta of 1.5.You also own $5,000 of Rent-N-Co (beta = 1.8)and $4,000 of Lincoln Corporation (beta = 0.9).What is the beta of your portfolio?

Accepted Answer

A)  1.4 
B)  1.5 
C)  4.2 
D)  4.65 
A)  1.4 
B)  1.5 
C)  4.2 
D)  4.65

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

Which of the following is typically considered the return on U.S.government bonds and bills and equals the real interest plus the expected inflation premium?

Accepted Answer

A)  required return 
B)  risk-free rate 
C)  risk premium 
D)  market risk premium 
A)  required return 
B)  risk-free rate 
C)  risk premium 
D)  market risk premium

Question 12

Which of the following is incorrect?

Accepted Answer

A)  Most firms would want to sell additional shares of common stock if they feel their stock is undervalued. 
B)  Most firms would not want to repurchase shares of common stock if they feel their stock is overvalued. 
C)  It is important for financial managers to understand market efficiency because it helps them understand how their stock prices will react to different types of decisions and news announcements. 
D)  none of these choices are complete. 
A)  Most firms would want to sell additional shares of common stock if they feel their stock is undervalued. 
B)  Most firms would not want to repurchase shares of common stock if they feel their stock is overvalued. 
C)  It is important for financial managers to understand market efficiency because it helps them understand how their stock prices will react to different types of decisions and news announcements. 
D)  none of these choices are complete.

Question 13

Which of the following statements is incorrect?

Accepted Answer

A)  The security market line shows the relationship between risk and return for any stock or portfolio. 
B)  The y-intercept of the security market line represents the return on the risk-free asset. 
C)  The measure of risk used in creating the security market line is the standard deviation. 
D)  none of these choices are complete. 
A)  The security market line shows the relationship between risk and return for any stock or portfolio. 
B)  The y-intercept of the security market line represents the return on the risk-free asset. 
C)  The measure of risk used in creating the security market line is the standard deviation. 
D)  none of these choices are complete.

Question 14

You have a portfolio consisting of 20 percent Boeing (beta = 1.3)and 40 percent Hewlett-Packard (beta = 1.6)and 40 percent McDonald's stock (beta = 0.7).How much market risk does the portfolio have?

Accepted Answer

A)  This portfolio has 18 percent less risk than the general market. 
B)  This portfolio has 28 percent more risk than the general market. 
C)  This portfolio has 18 percent more risk than the general market. 
D)  This portfolio has 28 percent less risk than the general market. 
A)  This portfolio has 18 percent less risk than the general market. 
B)  This portfolio has 28 percent more risk than the general market. 
C)  This portfolio has 18 percent more risk than the general market. 
D)  This portfolio has 28 percent less risk than the general market.

Question 15

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 16

A manager believes his firm will earn a 16 percent return next year.His firm has a beta of 1.5,the expected return on the market is 14 percent,and the risk-free rate is 4 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)  19 percent, undervalued 
B)  19 percent, overvalued 
C)  22 percent, undervalued 
D)  22 percent, overvalued 
A)  19 percent, undervalued 
B)  19 percent, overvalued 
C)  22 percent, undervalued 
D)  22 percent, overvalued

Question 17

Compute the expected return and standard deviation given these four economic states,their likelihoods,and the potential returns:

Accepted Answer

A)  9.5 percent; 32.43 percent 
B)  9.5 percent; 21.96 percent 
C)  9.5 percent; 18.97 percent 
D)  9.5 percent; 29.18 percent 
A)  9.5 percent; 32.43 percent 
B)  9.5 percent; 21.96 percent 
C)  9.5 percent; 18.97 percent 
D)  9.5 percent; 29.18 percent

Question 18

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 19

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 20

U.S.Bancorp holds a press conference to announce a positive news event that was unexpected to the market.As soon as the announcement is made,the stock price increases $8 per share but then over the next hour the price falls resulting in a net increase of only $4.Given this information which of the following statements is correct?

Accepted Answer

A)  This is an example of a market overreaction. 
B)  This is an example of a market underreaction. 
C)  This is an example of a semi-strong efficient market. 
D)  none of these choices are complete. 
A)  This is an example of a market overreaction. 
B)  This is an example of a market underreaction. 
C)  This is an example of a semi-strong efficient market. 
D)  none of these choices are complete.

A company has a beta of 0.85.If the market return is expected to be 9 percent and the risk-free rate is 2.5 percent,what is the company's required return?

You own $9,000 of Olympic Steel stock that has a beta of 2.5.You also own $7,000 of Rent-a-Center (beta = 1.2)and $8,000 of Lincoln Educational (beta = 0.4).What is the beta of your portfolio?

Paccar's current stock price is $75.10 and it is likely to pay a $3.29 dividend next year.Since analysts estimate Paccar will have a 14.2 percent growth rate,what is its required return?

Compute the expected return given these three economic states,their likelihoods,and the potential returns:

If the Japanese stock market bubble peaked at 37,500,and two and a half years later it had fallen to 25,900,what was the percentage decline?

Hastings Entertainment has a beta of 1.24.If the market return is expected to be 10 percent and the risk-free rate is 4 percent,what is Hastings' required return?

If the risk-free rate is 10 percent and the market risk premium is 4 percent,what is the required return for the market?

You own $1,000 of City Steel stock that has a beta of 1.5.You also own $5,000 of Rent-N-Co (beta = 1.8)and $4,000 of Lincoln Corporation (beta = 0.9).What is the beta of your portfolio?

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?

Which of the following is typically considered the return on U.S.government bonds and bills and equals the real interest plus the expected inflation premium?

Which of the following is incorrect?

Which of the following statements is incorrect?

You have a portfolio consisting of 20 percent Boeing (beta = 1.3)and 40 percent Hewlett-Packard (beta = 1.6)and 40 percent McDonald's stock (beta = 0.7).How much market risk does the portfolio have?

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

Compute the expected return and standard deviation given these four economic states,their likelihoods,and the potential returns:

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

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?

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

Filters

Exam 10: Estimating Risk and Return

A company has a beta of 0.85.If the market return is expected to be 9 percent and the risk-free rate is 2.5 percent,what is the company's required return?

You own $9,000 of Olympic Steel stock that has a beta of 2.5.You also own $7,000 of Rent-a-Center (beta = 1.2)and $8,000 of Lincoln Educational (beta = 0.4).What is the beta of your portfolio?

Paccar's current stock price is $75.10 and it is likely to pay a $3.29 dividend next year.Since analysts estimate Paccar will have a 14.2 percent growth rate,what is its required return?

Compute the expected return given these three economic states,their likelihoods,and the potential returns:

If the Japanese stock market bubble peaked at 37,500,and two and a half years later it had fallen to 25,900,what was the percentage decline?

Hastings Entertainment has a beta of 1.24.If the market return is expected to be 10 percent and the risk-free rate is 4 percent,what is Hastings' required return?

If the risk-free rate is 10 percent and the market risk premium is 4 percent,what is the required return for the market?

You own $1,000 of City Steel stock that has a beta of 1.5.You also own $5,000 of Rent-N-Co (beta = 1.8)and $4,000 of Lincoln Corporation (beta = 0.9).What is the beta of your portfolio?

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?

Which of the following is typically considered the return on U.S.government bonds and bills and equals the real interest plus the expected inflation premium?

Which of the following is incorrect?

Which of the following statements is incorrect?

You have a portfolio consisting of 20 percent Boeing (beta = 1.3)and 40 percent Hewlett-Packard (beta = 1.6)and 40 percent McDonald's stock (beta = 0.7).How much market risk does the portfolio have?

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

Compute the expected return and standard deviation given these four economic states,their likelihoods,and the potential returns:

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

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?

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

Filters