Question 1 1. 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?

Question 1
1. 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?

The constant growth model cannot be used because the growth rate is negative.

The company’s dividend yield 5 years from now is expected to be 10%.

The company’s expected stock price at the beginning of next year is $9.50.

The company’s expected capital gains yield is 5%.

The company’s current stock price is $20.
1 points
Question 2
1. Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

Beta; beta.

Variance; correlation coefficient.

Beta; variance.

Coefficient of variation; beta.

Standard deviation; correlation coefficient.
1 points
Question 3
1. Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?

A project’s NPV increases as the WACC declines.

A project’s discounted payback increases as the WACC declines.

A project’s MIRR is unaffected by changes in the WACC.

A project’s IRR increases as the WACC declines.

A project’s regular payback increases as the WACC declines.
1 points
Question 4
1. Which of the following risk types can be diversified by adding stocks to a portfolio?

Systematic Risk.

Default risk.

Non diversifiable risks.

Unique risks.

Market Risk.
1 points
Question 5
1. Firms that make investment decisions based upon the payback rule may be biased towards rejecting projects:

with early cash inflows.

With short lives.

With long lives.

Those with negative NPVs.

None of above.
1 points
Question 6
1. When a project’s internal rate of return equals its opportunity cost of capital, then:

The net present value will be negative.

The net present value is a linear combination of MIRR and IRR.

The net present value will be positive.

The project has no cash inflows.

The net present value will be zero.
1 points
Question 7
1. When hard rationing exists, projects may be evaluated by the use of ?

Payback period.

borrowing rather than lending projects.

Modified payback period.

A profitability index.

MIRR.
1 points
Question 8
1. Because of its age, your car costs $3000 annually in maintenence expense. You could replace it with a newer vehicle costing $6000. Both vehicles would be expected to last 4 more years. If your opportunity cost is 10% what should be the maximum annual maintenance expense be on the newer vehicle to justify the purchase ? (Hint : EAC on the new vehicle should not exceed $3000)

$1250.34.

$1107.18.

$1893.88.

$3000.00.

$1415.51.
1 points
Question 9
1. Taggart Inc.’s stock has a 50% chance of producing a 39% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return. What is the firm’s expected rate of return?

16.90%

15.55%

16.22%

16.06%

18.42%
1 points
Question 10
1. Tom O’Brien has a 2-stock portfolio with a total value of $100,000. $35,000 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42. What is his portfolio’s beta?

0.89

1.19

1.41

1.29

1.45
1 points
Question 11
1. Assume that you hold a well-diversified portfolio that has an expected return of 11.0% and a beta of 1.20. You are in the process of buying 1,000 shares of Alpha Corp at $10 a share and adding it to your portfolio. Alpha has an expected return of 22.5% and a beta of 1.80. The total value of your current portfolio is $90,000. What will the expected return and beta on the portfolio be after the purchase of the Alpha stock?

14.82% and 1.25

12.15% and 1.26

13.49% and 1.11

11.18% and 1.06

10.69% and 1.03
1 points
Question 12
1. Cooley Company’s stock has a beta of 1.20, the risk-free rate is 2.25%, and the market risk premium is 5.50%. What is the firm’s required rate of return?

9.38%

7.35%

6.73%

7.88%

8.85%
1 points
Question 13
1. Roenfeld Corp believes the following probability distribution exists for its stock. What is the coefficient of variation on the company’s stock?
State of the Economy Probability of State Occurring Stock’s Expected Return
Boom 0.29 25%
Normal 0.50 15%
Recession 0.21 5%
2.

0.4447

0.5114

0.4891

0.4002

0.3335
1 points
Question 14
1. You hold a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each. The portfolio’s beta is 1.12. You plan to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.25. What will the portfolio’s new beta be?

0.978

1.160

1.172

1.138

1.194
1 points
Question 15
1. Returns for the Dayton Company over the last 3 years are shown below. What’s the standard deviation of the firm’s returns? (Hint: This is a sample, not a complete population, so the sample standard deviation formula should be used.)
Year Return
2011 21.00%
2010 -12.50%
2009 17.50%
2.

14.18%

18.41%

17.49%

20.99%

17.31%
1 points