Question 1

What is the standard deviation for Stock A if the correlation coefficient between Stock A and the market is 0.57, Beta for Stock A is 0.78, and standard deviation of the market is 9.58%?

Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

Question 2

If you receive $242 at the end of each year for the first three years and $640 at the end of each year for the next three years. What is the net present value of this cash flow stream? Assume interest rate is 6%.

Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

Question 3

The square-root of variance is:

Answer

correlation coefficient

beta

covariance

weighted average

standard deviation

Question 4

The principal amount of a bond that is repaid at the end of term is called the par value or the:

Answer

face value

back-end amount

perpetuity value

discount amount

coupon value

Question 5

ABC Inc.’s stock has a 50% chance of producing a 5% return, a 30% chance of producing a 16.7% return, and a 20% chance of producing a 22.2% return. What is ABC’s expected return?

Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

Question 6

ABC’s last dividend paid was $1.4, its required return is 15%, its growth rate is 6%, and its growth rate is expected to be constant in the future. What is ABC’s expected stock price in 6 years?

Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

Question 7

ABC’s expected year-end dividend is $0.3, its required return is 14.1%, its dividend yield is 4.2%, and its growth rate is expected to be constant in the future. What is ABC’s expected stock price in 7 years?

Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

Question 8

A project has the following cash flows. What is the internal rate of return?

Year CF

0 -$782,100

1 $219,500

2 $348,600

3 $348,600

Answer

8.42 percent

5.35 percent

7.78 percent

9.01 percent

3.20 percent

Question 9

You have a portfolio of two risky stocks which turns out to have no diversification benefit. The reason you have no diversification is the returns:

Answer

are completely unrelated to one another.

are too small.

are too large to offset.

move perfectly with one another.

move perfectly opposite of one another.

Question 10

The ABC Co. has $1,000 face value stock outstanding with a market price of $876.9. The stock pays interest annually, matures in 10 years, and has a yield to maturity of 7.2 percent. What is the current yield?

Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

Question 11

You want to create a portfolio as risky as the market. Suppose you invest your money in Stocks A, B, C, and the risk-free asset. Compute your investment in Stock C (i.e. solve for weight of Stock C)?

Stock Weights Beta

A 18 1.4

B 24 0.4

C ? 1.6

Rf ? ?

Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

Question 12

How many years will it take for your money to grow from $421 to $780 at 8% compounded semi-annually?

Question 13

ABC, Inc., is considering a project with an initial cost of $34,568. The project will produce cash inflows of $10,992 a year for the first 2 years and $15,726 a year for the following 2 years. What is the payback period?

Note: Enter your answer rounded off to two decimal points. For example, if your answer is 12.345 then enter as 12.35 in the answer box.

Question 14

The ABC Company has a cost of equity of 14.9 percent, a pre-tax cost of debt of 6.3 percent, and a tax rate of 38 percent. What is the firm’s weighted average cost of capital if the weight of debt is 49 percent?

Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

Question 15

What is the future value of $11,464 for 15 years at 5 percent if interest is compounded semi-annually?

Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

Question 16

The common stock of ABC Industries is valued at $21.5 a share. The company increases their dividend by 3.8 percent annually and expects their next dividend to be $2.6. What is the required rate of return on this stock?

Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

Question 17

The nominal rate is 19.2% compounded monthly. Compute the effective rate.

Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

Question 18

A bond that sells for less than face value is called as:

Answer

perpetuity

par value bond

debenture

discount bond

premium bond

Question 19

ABC company’s market value of common stock is $200 million, preferred stock is $300 million, and debt is $500 million. Suppose that the cost of equity is 7%, the before-tax cost of debt is 3.1%, cost of preferred stock is 3.8%, and the tax rate is 38%.

Compute the WACC.

Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

Question 20

Suppose that today’s stock price is $43.9. If the required rate on equity is 16.7% and the growth rate is 7.5%, compute the expected dividend (i.e. compute D1)

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Question 21

ABC’s last dividend was $3.6. The dividend growth rate is expected to be at 20% for the next three years and by 16% in the following year. After which dividends are expected to grow at a rate of 6% forever. If the firm’s required return (rs) is 9%, what is its current stock price (i.e. solve for Po)?

Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

Question 22

The risk-free rate is 2.5%, the market risk premium is 7.1%, and the stock’s beta is 1.1. What is the cost of common stock (Ke)?

Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

Question 23

ABC Inc.’s perpetual preferred stock sells for $63 per share, and it pays an $7.1 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of $5 per share. What is the company’s cost of preferred stock for use in calculating the WACC?

Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

Question 24

If the market value of debt is $261,187, market value of preferred stock is $117,732, and market value of common equity is 250,769, what is the weight of preferred stock?

Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

Question 25

An investor puts $20,000 in a risk-free asset and $10,000 in the market portfolio. Compute the beta of his portfolio.

Answer

1

0.33

0.67

2

0.50

Question 26

You have developed the following data on three stocks:

Stock Standard Deviation Beta

A 0.55 0.49

B 0.65 0.61

C 0.40 1.09

If you are a risk minimizer, you should choose Stock _____ if it is to be held as part of a well-diversified portfolio and Stock _____ if it is to be held in isolation.

Answer

B, A

A, B

C, A

A, C

B, C

C, B

Question 27

Given the following information, what is the standard deviation for this stock?

State of

EconomyProbabilityReturn

Boom0.050.30

Normal0.650.17

Recession 0.30-0.18

Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

Question 28

Assume that the market’s required rate of return is 12.75% and the risk-free rate is 2.5%. Assume that Mike holds the following stocks:

Stock Investment Beta

A $75,000 1.2

B 25,000 1.1

C 75,000 1.9

D 85,000 0.9

What is Mike’s required rate of return?

Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

Question 29

ABC Inc. issued twelve-year, 12 percent semi-annual coupon bonds at par. Today, the bonds are priced at $980. What is the firm’s after-tax cost of debt if the tax rate is 35%?

Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.