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QUESTION 11

  1. If the firm is being operated so as to maximize shareholderwealth, and if our basic assumptions concerning the relationshipbetween risk and return are true, then which of the followingshould be true?

A.

If the beta of the asset is greater than the corporate betaprior to the addition of that asset, then the corporate beta afterthe purchase of the asset will be smaller than the originalcorporate beta.

B.

If the beta of an asset is larger than the firm's beta, then therequired rate of return is equal to the beta.

C.

If the beta of an asset is larger than the corporate beta priorto the addition of that asset, then the required return on the firmwill be greater after the purchase of that asset than prior to itspurchase.

D.

If the beta of the asset is larger than the firm's beta, thenthe required return on the asset is less than the required returnon the firm.

E.

If the beta of the asset is smaller than the firm's beta, thenthe required return on the asset is greater than the requiredreturn on the firm.

5 points

QUESTION 12

  1. A project's net present value is equal to:

A.

the present value of the cash outflows plus the present value ofcash inflows.

B.

the present value of the last cash inflow.

C.

the present value of all the expected future cash outflows.

D.

the present value of all the cash inflows after the fullrecovery of the initial investment.

E.

the present value of the expected future cash flows minus thepresent value of all the cash outflows.

5 points

QUESTION 13

  1. The chance of receiving an actual return that differs from theone that is expected is called _____.

A.

payoff

B.

beta

C.

karma

D.

probability distribution

E.

risk

5 points

QUESTION 14

  1. If the NPV of a project is positive, it means that:

A.

the project's discounted payback period is less than its paybackperiod.

B.

the internal rate of return is lower than the discount rateused.

C.

the project is not acceptable on a risk adjusted basis.

D.

accepting the project increases the value of the firm.

E.

the project's discounted payback period is longer than theuseful life of the project.

5 points

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Keith Leannon
Keith LeannonLv2
28 Sep 2019

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Related questions

1.Which of the following statements is most correct?

Diversifiable risk is caused by events unique to a single business.
Portfolio risk is caused by events unique to a single business.
Adding similar investments to a portfolio reduces risk more than adding randomly chosen investments does
It is impossible to reduce diversifiable risk.
None of the above statements is correct.

2.Advantages of short-term financing (as compared to long-term financing) include which of the following?

Loans can be obtained faster.
The interest rate on borrowed funds is generally lower.
Interest costs are relatively stable over time.
Answers (a) and (b) are correct.
Answers (a), (b), and (c) are correct.

3.Which of the following statements about the beta coefficient is false?

A stock's beta coefficient measures its volatility relative to the market portfolio.
A stock's beta coefficient can theoretically be calculated using the capital asset pricing model.
A stock's reported beta coefficient is based on forecasted future volatility.
A stock with a beta coefficient greater than 1.0 is said to be riskier than the market portfolio.
Under the capital asset pricing model, a stock with a beta coefficient less than 1.0 would have a required rate of return that is lower than the required rate of return on the market portfolio.

4.Investors will be most likely to purchase a stock if which of the following conditions holds?

E(Re) < R(Re)
E(Re) = R(Re)
E(Re) > R(Re)
E(Re) = RF
RPe = 0

1. If we are able to eliminate all of the unsystematic or diversifiable risk in a portfolio then, what is the result?

a.

a risk-free portfolio
b.
a portfolio that has an expected return of zero
c.

a portfolio that contains only systematic risk

2. A portfolio consists 20% of a risk-free asset and 80% of a stock. The risk-free return is 4%. The stock has an expected return of 15% and a standard deviation of 30%. What’s the expected return of the portfolio?

a.
9.5%
b.
15.0%
c.
12.8%

d.
2%


3. The risk-free rate is 5% and the expected return on the market portfolio is 13%. A stock has a beta of 1.5, what is its expected return?


a.
12%
b.
19.5%
c.

17%

4. For what value of the correlation coefficient for the returns of a pair of stocks will the benefits of diversification the largest?


a.

1.0
b.

-1.0
c.

0.0
d.

0.5


5. Which of the following is an example of systematic risk?
a.
IBM posts lower than expected earnings.
b.
The overall stock market becomes more risky due to super fasting trading algorithms.
c.

Intel announces record earnings.

6. According to the CAPM (capital asset pricing model), the security market line is a straight line. The intercept of this line should be equal to

a.
zero
b.
the expected risk premium on the market portfolio
c.
the expected return on the market portfolio
d.
the risk-free rate


7. A portfolio has 40% invested in Asset 1, 50% invested in Asset 2 and 10% invested in Asset 3. Asset 1 has a beta of 1.2, Asset 2 has a beta of 0.8 and Asset 3 has a beta of 1.8, what’s the beta of the portfolio?

a.
0.80
b.
1.06
c.
1.27


8. Suppose you can borrow and lend at the risk free-rate of 3%. Which of the following four risky portfolios has the best return relative to risk. (Hint: Calculate Sharpe Ratios the ratio of risk premium to standard deviation for each portfolio)

a.
portfolio with a standard deviation of 15% and an expected return of 12%
b.
portfolio with a standard deviation of 12% and an expected return of 9%
c.
portfolio with a standard deviation of 25% and an expected return of 18%
d.
portfolio with a standard deviation of 19% and an expected return of 15%


9. Which statements are TRUE regarding risk and return?

Statement I:
Diversification is the process of removing systematic risk from a portfolio.
Statement II:
In general, the greater the risk, the greater the return required by an investor.
Statement III:
Investors should focus on real returns if they are concerned about the purchasing power of their wealth.


a.
Statements II and III only
b.
Statement I only
c.
Statements I and III only
d.
Statements I and II only

10. The beta of the risk-free asset is:
a.

1.0
b.

0.5
c.

0.0
d.

-1.0

Question 5

The coefficient of variation is a better measure of risk than the standard deviation if the expected returns of the securities being compared differ significantly.

True
False

Question 6.

In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are interested in ex ante (future) data.

True
False

Question 7

Typically, debentures have higher interest rates than mortgage bonds primarily because the mortgage bonds are backed by assets while debentures are unsecured.

True
False

Question 8

If two firms have the same current dividend and the same expected growth rate, their stocks must sell at the same current price or else the market will not be in equilibrium.

True
False

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Question 9

Which of the following is the best measure of the wealth of a firm's stockholders?

The firm's Net Income during the past year
Expected Earnings per Share during the coming year
Book Value (or Net Worth) as recorded on the balance sheet
The price of the firm's stock on the open market

Flag this Question

Question 10

Consider the following firms:

Net Income Stock Price at Stock Price at
this year Beg of Year End of Year
Firm A: $10,000,000 $20 $10
Firm B: $(10,000,000) $10 $20
The manager of Firm A is doing a better job than B
The manager of Firm B is doing a better job than A
Neither manager is doing a good job
Both managers are doing a good job

Question 11

A company has the following income statement. What is its net operating profit after taxes (NOPAT)?

Sales $1,000
Costs 700
Depreciation 100
EBIT $ 200
Interest expense 50
EBT $ 150
Taxes (40%) 60
Net income $ 90

$ 90
$120
$150
$180
$200

Question 12

Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield 6 percent, and Carter's marginal income tax rate is 40 percent, what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two?

2.40%
3.60%
4.50%
5.25%
6.00%

Question 13

If a firm's current ratio is less than 1.0, it indicates that:

The firm had negative net income for the year
The firm will be unable to pay its shortterm loans which come due this year
Current Assets are less than Current Liabilities
The firm is insolvent

Question 14

A firm which has a relatively large amount of cash and receivables in its current assets accounts and a relatively small amount of current liabilities would be considered:

liquid
profitable
risky
nuts

Question 15

In November 2011 you bought 100 shares of Microsoft stock for $35.375 a share. In November 2013 you sold your stock for $92.5625 a share. What was your average annual rate of return on your Microsoft investment? (disregard dividends and commissions)

262%
62%
585%
1.6%

Question 16

You deposit $2,000 in a savings account that pays 10 percent interest, compounded annually. How much will your account be worth in 15 years?

$2,030.21
$5,000.00
$8,091.12
$8,354.50
$9,020.10

Question 17

You can earn 8 percent interest, compounded annually. How much must you deposit today to withdraw $10,000 in 6 years?

$5,402.69
$6,301.70
$6,756.76
$8,432.10
$9,259.26

Question 18

Calculate the required rate of return for Mercury, Inc., assuming that the real rate of interest is 3 percent, investors expect a 5 percent rate of inflation in the future, and they expect the rate of return on the overall stock market to be 13 percent. Mercury has a beta of 2.0.

15%
16%
17%
18%
None of the above

Question 19

Which is the best measure of risk for an asset held in isolation? Which is the best measure for an asset held in a diversified portfolio?

Variance; correlation coefficient
Standard deviation; correlation coefficient
Beta; variance
Coefficient of variation; beta
Beta; beta

Question 20

You have three stocks in your portfolio. $10,000 is invested in a stock with a beta of 1.50 and $15,000 is invested in a stock with a beta of 1.00, and $25,000 is invested in a stock with a beta of 0.50. What is the beta of your portfolio?

0.28
0.85
1.00
3.00

Question 21

A corporate bond with a $1,000 face value pays a $50 coupon every six months. The bond will mature in ten years, and has a nominal yield to maturity of 9 percent. What is the price of the bond?

$ 634.86
$1,064.18
$1,065.04
$1,078.23
$1,094.56

Question 22

The Jones Company has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with a perpetual annual dividend of $5 per share and a par value of $30. If the required return on this stock is currently 20 percent, what should be the stock's market value?

$150
$100
$ 50
$ 25
$ 10

Question 23

A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 15 percent, and if investors require a 19 percent rate of return, what is the price of the stock?

$57.50
$62.25
$71.86
$64.00
$44.92

Question 24

A stock is not expected to pay a dividend over the next four years. Five years from now, the company anticipates that it will establish a dividend of $1.00 per share (i.e., D5 = $1.00). Once the dividend is established, the market expects that the dividend will grow at a constant rate of 5 percent per year forever. The risk-free rate is 5 percent, the company's beta is 1.2, and the market risk premium is 5 percent. The required rate of return on the company’s stock is expected to remain constant. What is the current stock price?

$ 7.36
$ 8.62
$ 9.89
$10.98
$11.53

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