Desreumaux Inc's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5.00%, what is the market risk premium?
5.80%
5.95%
6.09%
6.25%
6.40%
Question 8
Jim Angel holds a $200,000 portfolio consisting of the following stocks:
Stock
Investment
Beta
A
$ 50,000
0.95
B
50,000
0.80
C
50,000
1.00
D
50,000
1.20
Total
$200,000
What is the portfolio's beta?
0.938
0.988
1.037
1.089
1.143
Question 9
Bruce Niendorf holds the following portfolio:
Stock
Investment
Beta
A
$150,000
1.40
B
50,000
0.80
C
100,000
1.00
D
75,000
1.20
Total
$375,000
Bruce plans to sell Stock A and replace it with Stock E, which has a beta of 0.75. By how much will the portfolio beta change?
-0.190
-0.211
-0.234
-0.260
-0.286
Question 10
Company A has a beta of 0.70, while Company B's beta is 1.20. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.)
Answer
2.75%
2.89%
3.05%
3.21%
3.38%
Question 12
If markets are in equilibrium, which of the following conditions will exist?
Each stock's expected return should equal its realized return as seen by the marginal investor.
Each stock's expected return should equal its required return as seen by the marginal investor.
All stocks should have the same expected return as seen by the marginal investor.
The expected and required returns on stocks and bonds should be equal.
All stocks should have the same realized return during the coming year.
Question 13
The preemptive right is important to shareholders because it
allows managers to buy additional shares below the current market price.
will result in higher dividends per share.
is included in every corporate charter.
protects the current shareholders against a dilution of their ownership interests.
protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.
Question 14
Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
A
B
Required return
10%
12%
Market price
$25
$40
Expected growth
7%
9%
These two stocks should have the same price.
These two stocks must have the same dividend yield.
These two stocks should have the same expected return.
These two stocks must have the same expected capital gains yield.
These two stocks must have the same expected year-end dividend.
Question 15
Which of the following statements is CORRECT?
Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation.
The preferred stock of a given firm is generally less risky to investors than the same firm's common stock.
Corporations cannot buy the preferred stocks of other corporations.
Preferred dividends are not generally cumulative.
A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation.
Question 16
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?
$23.11
$23.70
$24.31
$24.93
$25.57
Question 18
If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?
6.50%
6.83%
7.17%
7.52%
7.90%
Question 19
Sorenson Corp.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Sorenson's expected stock price in 7 years, i.e., what is ?
$37.52
$39.40
$41.37
$43.44
$45.61
Question 20
Nachman Industries just paid a dividend of D0 = $1.32. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value?
$41.59
$42.65
$43.75
$44.87
$45.99
Desreumaux Inc's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5.00%, what is the market risk premium?
5.80%
5.95%
6.09%
6.25%
6.40%
Question 8
Jim Angel holds a $200,000 portfolio consisting of the following stocks:
Stock
Investment
Beta
A
$ 50,000
0.95
B
50,000
0.80
C
50,000
1.00
D
50,000
1.20
Total
$200,000
What is the portfolio's beta?
0.938
0.988
1.037
1.089
1.143
Question 9
Bruce Niendorf holds the following portfolio:
Stock
Investment
Beta
A
$150,000
1.40
B
50,000
0.80
C
100,000
1.00
D
75,000
1.20
Total
$375,000
Bruce plans to sell Stock A and replace it with Stock E, which has a beta of 0.75. By how much will the portfolio beta change?
-0.190
-0.211
-0.234
-0.260
-0.286
Question 10
Company A has a beta of 0.70, while Company B's beta is 1.20. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.)
Answer
2.75%
2.89%
3.05%
3.21%
3.38%
Question 12
If markets are in equilibrium, which of the following conditions will exist?
Each stock's expected return should equal its realized return as seen by the marginal investor.
Each stock's expected return should equal its required return as seen by the marginal investor.
All stocks should have the same expected return as seen by the marginal investor.
The expected and required returns on stocks and bonds should be equal.
All stocks should have the same realized return during the coming year.
Question 13
The preemptive right is important to shareholders because it
allows managers to buy additional shares below the current market price.
will result in higher dividends per share.
is included in every corporate charter.
protects the current shareholders against a dilution of their ownership interests.
protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.
Question 14
Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
A
B
Required return
10%
12%
Market price
$25
$40
Expected growth
7%
9%
These two stocks should have the same price.
These two stocks must have the same dividend yield.
These two stocks should have the same expected return.
These two stocks must have the same expected capital gains yield.
These two stocks must have the same expected year-end dividend.
Question 15
Which of the following statements is CORRECT?
Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation.
The preferred stock of a given firm is generally less risky to investors than the same firm's common stock.
Corporations cannot buy the preferred stocks of other corporations.
Preferred dividends are not generally cumulative.
A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation.
Question 16
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?
$23.11
$23.70
$24.31
$24.93
$25.57
Question 18
If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?
6.50%
6.83%
7.17%
7.52%
7.90%
Question 19
Sorenson Corp.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Sorenson's expected stock price in 7 years, i.e., what is ?
$37.52
$39.40
$41.37
$43.44
$45.61
Question 20
Nachman Industries just paid a dividend of D0 = $1.32. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value?
$41.59
$42.65
$43.75
$44.87
$45.99