Question 1

Gretta's portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. The risk-free rate is 6% and the market risk premium is 5%. Which of the following statements is CORRECT?

Accepted Answer

A)   the required return on the market is 10%.
B)   the portfolio's required return is less than 11%.
C)   if the risk-free rate remains unchanged but the market risk premium increases by 2%, gretta's portfolio's required return will increase by more than 2%.
D)   if the market risk premium remains unchanged but expected inflation increases by 2%, gretta's portfolio's required return will increase by more than 2%.
E)   if the stock market is efficient, gretta's portfolio's expected return should equal the expected return on the market, which is 11%.F) A) and B)
G) D) and E)

Question 2

Your cousin will sell you his coffee shop for $250,000, with "seller financing," at a 6.0% nominal annual rate. The terms of the loan would require you to make 12 equal end-of-month payments per year for 4 years, and then make an additional final (balloon)  payment of $50,000 at the end of the last month. What would your equal monthly payments be?

Accepted Answer

A)   $4,029.37
B)   $4,241.44
C)   $4,464.67
D)   $4,699.66
E)   $4,947.01F) C) and D)
G) D) and E)

Question 3

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the nominal rate on the deposit (or loan).

Accepted Answer

A) True 
 B)False

Question 4

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?

Accepted Answer

A)   $17.39
B)   $17.84
C)   $18.29
D)   $18.75
E)   $19.22F) B) and E)
G) B) and C)

Question 5

Merrell Enterprises' stock has an expected return of 14%. The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT?

Accepted Answer

A)   the stock's dividend yield is 8%.
B)   the current dividend per share is $4.00.
C)   the stock price is expected to be $54 a share one year from now.
D)   the stock price is expected to be $57 a share one year from now.
E)   the stock's dividend yield is 7%.F) A) and C)
G) C) and E)

Question 6

Assume that the risk-free rate is 5%. Which of the following statements is CORRECT?

Accepted Answer

A)   if a stock's beta doubled, its required return under the capm would also double.
B)   if a stock's beta doubled, its required return under the capm would more than double.
C)   if a stock's beta were 1.0, its required return under the capm would be 5%.
D)   if a stock's beta were less than 1.0, its required return under the capm would be less than 5%.
E)   if a stock has a negative beta, its required return under the capm would be less than 5%.F) B) and D)
G) B) and E)

Question 7

You just deposited $2,500 in a bank account that pays a 4.0% nominal interest rate, compounded quarterly. If you also add another $5,000 to the account one year (4 quarters)  from now and another $7,500 to the account two years (8 quarters)  from now, how much will be in the account three years (12 quarters)  from now?

Accepted Answer

A)   $15,234.08
B)   $16,035.88
C)   $16,837.67
D)   $17,679.55
E)   $18,563.53F) A) and B)
G) A) and C)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   a portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable.
B)   if a stock has a negative beta, its expected return must be negative.
C)   a portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5.
D)   according to the capm, stocks with higher standard deviations of returns must also have higher expected returns.
E)   if the returns on two stocks are perfectly positively correlated (i.e., the correlation coefficient is +1.0)  and these stocks have identical standard deviations, an equally weighted portfolio of the two stocks will have a standard deviation that is less than that of the individual stocks.F) D) and E)
G) A) and B)

Question 9

Hazel Morrison, a mutual fund manager, has a $40 million portfolio with a beta of 1.00. The risk-free rate is 4.25%, and the market risk premium is 6.00%. Hazel expects to receive an additional $60 million, which she plans to invest in additional stocks. After investing the additional funds, she wants the fund's required and expected return to be 13.00%. What must the average beta of the new stocks be to achieve the target required rate of return?

Accepted Answer

A)   1.68
B)   1.76
C)   1.85
D)   1.94
E)   2.04F) A) and D)
G) A) and E)

Question 10

On January 1, 2016, your sister's pet supplies business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes. What will the interest tax deduction be for 2016?

Accepted Answer

A)   $17,419.55
B)   $17,593.75
C)   $17,769.68
D)   $17,947.38
E)   $18,126.85F) C) and E)
G) D) and E)

Question 11

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
 AB Beta 1.100.90 Constant growth rate 7.00%7.00%\begin{array}{lcc}& \mathrm { A } & \mathrm { B }  \	ext { Beta } & 1.10 & 0.90 \	ext { Constant growth rate } & 7.00 \% & 7.00 \%\end{array} Beta  Constant growth rate ​A1.107.00%​B0.907.00%​

Accepted Answer

A)   stock a must have a higher dividend yield than stock b.
B)   stock b's dividend yield equals its expected dividend growth rate.
C)   stock b must have the higher required return.
D)   stock b could have the higher expected return.
E)   stock a must have a higher stock price than stock b. F) C) and D)
G) D) and E)

Question 12

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)   the higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio.
B)   it is impossible to have a situation where the market risk of a single stock is less than that of a portfolio that includes the stock.
C)   once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk by even a small amount.
D)   an investor can eliminate virtually all diversifiable risk if he or she holds a very large, well-diversified portfolio of stocks.
E)   an investor can eliminate virtually all market risk if he or she holds a very large and well-diversified portfolio of stocks.F) A) and E)
G) B) and E)

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?
  AB Price $25$40 Expected growth 7%9% Expected return 10%12%\begin{array}{lcr}& \mathrm { A } & \mathrm { B }  \	ext { Price } & \$ 25 & \$ 40 \	ext { Expected growth } & 7 \% & 9 \% \	ext { Expected return } & 10 \% & 12 \%\end{array} Price  Expected growth  Expected return ​A$257%10%​B$409%12%​

Accepted Answer

A)   the two stocks could not be in equilibrium with the numbers given in the question.
B)   a's expected dividend is $0.50.
C)   b's expected dividend is $0.75.
D)   a's expected dividend is $0.75 and b's expected dividend is $1.20.
E)   the two stocks should have the same expected dividend. F) B) and C)
G) A) and E)

Question 15

Your bank account pays a 5% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

Accepted Answer

A)   the periodic rate of interest is 5% and the effective rate of interest is also 5%.
B)   the periodic rate of interest is 1.25% and the effective rate of interest is 2.5%.
C)   the periodic rate of interest is 5% and the effective rate of interest is greater than 5%.
D)   the periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%.
E)   the periodic rate of interest is 2.5% and the effective rate of interest is 5%.F) A) and C)
G) B) and D)

Question 16

The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero, which is the risk-free rate.

Accepted Answer

A) True 
 B)False

Question 17

Consider the following information and then calculate the required rate of return for the Universal Investment Fund, which holds 4 stocks. The market's required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows: 
 StockInvestmentBetaA$200,0001.50B$300,000−0.50C$500,0001.25D$1,000,0000.75\begin{array}{lll}Stock&Investment&Beta\A&\$ 200,000 & 1.50 \B&\$ 300,000 & -0.50 \C&\$ 500,000 & 1.25 \D&\$ 1,000,000 & 0.75\end{array}StockABCD​Investment$200,000$300,000$500,000$1,000,000​Beta1.50−0.501.250.75​

Accepted Answer

A)   9.58%
B)   10.09%
C)   10.62%
D)   11.18%
E)   11.77% F) A) and B)
G) B) and C)

Question 18

What is the present value of the following cash flow stream at a rate of 6.25%?

Accepted Answer

A)   $411.57
B)   $433.23
C)   $456.03
D)   $480.03
E)   $505.30F) A) and B)
G) A) and E)

Question 19

Orwell building supplies' last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs)  is 12%. What is the best estimate of the current stock price?

Accepted Answer

A)   $41.58
B)   $42.64
C)   $43.71
D)   $44.80
E)   $45.92F) B) and E)
G) A) and B)

Question 20

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?

Accepted Answer

A)   $969
B)   $1,020
C)   $1,074
D)   $1,131
E)   $1,187F) A) and D)
G) A) and C)

Exam 29: Basic Financial Tools: A review

On January 1, 2016, your sister's pet supplies business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes. What will the interest tax deduction be for 2016?

Correct Answer
verified

Assume that the risk-free rate is 5%. Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Merrell Enterprises' stock has an expected return of 14%. The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero, which is the risk-free rate.

Correct Answer
verified

Your bank account pays a 5% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

Correct Answer
verified

Orwell building supplies' last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 12%. What is the best estimate of the current stock price?

Correct Answer
verified

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?

Correct Answer
verified

Gretta's portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. The risk-free rate is 6% and the market risk premium is 5%. Which of the following statements is CORRECT?

Correct Answer
verified

What is the present value of the following cash flow stream at a rate of 6.25%?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the nominal rate on the deposit (or loan).

Correct Answer
verified

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

Correct Answer
verified

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?

Correct Answer
verified

Exam 29: Basic Financial Tools: A review

On January 1, 2016, your sister's pet supplies business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes. What will the interest tax deduction be for 2016?

Correct AnswerverifiedShow Answer

Assume that the risk-free rate is 5%. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Merrell Enterprises' stock has an expected return of 14%. The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero, which is the risk-free rate.

Correct AnswerverifiedShow Answer

Your bank account pays a 5% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Orwell building supplies' last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 12%. What is the best estimate of the current stock price?

Correct AnswerverifiedShow Answer

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?

Correct AnswerverifiedShow Answer

Gretta's portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. The risk-free rate is 6% and the market risk premium is 5%. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

What is the present value of the following cash flow stream at a rate of 6.25%?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the nominal rate on the deposit (or loan).

Correct AnswerverifiedShow Answer

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

Correct AnswerverifiedShow Answer

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified