Question 11 If a firm produces a 1.25 percent return on assets and also a 5 perc

Question

Question 11

If a firm produces a 1.25 percent return on assets and also a 5 percent return on equity, then the firm:

Select one:

a. has no net working capital.

b. is using its assets as efficiently as possible.

c. has an equity multiplier of 4.

d. has no debt of any kind.

e. has an equity multiplier of 2.

Question 12

A growth stock is a stock that results in a low return with relatively low levels of risk.

Select one:

True

False

Question 13

Given the following information, what is the standard deviation of stock A if it has an expected return of 30% in a boom economy, an expected return of 18% in a good economy, and an expected return of 8% in a recession? The probabilities of boom, normal, recession are 0.1, 0.6, and 0.3, respectively.

Select one:

a. 0.0642

b. 0.0527

c. 0.0128

d. 0.1159

e. 0.0697

Question 14

A project which has a payback period equal to its life also has a negative NPV.

Select one:

True

False

Question 15

If investors require a 6% nominal return and the expected inflation rate is 3.5%, what is the expected real return?

Select one:

a. 3.00%

b. 3.04%

c. 2.5%

d. 2.21%

e. 2.42%

Explanation / Answer

1. Option C. has an equity multiplier of 4.

Equity Multiplier = ROE / ROA = 5 / 1.25 = 4

2. False. Growth Stock carries a lot of risk

3. Option D. The Standard deviation is 0.1159

4. True.

5. Option E

Real Return = (1 + Nominal) / (1 + Inflation) - 1

Real Return = (1.06) / (1.035) - 1 = 2.42%

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