Question 5 The coefficient of variation is a better measure of risk than the sta

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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.

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.

Question 7

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

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.

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Question 9

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

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Question 10

Consider the following firms:

Question 11

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?

Question 13

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

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:

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)

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?

Question 17

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

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.

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?

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?

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?

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?

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?

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?

True

Explanation / Answer

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

Answer: True

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

Answer: True

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

Answer: True

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

Answer: The price of the firm's stock on the open market

Because this reflects all the information related to the company in the stock.

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Question 10

Consider the following firms:

Net Income

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

Answer: Neither manager is 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

Answer: NOPAT is earnings before interest and taxes (EBIT) adjusted for the impact of taxes. Therefore,

NOPAT = EBIT – tax = $200 – 40%x$200 = $200 - $80 = $120

Question 12

2.40%

3.60%

4.50%

5.25%

6.00%

Answer:
Treasury bond yield 6.00%
Tax rate 40.00%

Remember that municipal bonds are tax exempt, so their BT yield = AT yield.

Municipal yield = AT bond yield
Municipal yield = BT bond yield ´ (1 - T)
Municipal yield = 3.60%

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 short term loans which come due this year

Current Assets are less than Current Liabilities

The firm is insolvent

Answer: Current Assets are less than Current Liabilities

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

Answer: liquid

Question 15

262%

62%

585%

1.6%

Answer: 262%

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

Answer: Amount deposited = P = $2000

Interest = r% = 10%

Time = n = 15 years

Therefore Amount in 15 years = A = P(1+r%)n = 2000(1+10%)15 =$8,354.50

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

Answer: Amount deposited = P= ?

Interest = r% = 8%

Time = n = 6 years

Therefore Amount deposited can be calculated:

A = P(1+r%)n

10000 = Px (1+8%)6 = $6301.70

Question 18

15%

16%

17%

18%

None of the above

Answer: Market return = 13%

Here real interest rate = 3%

Inflation rate = 5%

Therefore Nominal interest rate = 3 + 5 = 8%

This nominal interest rate is also the risk free rate

Therefore risk free rate = Rf = 8%

So, by CAPM model

Expected return on stock = 8% + (13% - 8%) x beta

= 8% + (13% - 8%) x 2 = 18%

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

Answer:

Standard deviation; correlation coefficient

Question 20

0.28

0.85

1.00

3.00

Answer:

Stock with beta 1.5 have invested = $10000

Stock with beta 1 have invested = $15000

Stock with beta 0.5 have invested = $25000

Weight of stock with beta 1.5 = 10000/50000 = 0.2

Weight of stock with beta 1.0 = 15000/50000 = 0.3

Weight of stock with beta 0.5 = 25000/50000 = 0.5

Therefore portfolio beta = 0.2 x 1.5 + 0.3 x 1.0 + 0.5 x 0.5 = .3+.3+.25 = 0.85

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

Answer:

Year-

NPV at 9% =

$634.86

1050

Question 22

$150

$100

$ 50

$ 25

$ 10

Answer:

Stock value = Perpetual dividend / required rate of return = $5/20% = $25

Question 23

$57.50

$62.25

$71.86

$64.00

$44.92

Answer:

Growth rate = g = 15%

Dividend today = $2

Required rate of return = 19%

Therefore Sock current price = $2 X (1+15%) / (19% - 15%) = $57.5

Question 24

$ 7.36

$ 8.62

$ 9.89

$10.98

$11.53

Answer: 10.98%

True

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