Question 1

The set of probabilities for all possible occurrences.

Accepted Answer

A)  probability 
B)  probability distribution 
C)  stock market bubble 
D)  market probabilities 
A)  probability 
B)  probability distribution 
C)  stock market bubble 
D)  market probabilities B

Question 2

Expected Return A company's current stock price is $22.00 and its most recent dividend was $0.75 per share. Since analysts estimate the company will have a 12% growth rate, what is its expected return?

Accepted Answer

A)  3.00% 
B)  3.48% 
C)  12.00% 
D)  15.82% 
A)  3.00% 
B)  3.48% 
C)  12.00% 
D)  15.82% D

Question 3

Expected Return and Risk Compute the standard deviation given these four economic states, their likelihoods, and the potential returns:

Accepted Answer

A)  12.19% 
B)  23.8% 
C)  38.65% 
D)  88.06% 
A)  12.19% 
B)  23.8% 
C)  38.65% 
D)  88.06% C

Question 4

Portfolio Beta You have a portfolio with a beta of 1.25. What will be the new portfolio beta if you keep 80 percent of your money in the old portfolio and 20 percent in a stock with a beta of 1.75?

Accepted Answer

A)  1.00 
B)  1.35 
C)  1.50 
D)  3.00 
A)  1.00 
B)  1.35 
C)  1.50 
D)  3.00

Question 5

Netflicks, Inc. has a beta of 3.61. If the market return is expected to be 13.2 percent and the risk-free rate is 7 percent, what is Netflicks' risk premium?

Accepted Answer

A)  20.91% 
B)  22.38% 
C)  25.72% 
D)  29.38% 
A)  20.91% 
B)  22.38% 
C)  25.72% 
D)  29.38%

Question 6

The constant growth model assumes which of the following?

Accepted Answer

A)  That there is privately held information. 
B)  That the stock is efficiently priced. 
C)  That there are executive stock options available to managers. 
D)  That there is no restricted stock. 
A)  That there is privately held information. 
B)  That the stock is efficiently priced. 
C)  That there are executive stock options available to managers. 
D)  That there is no restricted stock.

Question 7

Which of the following is NOT a necessary condition for an efficient market?

Accepted Answer

A)  Many buyers and sellers. 
B)  No prohibitively high barriers to entry. 
C)  Free and readily available information available to all participants. 
D)  No trading or transaction costs. 
A)  Many buyers and sellers. 
B)  No prohibitively high barriers to entry. 
C)  Free and readily available information available to all participants. 
D)  No trading or transaction costs.

Question 8

US Bancorp holds a press conference to announce a positive news event that was unexpected to the market. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price continues to increase resulting in a total increase of $11. Given this information which of the following statements is correct?

Accepted Answer

A)  This is an example of a market overreaction. 
B)  This is an example of a market underreaction. 
C)  This is an example of a semi-strong efficient market. 
D)  None of these statements are correct. 
A)  This is an example of a market overreaction. 
B)  This is an example of a market underreaction. 
C)  This is an example of a semi-strong efficient market. 
D)  None of these statements are correct.

Question 9

Risk Premiums You own $5,000 of Software Corp's stock that has a beta of 3.75. You also own $10,000 of Home Improvement Corp (beta = 1.5) and $15,000 of Publishing Corp (beta = 0.35). Assume that the market return will be 13 percent and the risk-free rate is 4.5 percent. What is the risk premium of the portfolio?

Accepted Answer

A)  11.05% 
B)  16.50% 
C)  17.00% 
D)  24.70% 
A)  11.05% 
B)  16.50% 
C)  17.00% 
D)  24.70%

Question 10

Stock A has a required return of 19%. Stock B has a required return of 11%. Assume a risk-free rate of 4.75%. Which of the following is a correct statement about the two stocks?

Accepted Answer

A)  Stock A is riskier. 
B)  Stock B is riskier. 
C)  The stocks have the same risk. 
D)  We would need to know if the markets are efficient to answer this question. 
A)  Stock A is riskier. 
B)  Stock B is riskier. 
C)  The stocks have the same risk. 
D)  We would need to know if the markets are efficient to answer this question.

Question 11

Expected Return Risk Compute the standard deviation of the expected return given these three economic states, their likelihoods, and the potential returns:

Accepted Answer

A)  6.8% 
B)  16.5% 
C)  21.5% 
D)  46.4% 
A)  6.8% 
B)  16.5% 
C)  21.5% 
D)  46.4%

Question 12

This is the reward for taking systematic stock market risk.

Accepted Answer

A)  required return 
B)  risk-free rate 
C)  risk premium 
D)  market risk premium 
A)  required return 
B)  risk-free rate 
C)  risk premium 
D)  market risk premium

Question 13

Which of the following is incorrect?

Accepted Answer

A)  Most firms would want to sell additional shares of common stock if they feel their stock is undervalued. 
B)  Most firms would not want to repurchase shares of common stock if they feel their stock is overvalued. 
C)  It is important for financial managers to understand market efficiency because it helps them understand how their stock prices will react to different types of decisions and news announcements. 
D)  None of these statements are incorrect. 
A)  Most firms would want to sell additional shares of common stock if they feel their stock is undervalued. 
B)  Most firms would not want to repurchase shares of common stock if they feel their stock is overvalued. 
C)  It is important for financial managers to understand market efficiency because it helps them understand how their stock prices will react to different types of decisions and news announcements. 
D)  None of these statements are incorrect.

Question 14

A theory that describes the types of information that are reflected in current stock prices.

Accepted Answer

A)  asset pricing 
B)  behavioral finance 
C)  efficient market hypothesis 
D)  public information 
A)  asset pricing 
B)  behavioral finance 
C)  efficient market hypothesis 
D)  public information

Question 15

Praxair's upcoming dividend is expected to be $2.25 and its stock is selling at $65. The firm has a beta of 0.8 and is expected to grow at 10% for the foreseeable future. Compute Praxair's required return using both CAPM and the constant growth model. Assume that the market portfolio will earn 10 percent and the risk-free rate is 3 percent.

Accepted Answer

A)  CAPM: 8.6%; Constant Growth Model: 13.46% 
B)  CAPM: 9.7%; Constant Growth Model: 12.56% 
C)  CAPM: 10.1%; Constant Growth Model: 11.46% 
D)  CAPM: 8.2%; Constant Growth Model: 9.56% 
A)  CAPM: 8.6%; Constant Growth Model: 13.46% 
B)  CAPM: 9.7%; Constant Growth Model: 12.56% 
C)  CAPM: 10.1%; Constant Growth Model: 11.46% 
D)  CAPM: 8.2%; Constant Growth Model: 9.56%

Question 16

Paccar's current stock price is $75.10 and it is likely to pay a $3.29 dividend next year. Since analysts estimate Paccar will have a 14.2% growth rate, what is its required return?

Accepted Answer

A)  15.39% 
B)  17.94% 
C)  18.58% 
D)  19.62% 
A)  15.39% 
B)  17.94% 
C)  18.58% 
D)  19.62%

Question 17

Portfolio Beta You own $1,000 of City Steel stock that has a beta of 1.5. You also own $5,000 of Rent-N-Co (beta = 1.8) and $4,000 of Lincoln Corporation (beta = 0.9). What is the beta of your portfolio?

Accepted Answer

A)  1.4 
B)  1.5 
C)  4.2 
D)  4.65 
A)  1.4 
B)  1.5 
C)  4.2 
D)  4.65

Question 18

This is the average of the possible returns weighted by the likelihood of those returns occurring.

Accepted Answer

A)  efficient return 
B)  expected return 
C)  market return 
D)  required return 
A)  efficient return 
B)  expected return 
C)  market return 
D)  required return

Question 19

Estee Lauder's upcoming dividend is expected to be $0.65 and its stock is selling at $45. The firm has a beta of 1.1 and is expected to grow at 10% for the foreseeable future. Compute Estee Lauder's required return using both CAPM and the constant growth model. Assume that the market portfolio will earn 11 percent and the risk-free rate is 4 percent.

Accepted Answer

A)  CAPM: 11.2%; Constant Growth Model: 10.97% 
B)  CAPM: 11.7%; Constant Growth Model: 11.44% 
C)  CAPM: 10.1%; Constant Growth Model: 11.46% 
D)  CAPM: 9.2%; Constant Growth Model: 9.56% 
A)  CAPM: 11.2%; Constant Growth Model: 10.97% 
B)  CAPM: 11.7%; Constant Growth Model: 11.44% 
C)  CAPM: 10.1%; Constant Growth Model: 11.46% 
D)  CAPM: 9.2%; Constant Growth Model: 9.56%

Question 20

You hold a diversified portfolio consisting of $1,000 investment in each of 10 different stocks. The portfolio has a beta of 0.8. You have decided to sell one of your stocks that has a beta equal to 1.1 for $1,000. You will purchase $1,000 of a new stock with a beta of 2.5. After these two transactions (sell and buy), what will be the beta of the new portfolio?

Accepted Answer

A)  1.1 
B)  0.99 
C)  0.87 
D)  0.94 
A)  1.1 
B)  0.99 
C)  0.87 
D)  0.94

The set of probabilities for all possible occurrences.

Expected Return A company's current stock price is $22.00 and its most recent dividend was $0.75 per share. Since analysts estimate the company will have a 12% growth rate, what is its expected return?

Expected Return and Risk Compute the standard deviation given these four economic states, their likelihoods, and the potential returns:

Portfolio Beta You have a portfolio with a beta of 1.25. What will be the new portfolio beta if you keep 80 percent of your money in the old portfolio and 20 percent in a stock with a beta of 1.75?

Netflicks, Inc. has a beta of 3.61. If the market return is expected to be 13.2 percent and the risk-free rate is 7 percent, what is Netflicks' risk premium?

The constant growth model assumes which of the following?

Which of the following is NOT a necessary condition for an efficient market?

Stock A has a required return of 19%. Stock B has a required return of 11%. Assume a risk-free rate of 4.75%. Which of the following is a correct statement about the two stocks?

Expected Return Risk Compute the standard deviation of the expected return given these three economic states, their likelihoods, and the potential returns:

This is the reward for taking systematic stock market risk.

Which of the following is incorrect?

A theory that describes the types of information that are reflected in current stock prices.

Paccar's current stock price is $75.10 and it is likely to pay a $3.29 dividend next year. Since analysts estimate Paccar will have a 14.2% growth rate, what is its required return?

Portfolio Beta You own $1,000 of City Steel stock that has a beta of 1.5. You also own $5,000 of Rent-N-Co (beta = 1.8) and $4,000 of Lincoln Corporation (beta = 0.9). What is the beta of your portfolio?

This is the average of the possible returns weighted by the likelihood of those returns occurring.

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters

Exam 10: Estimating Risk and Return

The set of probabilities for all possible occurrences.

Expected Return A company's current stock price is $22.00 and its most recent dividend was $0.75 per share. Since analysts estimate the company will have a 12% growth rate, what is its expected return?

Expected Return and Risk Compute the standard deviation given these four economic states, their likelihoods, and the potential returns:

Portfolio Beta You have a portfolio with a beta of 1.25. What will be the new portfolio beta if you keep 80 percent of your money in the old portfolio and 20 percent in a stock with a beta of 1.75?

Netflicks, Inc. has a beta of 3.61. If the market return is expected to be 13.2 percent and the risk-free rate is 7 percent, what is Netflicks' risk premium?

The constant growth model assumes which of the following?

Which of the following is NOT a necessary condition for an efficient market?

Stock A has a required return of 19%. Stock B has a required return of 11%. Assume a risk-free rate of 4.75%. Which of the following is a correct statement about the two stocks?

Expected Return Risk Compute the standard deviation of the expected return given these three economic states, their likelihoods, and the potential returns:

This is the reward for taking systematic stock market risk.

Which of the following is incorrect?

A theory that describes the types of information that are reflected in current stock prices.

Paccar's current stock price is $75.10 and it is likely to pay a $3.29 dividend next year. Since analysts estimate Paccar will have a 14.2% growth rate, what is its required return?

Portfolio Beta You own $1,000 of City Steel stock that has a beta of 1.5. You also own $5,000 of Rent-N-Co (beta = 1.8) and $4,000 of Lincoln Corporation (beta = 0.9). What is the beta of your portfolio?

This is the average of the possible returns weighted by the likelihood of those returns occurring.

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters