Fall FIN-315-01D Business Finance I exam 3

Question 1

Last year Mike bought 100 shares of Dallas Corporation common
stock for $53 per share. During the year he received dividends of $1.45 per
share. The stock is currently selling for $60 per share. What rate of return
did Mike earn over the year?

Answer

		11.7 percent
		13.2 percent
		14.1 percent
		15.9 percent

Question 2

Emmy Lou, Inc. has an expected dividend next year of $5.60 per
share, a growth rate of dividends of 10 percent, and a required return of 20
percent. The value of a share of Emmy Lou, Inc.’s common stock is ________.

Answer

		$28.00
		$56.00
		$22.40
		$18.67

Question 3

Systematic risk is also referred to as

Answer

		diversifiable risk.
		economic risk.
		nondiversifiable risk.
		not relevant.

Question 4

Nico Corporation’s common stock is expected to pay a dividend of
$3.00 forever and currently sells for $21.42. What is the required rate of
return?

Answer

		10%
		12%
		13%
		14%

Question 5

A firm has experienced a constant annual rate of dividend growth
of 9 percent on its common stock and expects the dividend per share in the
coming year to be $2.70. The firm can earn 12 percent on similar risk
involvements. The value of the firm’s common stock is ________.

Answer

		$22.50/share
		$9/share
		$90/share
		$30/share

Question 6

Tangshan China Company’s stock is currently selling for $80.00
per share. The expected dividend one year from now is $4.00 and the required
return is 13 percent. What is Tangshan’s dividend growth rate assuming that
dividends are expected to grow at a constant rate forever?

Answer

		8%
		9%
		10%
		11%

Question 7

Tangshan China’s stock is currently selling for $160.00 per
share and the firm’s dividends are expected to grow at 5 percent indefinitely.
Assuming Tangshan China’s most recent dividend was $5.50, what is the required
rate of return on Tangshan’s stock?

Answer

		7.3%
		8.6%
		9.5%
		10.6%
Question 8 The expected value, standard deviation of returns, and coefficient of variation for asset A are ________. (See table below.) Answer 10 percent, 8 percent, and 1.25, respectively 9.33 percent, 8 percent, and 2.15, respectively 9.35 percent, 4.68 percent, and 2.00, respectively 9.35 percent, 2.76 percent, and 0.295, respectively Question 9 An investment banker has recommended a $100,000 portfolio containing assets B, D, and F. $20,000 will be invested in asset B, with a beta of 1.5; $50,000 will be invested in asset D, with a beta of 2.0; and $30,000 will be invested in asset F, with a beta of 0.5. The beta of the portfolio is Answer 1.25. 1.33. 1.45. unable to be determined from the information provided.

Question 10

Nico Custom Cycles’
common stock currently pays no dividends. The company plans to begin paying
dividends beginning 3 years from today. The first dividend will be $3.00 and
dividends will grow at 5 percent per year thereafter. Given a required return
of 15 percent, what would you pay for the stock today?

Answer

		$25.33
		$18.73
		$29.86
		$22.68
Question 11 The ________ are sometimes referred to as the residual owners of the corporation. Answer preferred stockholders unsecured creditors common stockholders secured creditors

Question 12

Asset P has a beta of 0.9. The risk-free rate of return is 8
percent, while the return on the market portfolio of assets is 14 percent. The
asset’s required rate of return is

Answer

		13.4 percent.
		6.0 percent.
		5.4 percent.
		10 percent.

Question 13

Asset Y has a beta of
1.2. The risk-free rate of return is 6 percent, while the return on the market
portfolio of assets is 12 percent. Asset Y’s risk premium is

Answer

		7.2 percent.
		6.0 percent.
		13.2 percent.
		10 percent.

Question 14

Table 8.3

Consider the following two securities X and Y.

Which asset (X or Y) in Table 8.3 has the least total risk? Which has the least
systematic risk?

Answer

		X; X.
		X; Y.
		Y; X.
		Y; Y.

Question 15

A firm has an expected dividend next year of $1.20 per share, a
zero growth rate of dividends, and a required return of 10 percent. The value
of a share of the firm’s common stock is ________.

Answer

		$120
		$10
		$12
		$100

Question 16

An investment advisor has recommended a $50,000 portfolio
containing assets R, J, and K; $25,000 will be invested in asset R, with an
expected annual return of 12 percent; $10,000 will be invested in asset J, with
an expected annual return of 18 percent; and $15,000 will be invested in asset
K, with an expected annual return of 8 percent. The expected annual return of
this portfolio is

Answer

		12.67%.
		12.00%.
		10.00%.
		unable to be determined from the information provided.

Question 17

Julian is considering purchasing the stock of Pepsi Cola because
he really loves the taste of Pepsi. What should Julian be willing to pay for
Pepsi today if it is expected to pay a $2 dividend in one year and he expects
dividends to grow at 5 percent indefinitely? Julian requires a 12 percent
return to make this investment.

Answer

		$28.57
		$29.33
		$31.43
		$43.14
Question 18 What is the expected market return if the expected return on asset X is 20 percent, its beta is 1.5, and the risk free rate is 5 percent? Answer 5.0% 7.5% 15.0% 22.5%

Question 19

Patrick Company expects to generate free-cash of $120,000 per
year forever. If the firm’s required return is 12 percent, the market value of
debt is $300,000, the market value of preferred stock is $70,000, and the
company has 100,000 shares of stock outstanding. What is the value of Patrick’s
stock?

Answer

		$6.30
		$10.00
		$7.00
		$9.70

Question 20

A firm has an issue of preferred stock outstanding that has a
stated annual dividend of $4. The required return on the preferred stock has
been estimated to be 16 percent. The value of the preferred stock is ________.

Answer

		$64
		$16
		$25
		$50