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1.

(Points: 1)     Last year, you purchased 300 shares of stock for $3,800. The stock pays an annual dividend of $.05 per share. Today, you sold your shares for $4,080. What is your total percentage return on this investment?

1. 3.95 percent

2. 7.76 percent

3. 7.80 percent

4. 7.91 percent

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2.

(Points: 1)     You sold 200 shares of stock today for $60 a share. You bought those shares one year ago at a total cost of $14,000. Your percentage return on this investment was -6 percent. What is the amount of the dividend income you received on this investment?

1. $512.91

2. $925.80

3. $1,160.00

4. $2,000

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3.

(Points: 1)     Which one of the following had the smallest risk premium for the period of 1926-2006?

1. long-term corporate bonds

2. long-term government bonds

3. small-company stocks

4. large-company stocks

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4.

(Points: 1)     Assume large-company stocks earned 14.1 percent over a period of years. Over that same period, the risk-free rate was 5 percent and the inflation rate was 4.3 percent. What was the risk premium on large-company stocks during this time period?

1. 4.8 percent

2. 8.9 percent

3. 9.1 percent

4. 9.6 percent

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5.

(Points: 1)     Over the past 5 years, the Swann Co. had annual returns of 6.8 percent, -14.7 percent, 6.3 percent, 1.1 percent, and -28.9 percent. What is the arithmetic average rate of return for this time period?

1. -5.88 percent

2. -2.90 percent

3. .74 percent

4. 3.39 percent

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6.

(Points: 1)     Global Operations has an average rate of return of 8 percent and a standard deviation of 16 percent. What is the approximate probability that this stock will yield more than 40 percent in any given year?

1. 2.5 percent

2. 5.0 percent

3. 16.0 percent

4. 32.0 percent

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7.

(Points: 1)     A company had annual returns of 18 percent, -3 percent, 11 percent, and 14 percent over the past 4 years. What is the standard deviation of the returns for this period?

1. 8.42 percent

2. 9.13 percent

3. 9.58 percent

4. 10.07 percent

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8.

(Points: 1)     Last year, you purchased a stock for $38 a share. Today, you sold this stock for $41. What was the dividend yield if your total return on this stock was 11 percent?

1. .31 percent

2. .38 percent

3. 3.1 percent

4. 3.5 percent

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9.

(Points: 1)     A stock had annual returns of 5.6 percent, 9.4 percent, -2.6 percent, and 14.6 percent over the past 4 years, respectively. What was the geometric average rate of return for the period?

1. 6.47 percent

2. 6.51 percent

3. 6.56 percent

4. 6.60 percent

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10.

(Points: 1)     The common stock of a firm has a mean of 11 percent and a standard deviation of 9 percent. What is the lower end of the 95 percent probability range of returns for any one given

year?

1. -7 percent

2. -2 percent

3. 2 percent

4. 18 percent

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11.

(Points: 1)     The U.S. Treasury bill is yielding 3.6 percent while a stock with a beta of 1.6 is yielding 11.6 percent. What is the reward-to-risk ratio?

1. 5 percent

2. 6 percent

3. 7 percent

4. 8 percent

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12.

(Points: 1)     Susie invested $1,400 in stock A, $3,000 in stock B, and $1,600 in stock C. What is the portfolio weight of stock B?

1. .48

2. .50

3. .52

4. .54

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13.

(Points: 1)     A portfolio is equally invested in 2 stocks and a risk-free security. Stock A is equally as risky as the market and stock B has a beta of 1.07. What is the portfolio beta?

1. .69

2. .73

3. .83

4. .92

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14.

(Points: 1)     Standard deviation measures _____ risk while beta measures _____ risk.

1. market; systematic

2. total; systematic

3. systematic; unsystematic

4. systematic; total

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15.

(Points: 1)     Stock A has a beta of 1.4 and an expected rate of return of 14.68 percent. The market risk premium is 8 percent and the risk-free rate is 3 percent. On a security market line (SML) graph, stock A will lie to the:

1. right of the overall market and below the SML.

2. right of the overall market and above the SML.

3. left of the overall market and below the SML.

4. left of the overall market and above the SML.

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16.

(Points: 1)     A stock has a beta of .7 and a standard deviation of 5.8 percent. The market rate of return is 10.1 percent and the U.S. Treasury bill is providing a 4.1 percent return. What is the expected return on the stock?

1. 8.30 percent

2. 9.01 percent

3. 10.24 percent

4. 11.17 percent

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17.

(Points: 1)     A 5 percent preferred stock is selling for $60 a share. The par value per share is $100. What is the cost of preferred?

1. 5.00 percent

2. 7.84 percent

3. 8.33 percent

4. 8.92 percent

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18.

(Points: 1)     The Hen House is expected to pay an annual dividend of $2 a share next year. The company recently announced that future dividends will increase by 2.7 percent annually. The market price is $50 a share. What is the cost of equity?

1. 6.59 percent

2. 6.70 percent

3. 6.82 percent

4. 7.04 percent

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19.

(Points: 1)     Circle Globes’ stock has a beta of 1.1 and a standard deviation of 9.23 percent. The market risk premium is 8 percent and the risk-free rate is 3.8 percent. What is the cost of equity?

1. 8.42 percent

2. 9.67 percent

3. 12.52 percent

4. 12.60 percent

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20.

(Points: 1)     A firm has a debt-equity ratio of .5 and a tax rate of 40 percent. Its cost of equity is 10 percent and its pre-tax cost of debt is 8 percent. What is the firm’s WACC?

1. 8.27 percent

2. 8.71 percent

3. 9.40 percent

4. 9.71 percent

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21.

(Points: 1)     Western United has 150,000 shares of common stock outstanding at a price per share of $30. There are 15,000 shares of preferred stock outstanding at a price of $60 a share. The firm also has 3,600 bonds outstanding that are currently selling at par. Each bond has a $1,000 face value. What weight should be assigned to the common stock when computing this firm’s WACC?

1. .2632

2. .5000

3. .5556

4. .5738

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22.

(Points: 1)     A firm desires a WACC of 8.4 percent. Its cost of equity is 11.2 percent and its pre-tax cost of debt is 7.1 percent. The firm does not issue preferred stock. The tax rate is 38 percent. What must the debt-equity ratio of the firm be if it is to achieve its target WACC?

1. .59

2. .63

3. .67

4. .70

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23.

(Points: 1)     Kitelinger’s is expected to pay an annual dividend of $1.80 a share next year and increase all future dividends by 3 percent annually. What is the firm’s cost of equity if its stock is currently selling for $44.55 a share?

1. 6.81 percent

2. 7.04 percent

3. 7.11 percent

4. 7.23 percent

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24.

(Points: 1)     You want to create a $25,000 portfolio that consists of three stocks and has an expected return of 13 percent. Currently, you own $15,500 of stock A and $6,000 of stock B. The expected return for stock A is 14.5 percent, and for stock B it is 9.2 percent. What is the expected rate of return for stock C?

1. 11.21 percent

2. 11.58 percent

3. 12.62 percent

4. 12.87 percent

5. 13.20 percent

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25.

(Points: 1)     You own a $90,000 portfolio that is invested in stock A and B. The portfolio beta is equal to the market beta. Stock A has an expected return of 14.1 percent and a beta of 1.2. Stock B has a beta of .76. What is the value of your investment in stock A?

1. $39,333

2. $40,909

3. $49,091

4. $50,545

5. $50,667

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26.

(Points: 1)    

A portfolio is invested 20 percent in stock A, 50 percent in stock B, and 30 percent in stock C. Assuming the returns are normally distributed, what is the 68 percent probability range of returns for any given year?

State of         Probability of               Rate of Return if State Occurs

Economy      State of Economy         Stock A     Stock B     Stock C

Boom            .15                                .18            .13            .15

Normal          .75                                .13            .09            .12

Recession      .10                                -.25          .02            -.20

1. -3.89 percent to 15.77 percent

2. -3.89 percent to 22.32 percent

3. 2.66 percent to 15.77 percent

4. 2.66 percent to 22.32 percent

5. 6.55 percent to 15.77 percent

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27.

(Points: 1)     The risk-free rate is 3.5 percent and the expected return on the market is 11 percent. Stock A has a beta of 1.1 and an expected return of 12 percent. Stock B has a beta of .92 and an expected return of 10.25 percent. Are these stocks correctly priced? Why or why not?

1. No; Stock A is underpriced and stock B is overpriced.

2. No; Stock A is overpriced and stock B is underpriced.

3. No; Stock A is overpriced but stock B is correctly priced.

4. No; Stock A is underpriced but stock B is correctly priced.

5. Yes; Both stocks are correctly priced.

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28.

(Points: 1)     The stock of Ernst Electric has a beta of .87. The market risk premium is 8.6 percent and the risk-free rate is 3.7 percent. What is the expected return on Ernst Electric stock?

1. 7.96 percent

2. 10.58 percent

3. 11.18 percent

4. 12.20 percent

5. 12.30 percent

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29.

(Points: 1)     All else constant, which of the following will increase the aftertax cost of debt for a firm?I. increase in the yield to maturity of the firm's outstanding debtII. decrease in the yield to maturity of the firm's outstanding debtIII. increase in the firm's tax rateIV. decrease in the firm's tax rate

1. I only

2. I and III only

3. I and IV only

4. II and III only

5. II and IV only

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30.

(Points: 1)     Fancee Restaurant's cost of equity is 15.3 percent and its aftertax cost of debt is 6.1 percent. What is the firm's weighted average cost of capital if its debt-equity ratio is 0.58 and the

tax rate is 30 percent?

1. 8.94 percent

2. 10.36 percent

3. 11.92 percent

4. 12.28 percent

5. 13.01 percent

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31.

(Points: 1)     Alpha Industries is considering a project with an initial cost of $7.4 million. The project will produce cash inflows of $1.54 million a year for 7 years. The firm uses the subjective approach to assign discount rates to projects. For this project, the subjective adjustment is +1.5 percent. The firm has a pre-tax cost of debt of 8.6 percent and a cost of equity of 13.7 percent. The debt-equity ratio is .0.65 and the tax rate is 35 percent. What is the net present value of the project?

1. -$372,951

2. -$187,016

3. $48,209

4. $133,333

5. $269,480

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