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##### finance homework mcq eco282

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Question;17. Cost of;equity can be estimated using;a. Discounted;cash flow (DCF) approach;b. Capital;Asset Pricing Model (CAPM);c. Arbitrage;Pricing Theory (APT);D. All of the above;18. Cost of;equity can be estimated using;a. The;Fama-French three-factor model;b. Capital;Asset Pricing Model (CAPM);c. Arbitrage;Pricing Theory (APT);D. All of the above;68;19. The;historical returns data for the past three years for Company A's stock is -6%;15%, 15% and that of the market portfolio is 10%, 10% and 16%. Calculate the;beta for Stock A.;A. 1.75;b. 1.0;c. 0.57;d. None of;the above;Solution: Beta = Cov(RA, RM)/Var(RM) = 21/12 = 1.75;20. The;historical returns data for the past three years for Company A's stock is;-6.0%, 15%, 15% and that of the market portfolio is 10%, 10% and 16%. If the;risk-free rate of return is 4%, what is the cost of equity capital (required;rate of return of company A's common stock) using CAPM?;A. 18%;b. 14%;c. 12%;d. None of;the above;Solution: rM = (10 + 10 + 16)/3 = 12%, r = 4 + 1.75 (12 -;4) = 18%;21. The;historical data for the past three years for the market portfolio are 10%, 10%;and 16%. If the risk-free rate of return is 4%, what is the market risk;premium?;a. 4% B. 8%;c. 16%;d. None of;the above;22. The;historical returns data for the past three years for Company A's stock is;-6.0%, 15%, 15% and that of the market portfolio is 10%, 10% and 16%. According;to the security market line (SML), the Stock A is;A. Over priced;b. Under;priced;c. Correctly;priced;d. Need more;information;23. The;historical returns data for the past three years for Stock B and the stock;market portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%.;Calculate the expected return for Stock B and the market portfolio.;A. Stock B 16%, Market Portfolio: 14%;b. Stock B;14%, Market Portfolio: 16%;c. Stock B;24%, Market Portfolio: 12%;d. None of;the above;69;24. The;historical returns data for the past three years for Stock B and the stock;market portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%.;Calculate the variance of the market portfolio returns.;a. 192;b. 128;C. 28;d. None of the above;Solution: Variance = [(10 - 14)^2 + (12 - 14)^2 + (20 -;14)^2]/2 = 28;25. The;historical returns data for the past three years for Stock B and the stock;market portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%.;Calculate the covariance of returns between Stock B and the market portfolio.;A. 24;b. 28;c. 292;d. None of;the above;Solution: Cov(RB, RM) = [(24 - 16)(10 - 14) + (0 - 16)(12 -;14) + (24 - 16)(20 - 14)]/2 = 24;26. The;historical returns data for the past three years for Stock B and the stock;market portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%.;Calculate the beta for Stock B.;A. 0.86;b. 1.0;c. 0.125;d. None of;the above;Solution: Using answers for (24) and (25), beta = 24/28 =;0.86;27. The;historical returns data for the past three years for Stock B and the stock;market portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%.;If the risk-free rate is 4%, calculate the market risk premium.;a. 18.1%;b. 14%;C. 10%;d. None of;the above;28. On a graph;with common stock returns on the Y-axis and market returns on the X-axis, the;slope of the regression line represents the;a. Alpha;B. Beta;c. R-squared;d. Adjusted;beta;70;29. The;historical returns data for the past three years for Stock B and the stock;market portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%.;Calculate the required rate of return (cost of equity) for Stock B using CAPM.;(The risk-free rate of return = 4%);a. 8.6% B.;12.6%;c. 14.3%;d. None of;the above;30. The;historical returns data for the past four years for Stock C and the stock;market portfolio returns are: Stock C: 10%, 30%, 20%,20%, Market Portfolio: 5%;15%, 25%, 15%. Calculate the beta for the stock;a. 0.86;B. 0.5;c. 1.5;d. None of;the above;Solution;Cov(RC, RM) = [(5 - 15)(10 - 20) + (15 - 15)(30 - 20) + (25;- 15)(20 - 20) + (15 - 15)(20 - 20)]/(4 - 1) = 33.3;Var(RM) = [(5 - 15)^2 + (15 - 15)^2 + (25 - 15)^2 + (15 -;15)^2]/(4 - 1) = 66.6 Beta = 33.3/66.6 = 0.5;31. The;historical returns data for the past four years for Stock C and the stock;market portfolio returns are: Stock C: 10%, 30%, 20%,20%, Market Portfolio: 5%;15%, 25%, 15%. If the risk-free rate of return is 5%, calculate the required;rate of return on the Stock C using;CAPM. a. 5% B. 10%;c. 15%;d. None of;the above;Solution: Using CAPM and he beta from (30);32. The beta;of the computer company is 1.7 and the standard error of the estimate is 0.3.;What is the range of values for beta, that has 95% chance of being right?;A. 1.1 - 2.3;b. 1.4 - 2.0;c. 1.5 -;2.0;d. None of;the above;33. Generally;the value to use for the risk-free interest rate is: A. Short-term Treasury;bill rate;b. Long-term;Corporate bond rate;c. Medium-term;Corporate bond rate;d. None of;the above;71;34. A project;has an expected risky cash flow of $200, in year 1. The risk-free rate is 6%;the market rate of return is 16%, and the project's beta is 1.5. Calculate the;certainty equivalent cash flow for year 1.;A. $175.21;b. $164.29;c. $228.30;d. None of;the above;35. A project;has an expected risky cash flow of $500, in year 2. The risk-free rate is 4%;the market rate of return is 14%, and the project's beta is 1.2. Calculate the;certainty equivalent cash flow for year 2.;a. $622.04;b. $164.29;C. $401.90;d. None of;the above;36. A project;has an expected risky cash flow of $500, in year 3. The risk-free rate is 4%;the market rate of return is 14%, and the project's beta is 1.2. Calculate the;certainty equivalent cash flow for year 3.;a. $622.04;B. $360.33;c. $401.90;d. None of;the above;37. A project;has an expected cash flow of $300 in year 3. The risk-free rate is 5%, the;market risk premium is 8% and the project's beta is 1.25. Calculate the;certainty equivalent cash flow for year 3.;A. $228.35;b. $197.25;c. $300;d. None of;the above

Paper#48769 | Written in 18-Jul-2015

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