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Strayer FIN 540 Week 6 ? Homework Chapter 25 and 26

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Question;FIN 540 ? Homework;Chapter 25;1. For markets to be in equilibrium (that is;for there to be no strong pressure for prices to departfrom their current;levels);a. The past realized rate of return must be equal to the;expected rate of return, that is,.;b. The required rate of return must equal the realized rate;of return, that is, r =.;c. All companies must pay dividends.;d. No companies can be in danger of declaring bankruptcy.;e. The expected rate of return must be equal to the required;rate of return, that is, = r.;2. In a portfolio of;three different stocks, which of the following could NOT be true?;a. The riskiness of the portfolio is greater than the;riskiness of one or two of the stocks.;b. The beta of the portfolio is less than the betas of each;of the individual stocks.;c. The beta of the portfolio is greater than the beta of one;or two of the individual stocks' betas.;d. The beta of the portfolio cannot be equal to 1.;e. The riskiness of the portfolio is less than the riskiness;of each of the stocks if they were held in isolation.;3. You have the;following data on (1) the average annual returns of the market for the past 5;years;and (2) similar information on Stocks A and B. Which of the;possible answers best describes the historical betas for A and B?;Years Market Stock A Stock B;1 0.03 0.16 0.05;2?0.05 0.20 0.05;3 0.01 0.18 0.05;4?0.10 0.25 0.05;5 0.06 0.14 0.05;a. bA > +1, bB = 0.;b. bA = 0, bB =?1.;c. bA < 0, bB = 0.;d. bA 0, bB = 1.;4. Which of the;following statements is CORRECT?;a. The typical R2;for a stock is about;0.94 and the typical R2;for a portfolio is;about 0.6.;b. The typical R2;for a stock is about;0.3 and the typical R2;for a large portfolio;is about 0.94.;c. The typical R2;for a stock is about;0.94 and the typical R2;for a portfolio is;also about;0.94.;d. The typical R2;for a stock is about;0.6 and the typical R2;for a portfolio is;also about 0.6.;e. The typical R2;for a stock is about;0.3 and the typical R2;for a portfolio is;also about 0.3.;5. Which of the;following statements is CORRECT?;a. The characteristic line is the regression line that;results from plotting the returns on a particular stock versus the returns on a;stock from a different industry.;b. The slope of the characteristic line is the stock's;standard deviation.;c. The distance of the plot points from the characteristic;line is a measure of the stock's market risk.;d. The distance of the plot points from the characteristic;line is a measure of the stock's diversifiable risk.;e. "Characteristic line" is another name for the;Security Market Line.;1. Which of the;following is NOT a real option?;a. The option to buy shares of stock if its price goes up.;b. The option to expand into a new geographic region.;c. The option to abandon a project.;d. The option to switch the type of fuel used in an;industrial furnace.;e. The option to expand production if the product is;successful.;2. Which of the;following will NOT increase the value of a real option?;a. An increase in the volatility of the underlying source of;risk.;b. An increase in the risk-free rate.;c. An increase in the cost of obtaining the real option.;d. A decrease in the probability that a competitor will;enter the market of the project in;question.;e. Lengthening the time in which a real option must be;exercised.;3. Which of the;following is most CORRECT?;a. Real options change the risk, but not the size, of projects;expected cash flows.;b. Real options are likely to reduce the cost of capital;that should be used to discount a;project's expected cash flows.;c. Very few projects actually have real options.;d. Real options are less valuable when there is a lot of;uncertainty about the true values;future sales and costs.;e. Real options change the size, but not the risk, of;projects' expected cash flows.;4. Ashgate;Enterprises uses the NPV method for selecting projects, and it does a;reasonably goodjob of estimating projects' sales and costs. However, it;never considers real options that might be associated with projects. Which of;the following statements is most likely to describe its situation?;a. Its estimated capital budget is probably too large due to;its failure to consider;abandonment and growth options.;b. Failing to consider abandonment and flexibility options;probably makes the optimal capital budget too large, but failing to consider;growth and timing options probably makes the optimal capital budget too small;so it is unclear what impact not considering real options has on the overall;capital budget.;c. Failing to consider abandonment and flexibility options;probably makes the optimal capital budget too small, but failing to consider;growth and timing options probably makes the optimal capital budget too large;so it is unclear what impact not considering real options has on the overall;capital budget.;d. Real options should not have any effect on the size of;the optimal capital budget.;e. Its estimated capital budget is probably too small;because projects' NPVs are often larger when real options are taken into;account.;5. Refer to Exhibit;26.1. Since the project is considered to be quite risky, a 20% cost of capital;is used. What is the project's expected NPV, in thousands of dollars?;a. $336.15;b. $373.50;c. $415.00;d. $461.11;e. $507.22

 

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