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Fin 221 Exam 2




Question;Multiple Choice;Identify the choice;that best completes the statement or answers the question.;1.;Stock;A and Stock B each have an expected return of 12 percent, a beta of 1.4, and a;standard deviation of 25 percent. The returns on the two stocks have a;correlation of 0.6. Portfolio P has half of its money invested in Stock A and;half in Stock B. Which of the following statements is correct?;A);Portfolio;P has an expected return of 12 percent.;B);Portfolio;P has a beta of 1.4.;C);Portfolio;P has a standard deviation of 25 percent;D);Both;statements A and B are correct;E);All;of the above are correct.;2.;Universe On-line (UOL);announced that they will pay their first dividend of $1 on their common stock;in a year (D1).;Analysts think dividends will grow by 30% in year 2, by 40% in year 3, and by;25% in year 4 before settling into a constant growth rate of 12% in year 5 and;beyond. What is the value of UOL?s stock today based on this information if the;required return is 16%?;A);$34.59;B);$39.43;C);$28.00;D);$25.00;E);$63.70;3.;Ford preferred stock has;a par value of $25 with a dividend yield of 10%. What is the value of this;stock if the required return is 8%?;A);$31.25;B);$30.00;C);$28.75;D);$25.00;E);$20.00;4.;As a manager of the 221;Fund, a well-diversified portfolio, you have been given the following;information for 4 potential new stocks to add to the 221 Fund.;Stock;Expected;Return;Required;Return;Coefficient of;Variation (CV);Acme;Inc.;15%;13%;1.0;Bubba;Co.;21%;24%;1.5;Cosmo-Cola;17%;18%;0.9;Da;Bares Enterprises;20%;25%;1.4;Which;stock(s) would you add to the well-diversified 221 Fund portfolio based on the;information given?;A);Acme;B);Cosmo-Cola;C);Bubba;D);Da;Bares;5.;The;risk-free rate is 5 percent. Stock A has a beta = 1.0 and Stock B has a beta =;1.4. Stock A has a required return of 11 percent. What is Stock B's required;return?;A);13.4%;B);15.4%;C);12.4%;D);14.4%;E);16.4%;6.;In;the years ahead the market risk premium is expected to fall, while the;risk-free rate is expected to remain at current levels. Given this forecast;which of the following statements is most correct?;A);The;required return will increase for stocks with a beta less than 1.0 and will;decrease for stocks with a beta greater than 1.0.;B);The;required return will fall for all stocks but will fall less for stocks with;higher betas.;C);The;required return will fall for all stocks but will fall more for stocks with;higher betas.;D);The;required return on all stocks will remain unchanged.;E);The;required return for all stocks will fall by the same amount.;7.;Assume;that inflation is expected to decline steadily in the future, but that the real;risk-free rate, r*, will remain constant. Which of the following statements is;CORRECT, other things held constant?;A);If;the pure expectations theory holds, the Treasury yield curve must be downward;sloping.;B);If;inflation is expected to decline, there can be no maturity risk premium.;C);The;expectations theory cannot hold if inflation is decreasing.;D);If;there is a positive maturity risk premium, the Treasury yield curve must be;upward sloping.;E);If;the pure expectations theory holds, the corporate yield curve must be downward;sloping.;8.;Harbuck?s Coffee is a;constant growth stock selling for its equilibrium price of $40. Harbucks has a;beta of 1.2 and the current dividend is $1.20. What is Harbuck?s expected constant;growth rate if the risk-free rate is 3% and the market return is 12%?;A);14.0%;B);10.8%;C);14.4%;D);10.5%;E);13.8%;9.;If the constant growth;model is to give a "reasonable" valuation of a stock, which of the;following isnot;a valid assumption for the model?;A);A;growth rate greater than the required rate of return;B);An;exceptionally high required rate of return;C);A;growth rate of zero;D);A;negative growth rate;E);All;of the above are valid assumptions for the model.;10.;An;analyst seeks to determine the value of Bulldog Industries. After careful;research, the analyst believes that free cash flows for the firm will be $80;million in the upcoming year (year 1) and will grow at 10% annually for each of;the two following years (years 2 and 3). The free cash flows will grow at a;rate of 5% after year 3. What is the Terminal Value (in millions of $) of;Bulldog at the end of year 3 at a WACC of 10%?;A);1,936;B);2,033;C);1,016;D);2,274;11.;Commercial;papaer is an example of a security traded in the ________ market.;A);stock;B);money;C);capital;D);futures;12.;The;real risk-free rate is expected to remain constant at 3% in the future, a 2%;rate of inflation is expected for the next 2 years, after which inflation is;expected to increase to 4%, and there is a positive maturity risk premium that;increases with years to maturity. Given these conditions, which of the;following statements is CORRECT?;A);The;conditions in the problem cannot all be true--they are internally inconsistent.;B);The;yield on a 2-year T-bond must exceed that on a 5-year T-bond.;C);The;yield on a 7-year Treasury bond must exceed that of a 5-year corporate bond.;D);The;Treasury yield curve under the stated conditions would be humped rather than;have a consistent positive or negative slope.;E);The;yield on a 5-year Treasury bond must exceed that on a 2-year Treasury bond.;13.;Consider;the following information and then calculate the required rate of return for;the Global Investment Fund, which holds 4 stocks. The market's required rate of;return is 9.50%, the risk-free rate is 7.00%, and the Fund's assets are as;follows;Stock;Investment;Beta;A;$200,000;1.50;B;$300,000;-0.50;C;$500,000;1.25;D;$1,000,000;0.75;A);8.91%;B);10.42%;C);6.77%;D);10.06%;E);8.64%;14.;Which of the following (all other;factors held constant) will cause an increase in a stock?s value?;A);An;increase in the risk-free rate;B);A;decrease in the stock?s beta;C);An;increase in the market risk premium;D);A;decrease in the constant growth rate in dividends;15.;Grossnickle;Corporation issued 20-year, noncallable, 7.8% annual coupon bonds at their par;value of $1,000 one year ago. Today, the market interest rate on these bonds is;5.5%. What is the current price of the bonds, given that they now have 19 years;to maturity?;A);$1,165.62;B);$1,507.70;C);$1,114.94;D);$1,266.98;E);$1,064.26;16.;Kholdy;Inc's bonds currently sell for $1,275. They pay a $120 annual coupon and have a;20-year maturity, but they can be called in 5 years at $1,120. Assume that no;costs other than the call premium would be incurred to call and refund the;bonds, and also assume that the yield curve is horizontal, with rates expected;to remain at current levels on into the future. What is the difference between;the bond's YTM and its YTC?;A);1.68%;B);1.54%;C);1.82%;D);1.91%;E);1.48%;17.;If;current market interest rates rise, what will happen to the value of;outstanding bonds?;A);They;will remain unchanged.;B);They;will rise.;C);They;will fall.;D);There;is no connection between current market interest rates and the value of;outstanding bonds.;18.;Which;of the following factors would be most likely to lead to an increase in nominal;interest rates?;A);A;new technology like the Internet has just been introduced, and it increases;investment opportunities.;B);There;is a decrease in expected inflation.;C);The;Federal Reserve decides to try to stimulate the economy.;D);The;economy falls into a recession.;E);Households;reduce their consumption and increase their savings.;19.;Kelly;Inc's 5-year bonds yield 7.50% and 5-year T-bonds yield 4.50%. The real;risk-free rate is r* = 2.5%, the default risk premium for Kelly's bonds is DRP;= 0.40%, the liquidity premium on Kelly's bonds is LP = 2.6% versus zero on;T-bonds, and the inflation premium (IP) is 1.5%. What is the maturity risk;premium (MRP) on all 5-year bonds?;A);0.56%;B);0.40%;C);0.38%;D);0.50%;E);0.59%;20.;Which;is the best measure of risk for a single asset held in isolation, and which is;the best measure for an asset held in a diversified portfolio?;A);Standard;deviation, correlation coefficient.;B);Coefficient;of variation, beta.;C);Beta;beta.;D);Variance;correlation coefficient.;E);Beta;variance.;21.;Here are the expected returns on two;stocks;Probability;X;Y;0.1;-20%;10%;0.8;20;15;0.1;40;20;What is stock;X?s coefficient of variation?;A);1.56;B);0.96;C);0.78;D);0.64;E);1.32;22.;Burns Nuclear Power;common stock has a beta of 0.8 and currently pays a dividend of $3. The US;Treasury bill rate is 2.5% and the market risk premium is 9.5%. What is the;value of this stock if a constant annual growth rate of 4% is expected in;dividends and earnings?;A);$51.15;B);$64.82;C);$73.17;D);$49.18;E);$76.10;23.;You;recently sold 200 shares of Disney stock, and the transfer was made through a;broker. This is an example of;A);A;secondary market transaction.;B);A;primary market transaction.;C);A;money market transaction.;D);An;over-the-counter market transaction.;E);A;futures market transaction.;24.;Company;A has a beta of 0.70, while Company B's beta is 1.30. The required return on;the stock market is 11.00%, and the risk-free rate is 4.25%. What is the;difference between A's and B's required rates of return? (Hint: First find the;market risk premium, then find the required returns on the stocks.);A);4.05%;B);3.73%;C);4.90%;D);4.74%;E);3.60%;25.;Which;of the following bonds would have the most re-investment rate risk?;A);A;20-year, 11% coupon bond;B);A;5-year, 11% coupon bond;C);A;5-year zero coupon bond;D);A;20-year zero coupon bond;26.;Which;of the following statements is CORRECT?;A);If;a coupon bond is selling at a premium, then the bond's current yield is zero.;B);The;current yield on Bond A exceeds the current yield on Bond B. Therefore, Bond A;must have a higher;yield to maturity than Bond B.;C) If a coupon bond is selling at a discount, then the;bond's expected capital gains yield is negative.;D) If a bond is selling at a discount, the yield to;call is a better measure of the expected return than the yield to maturity.;E) If a coupon bond is selling at par, its;current yield equals its yield to maturity.;27. Assume that you manage a $10.00 million mutual fund;that has a beta of 1.05 and a 9.50% required return. The risk-free rate is;4.20%. You now receive another $8.50 million, which you invest in stocks with;an average beta of 0.65. What is the required rate of return on the new;portfolio? (Hint: You must first find the market risk premium, then find the;new portfolio beta.);A) 8.57%;B) 9.00%;C) 7.80%;D) 8.14%;E) 7.97%;28. Assume the pure expectations hypothesis (or theory);holds and you observe the following Treasury bond rates.;Years to Maturity;Yield;1;2.0%;2;3.2%;3;4.0%;What is the expected one-year;Treasury yield two years from today?;A) 2.00%;B) 6.18%;C) 4.00%;D) 5.62%;E) 5.58%;29. Suppose the real risk-free rate is 3.25%, the;average future inflation rate is 4.35%, and a maturity risk premium of 0.07%;per year to maturity applies to both corporate and T-bonds, i.e., MRP =;0.07%(t), where t is the years to maturity. Suppose also that a liquidity;premium of 0.50% and a default risk premium of 1.00% apply to A-rated corporate;bonds but not to T-bonds. How much higher would the rate of return be on a;10-year A-rated corporate bond than on a 5-year Treasury bond? Here we assume;that the pure expectations theory is NOT valid. Disregard cross-product terms;i.e., if averaging is required, use the arithmetic average.;A) 1.61%;B) 1.81%;C) 1.52%;D) 1.85%;E) 1.89%;30. O'Brien Ltd.'s outstanding bonds have a $1,000 par;value, and they mature in 25 years. Their nominal annual, not semiannual yield;to maturity is 9.25%, they pay interest semiannually, and they sell at a price;of $1,075. What is the bond's nominal coupon interest rate?;A) 11.93%;B) 9.62%;C) 10.63%;D) 9.12%;E) 10.02%;31.;What is the meaning of a upward sloping;yield curve?;A);Inflation;rates are less than nominal rates.;B);Short-term;interest rates are equal to long-term rates.;C);Short-term;interest rates are greater than long-term rates.;D);Short-term;interest rates are less than long-term rates;32.;You;must estimate the intrinsic value of Mega Dynamics stock in our universe. Mega;Dynamics? current free cash flow is $25 billion, and it is expected to grow at;a constant annual rate of 8.5%. The company?s WACC is;11%. Mega Dynamics has $200 billion of long-term;debt and preferred stock, and there are 30 billion shares of common stock;outstanding. What is Mega Dynamics? estimated intrinsic value per share of;common stock?;A);$26.67;B);$29.50;C);$22.67;D);$28.00;E);$24.00;33.;A;20-year, $1,000 par value bond has a 9% annual coupon. The bond currently sells;for $925. If the yield to maturity remains at its current rate, what will the;price be 5 years from now?;A);$941.86;B);$978.40;C);$951.87;D);$965.84;E);$933.09;34.;Tucker;Corporation is planning to issue new 20-year bonds. The current plan is to make;the bonds non-callable, but this may be changed. If the bonds are made callable;after 5 years at a 5% call premium, how would this affect their required rate;of return;A);There;is no reason to expect a change in the required rate of return.;B);Because;of the call premium, the required rate of return would decline.;C);It;is impossible to say without more information.;D);The;required rate of return would increase because the bond would then be more;risky to a bondholder.;E);The;required rate of return would decline because the bond would then be less risky;to a bondholder.;35.;Goode;Inc.'s stock has a required rate of return of 11.50%, and it sells for $18.00;per share. Goode's dividend is expected to grow at a constant rate of 7.00%.;What was the last dividend, D?;A);$0.77;B);$0.76;C);$0.57;D);$0.62;E);$0.92;36.;MeFirst;Corporation has a cumulative preferred share issue that is suppose to pay a;quarterly dividend of $2. MeFirst failed to pay 3 consecutive dividends to;investors and then managed to pay a common share dividend the very next;quarter. How much cash must MeFirst have paid to each preferred share holder at;that time?;A);$2;per share;B);$8;per share;C);$6;per share;D);$10;per share;37.;Keenan;Industries has a bond outstanding with 15 years to maturity, an 8.25% nominal;coupon, semiannual payments, and a $1,000 par value. The bond has a 6.50%;nominal yield to maturity, but it can be called in 6 years at a price of;$1,150. What is the bond?s nominal yield to call?;A);6.54%;B);6.75%;C);6.89%;D);6.61%;E);8.54%;38.;Quickee-Mart;sold an issue of 20-year $1,000 par value bonds to the public that carry a 8.5%;coupon rate, payable semi-annually. It is now 10 years later and the current;yield to maturity is 9.00%. If interest rates remain at 9.00% until;Quickee-Mart?s bonds mature, what will happen to the value of the bonds over;time?;A);The;bonds will sell at a premium and decline in value until maturity.;B);The;bonds will sell at a premium and rise in value until maturity.;C);The;bonds will sell at a discount and fall in value until maturity.;D);The;bonds will sell at a discount and rise in value until maturity.;39.;MAD;Inc.'s bond rating is downgraded by Standard and Poor's from AAA to BBB. Which;of the following would occur in light of this news?;A);MAD;Inc.'s bond price would fall.;B);MAD;Inc.'s bond price would increase.;C);MAD;Inc.'s bond price would remain the same.;D);MAD;Inc.?s default risk premium would increase.;E);Both;A and D would occur.;40.;Which;of the following is an example of a capital market instrument?;A);Commercial;paper.;B);Preferred;stock.;C);Banker's;acceptances.;D);U.S.;Treasury bills.;E);Money;market mutual funds.


Paper#51062 | Written in 18-Jul-2015

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