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Fifi 3303 ..,,,_;-. ,:,-..:.. ,:._...,-:: ............. . .. ,_ . . , . . -.. ............... ... .... Dr. Jaines McCown" E._L_e_ .-..:Spring, 2010..,:" ' , - • "_ ' -. . M idt6nn #2 'i " " "

_¢. = . .... .

lnstn.lctioils: " . ' .,

I. 25 quesuons. Choose the best answer.lbr each and mark it on your scantron sildct.Multi])le.-answers,will re_eiye no cre/Jit.' . - " ' • :

'? lfvou are clueless about any.of the cuesfions, take a guess. You have nothing to lose. " ,

3. ,You are allowed one ( 1) 4,x 6.index card or sheet of..paper with an_Jfing'wntten on it.And a ,:=,

. - " calculator-No-other books• notes, or'o'ther':aids are perlnit{ed. ., .., . . .

4. Anyone cauglit cheating will bedealt with severelsz No collaboration between students is : ....permitted.Beware of, engaging'in any behavior that'mlght be construed as cheating,lsuch as

gaz!ng upon a classmate's exam or conversing with zi clas'smatb.while the exam is in progress: . ,,.... .- . , -t • T,. ,. ,

t 1 _ . • .

..A- .g"

1. Dada, lnc.'s prefen'ed stock pays a di_dend of $4.50 per share each year. The current market

O price is $3:4:62 per share. What retum=_l_the preferred stockholders require? Round your answer . _-.

tothe,,ea_e_t,e_thofonep_r_e_t____ 9_/ % 12 O(flPs'a. 3.0% % _ °

b4SOjo Z}.5_,c,,o,o 5z},t,,7..-- =-I%/,e. None of the above

2. SC Coq)oration common stock pays an annual dividend o1"$5.45 per share. The dividend isforecast to remai_ c_stan-0in tile future. Investors require an 8.% return on SC stock. What is thecurrent market price_ Jof-S@ stock? Round your answer to the i_tir_'cent.

_64,2 _%,/z,q-_ "I'f.$46.33

d. $6.41

e. None of the above _...., 5 /_Sk0%.

3. Bongimun, lnc's common stock will pay a dividend of $0.75 next year. The dividend is

O forecast to at a constant rate of I and the current price of the stock is $4.00 " "grow 9_er year pershare. What return do the company's iffV--g_'Jofsrequire? Round your answer to the nearest onehundredth of one percent _

c. 24.25% ._)--_.3ct. 16.25% o -

e. None of the above -" _"-_" tq "_- \'_

4. Cacaphony Inc has common stock,idth-_ d],_,idend this year o1"$3.40 per share. The dividend gt.-IO_

is forecast to grow at an annual ,'ate of13% F,er year for tile nex_ars and then slow to a -_ "2) "-_."-i %"4% annual rate thereafter. Investors require an 18_)%return on their investment in Cacaphony

# J

common. What is the CUlTent market price of Cacaphony's common stock'? Round your answer

a. $45.2, 3./_ (/ol3) "_ _g_-_--- .[.._b$,222 __ t t" ,c. $53.40

d. $17.99 /.'l%

>5,,, +- s./Ig 4--7_..fl%(o+-2,_5_

. t

. 5. iBosonk, Inc. has 2009 earnings of $50 mflhon and:pald_dwJdends of$15 mflhon. Its common "r!!r _:,,, ......_, . ..- stqckholders equity at the beginning of 2009 was $425. mflhon_Usmg the retennon rate method, -,..,._., -.:.

--:.-_: . _vl_at is yourestimate oftl{e future growth ................... .... _ _ --ate of Bosonk.sRt v de lds. Round.your answer to the..:=:::-w--_---:-.: v.."-= .... = .... -"..... '"7"--........ -"-_ " ' _: " """ ...... " :: . _7''_:'''_

a.nearest3.53%.,°ne hundredth of one percent. .b. 5.95%

d 2.55% .• 1c. None of the above o ....

6. Using free cash tlo_ to estimate the value ofa company:s stock is.sometimes used under'whatcircumstances?

a. When tile company lias no retained earnings . . .b. 7vVhenthe corn pany is based in a foreign country ....... . .

(_},Wvhen the company is under audit.by the IRShe!l the corn pany does not pay divMendse. None of the above

7. YOU purchased a US Treasury bond on January 1. 2009 for.$.l ..200._You collected one coupoll .

p}lyment of $55 on December 31_ 2009 and soldtt_e bond that sal)le.dayfor $9._._.__63W.lmt.lS you:: " " holding period r-&_m "on'the bdiid? Roufid "_5fi¥answer to.the'nearest'bqf6"lifiildre'dth 'dfbhe ..................., " ' :'" "='

" /g,V._ .-: percent.' - .

• b'. 4.58% \_C'. 0_'- --_- , -- i _ r a'_

..... <<e!.Noi_'e oflhe above "

' ' ---tg2=8._:Whal i's a risk _remium? " I : " "15/7bT_'l'he'_mV_o_ltthat casinos pay to gamblers to entice theln to gamble with the,_l '-

_e additional return req aired by risk averse investors O', [}k(3 _IJ_ 0}_(_e: None of tile above . - " _") t/..t'_k.._V _

, s._ct classes ith Io er ' ' " - '....... cwet volatili"?_ tncai_ loi_'de;i'_ilYPa_,i'c'g_lc' t_,_l;_clcd ,CtUlnS bc ausc {_ '*_0 vQ _,b Risk averse investors prefex- higher volallhty

c. Risk loving investors prefer lower volatmly

"d_Gam ole,-s &slike higher returns

._ __tCv-rUn?',/'_tILiSlc._

/"

D . . ;. 'E...

-cry: Treasury Bills, Stocks, Treasury Bonds; _ ,' ",' _ "-5'-"3".' (% _"a. Treasury Bonds, Stocks, Treasury Bills

ck_tocks, Tre,'isury Bonds, Treasury Bills .._I

? reas.ryTeas.ryBo.l ,.Stocks---- -Voc\u_[_tocks. Trcasur 5 Bills. Treasury Bonds

eNo,,eofthea,ove "VV tSbX 0 )

_. iviSk averse investors like to diversify their investments becauseersification decreases the volatility of their returns_iversification increases their expected returns "

5d!versification decreases their expected returns . / 1 '.[) _,J_Q.)""_ L_¢/_-d. Diversification increases tim volatility of their returns _ .e.Noneoftheabo,,_ .;-oil.'.____¢_p,(.h_bC9_ _I

12. Which ofthe tbllowingstatements aretrue? _._ _6(_5 _( X0_'a. Diversification can remove systematic risk bul not unsystenaalic risk

O can remove unsystematic risk but not systematic riskcN_iversification D,

d. Diversification cannot remove systematic nor unsystelnatic risk ,, _,i__;. _. , _ :__-.:,e. Noneoftheahove lint .... ",_ , ",,

d ] "

13. The rclation between the returns on individual stocks and volatility is h ;

a. A positive relation _.. c. L _-b. A negative relation _: :! ,,

c. hTelevant _ _: r, ri:. _;'Q_.o relatione. None of the al'},,v.,,e .:

14. You have used tile historical approach to estimate tile expected future return on Bieber lncstock. You estimate tile return will be 14%. You came to this conclusion because the historical

risk premium on Bieber stock for tile last ten years averaged 10%. The average return onTreasury Bills during that stone period was 6%, What is tile cutwent interest rate on'TreasuryBills?

o4+ =/42b. 4% o oc. 8%

..,_&t,.:,r_+&,-= .... ., ...... ,.,. q. +_ ..................... ;..... c._ ........ ................ Z ........... ; +_tO_.l:ll,,)j(!_..I,- _.1

.:. +:_::7.:-4-.,l,_::-,Tidu,want.to+estimale..the:expedR3d futt_fe4-_ltiria:offS fia_ba':t:,_'t6c_i,_s ng.t _eipro_hb st c .' ,:.., : :,, " :. 7.... ;._.. -,;--. ,.. _ . . .... +-._approach. Refer to the tbllowing table of probabilities a'nd outconles to estimate the return:

State of the World Probability Expected Return4

Good (1.3 .45% "

Mediocre 0.3 22%

Bad 0.4 I/5%

The expected re!urn on the stock is (rounded to the nearest one tenth of one percent):a. 26.1%

b3,:,% +.lZ +c. 38.1%.: d. 10.1%

. I 2 .lk'-_-.-.... 16. The expected return on'.Honkstonk stockvis-I 6% :and its beta is_l;.-5._rThecurrent i/_terest rate ' - : :-" .= : -7:_

•off I' year Treasury Bills is 5%. Using the CAPM. the expected return on the market tSortfolio is

i _ ' ...:._'what?R°undy°uranswert6thenearesttenth0f°nepercent'2.3:[/,,._ . . .." ' "'./_, ='oD_#.'_'' -Io [____7,:;_,+_)'/"_,D5,.I

'" I .o5" . -_ ' " / tt 1-' ",'I"7'?n

:.(i :_,40% . (o= _0b,+ o_ p5 ,_-24,,,,_sd. 8.3%._H_,,.; .- . 1_ L .. "_1:. iS¢(1Ll[:,!}i_lJlt2

eJ None of the above , i? _ •

• , . _.:,..,.+. _ 2- ][: ,,.,e a ......... ; ..... "_; "'\_ .I,;It i_; i1 _!:...... Y ""] t" .'+ '.';. "

" 17.[According It) the'CAPM, an:asset that has a b_a.equal_ioizert_ will ha*_e an ex 3ected relUH1 i .......

equal toa. The market portlbliob. One

c. The market porlfolio retunl mivms the risk-free :'ale

#0fhe ri'sk-fi'ee rate ' :'

c. None ot the above

IN. The l_fficicni Markets Hypothesis says thai

:_AII+,,,_ks,,,iHh,,,erea_i_ed,_,u,,,_e,_u_,l,,,,,_.!,_'xp_'_,_'d,.'.,,-,,sD (c.)lock _rices fidly and quickly reflect all available infi'_rmation

.... , . . .

./Stock prices adjust instan|aneously to irrelevant intbrmation i ...... ' _ ",,_i. e. Nolle of the above i

-" i [_: :.... " _.g

19. A stock's beta is a measure of

a. The company's idiosyncratic risk

_.The COlnpalD"s to systematic riskexposure

he interest rate at ,.vhicl/tile company may borrow from banksd. The risk-free ratee. Nolle of the above

\2(}. _/_u are evahlatmg a project with tile followine cash flows. What is tile net present vah, e ofx,,/

tl,\eff)'foject, assulning a 15% discount rate? Round your answer to tile nearest tenth of a million.Year Cash Flow (Millions)

_0,o _ - ,075.55q32 ,7_._20,, "z_-r.'Z:3 ¢ °3_2

_0,_ ' 2.2_--) I'.g >to_0,3 s,S to./t.,, "2-g.3log

73 ' '"© _0,_ I_./S I!b_oSz- _,,i

..' . , t

"a\23.3 ...... . , -' ........ : ,. . ! .... t. '.,,.

79.4 i a '. i ,,I

"R -70.6 i_ ). !.,. _:.!,,N.-0.4 " ! _" _: ,'*." :'

_oneoftheabove ,_ ., _........

ll'a project has a net present v£alue of zero. this ilnplies thathe discount rate is equal to the internal rate of return

b. The discount rate is greater than the internal rate of returnc. The discount rate is less than tile internal rate of return

d. Unable to determine from tile infommtion givene. None o[" tile above

22. One potential proNem with imemaI rate of return is

D 'tl_NCall only get one answer\

r_/,

• • %

ay.result in multipl]e ;ahswers- "eN;Can n I y result in real numbers for answers ........:-- d. It is interior to tile payback method

e. None of the above

-23. "A potential conflict between net presem value and intermq rate 0fl'eturEq is

m. May get di fJ"L'rdnlresults due to-the tn&U_nmgproblemb. May gel difli_'rent results due to the sca._leprot: lem"" c. May get dilTerent results due to tax considerations

Q_gth A and B-.e. None of the above

24. There is no discernable relation,between the riskiness of an individual slock mad its return

because

a. The risk includes systematic risk

Q3) Tbe risk includes unsystematic lisk,'_The relurn includes compensation liJr income taxes

-" ."d.The return.includes excess coinpensation tbr risk

_.,_ e. None of the above .__ _

_.Z5. The'standard deviatid/Tof a"stock's i-etui:ns are equal to_,#.,'£m"_.._,.

- _:-._._i "a The.variance .... 2................. -. _ _ • _ -..,.'..._:.. b Tile square of the varmnce -

''_,. \" t he square root ofthe_varmnce___ -_ . -___ -- .." .._ '" !_'_ ":"_The sqm'lre root.oftiie _ean _ . " . ',, . . " :__ . _',:. *_'_" e Noleoftheabove. : >: ' '- - ".

- ,¢t_,_ 2 _ .

N

: . 2 _

mm

II