Question 1

Hirshfeld Corporation's stock has a required rate of return of 10.25%,and it sells for $57.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend,D1?

Accepted Answer

A)  $2.20
B)  $2.44
C)  $2.69
D)  $2.96
E)  $3.25F) All of the above
G) None of the above

Question 2

If a stock's dividend is expected to grow at a constant rate of 5% a year,which of the following statements is CORRECT? The stock is in equilibrium.

Accepted Answer

A)  The stock's dividend yield is 5%.
B)  The price of the stock is expected to decline in the future.
C)  The stock's required return must be equal to or less than 5%.
D)  The stock's price one year from now is expected to be 5% above the current price.
E)  The expected return on the stock is 5% a year.F) A) and B)
G) B) and D)

Question 3

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT?

Accepted Answer

A)  Exactly 8% of the first monthly payment represents interest.
B)  The monthly payments will decline over time.
C)  A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment.
D)  The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.
E)  The amount representing interest in the first payment would be higher if the nominal interest rate were 6% rather than 8%.F) C) and D)
G) B) and D)

Question 4

Diversification will normally reduce the riskiness of a portfolio of stocks.

Accepted Answer

A) True 
 B)False

Question 5

If D0 = $2.25,g (which is constant) = 3.5%,and P0 = $50,what is the stock's expected dividend yield for the coming year?

Accepted Answer

A)  4.42%
B)  4.66%
C)  4.89%
D)  5.13%
E)  5.39%F) B) and E)
G) A) and B)

Question 6

Managers should under no conditions take actions that increase their firm's risk relative to the market,regardless of how much those actions would increase the firm's expected rate of return.

Accepted Answer

A) True 
 B)False

Question 7

Hazel Morrison,a mutual fund manager,has a $40 million portfolio with a beta of 1.00.The risk-free rate is 4.25%,and the market risk premium is 6.00%.Hazel expects to receive an additional $60 million,which she plans to invest in additional stocks.After investing the additional funds,she wants the fund's required and expected return to be 13.00%.What must the average beta of the new stocks be to achieve the target required rate of return?

Accepted Answer

A)  1.68
B)  1.76
C)  1.85
D)  1.94
E)  2.04F) None of the above
G) D) and E)

Question 8

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?

Accepted Answer

A)  Standard deviation; correlation coefficient.
B)  Beta; variance.
C)  Coefficient of variation; beta.
D)  Beta; beta.
E)  Variance; correlation coefficient.F) B) and D)
G) B) and C)

Question 9

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%,compounded monthly?

Accepted Answer

A)  $969
B)  $1,020
C)  $1,074
D)  $1,131
E)  $1,187F) C) and D)
G) D) and E)

Question 10

Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT?  AB Price $25$40 Expected growth 7%9% Expected return 10%12%\begin{array} { l c r } &	ext {A}&	ext {B}\	ext { Price } & \$ 25 & \$ 40 \	ext { Expected growth } & 7 \% & 9 \% \	ext { Expected return } & 10 \% & 12 \%\end{array} Price  Expected growth  Expected return ​A$257%10%​B$409%12%​

Accepted Answer

A)  The two stocks could not be in equilibrium with the numbers given in the question.
B)  A's expected dividend is $0.50.
C)  B's expected dividend is $0.75.
D)  A's expected dividend is $0.75 and B's expected dividend is $1.20.
E)  The two stocks should have the same expected dividend. F) A) and E)
G) B) and C)

Question 11

American Express and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements.If the APR is stated to be 18.00%,with interest paid monthly,what is the card's EFF%?

Accepted Answer

A)  18.58%
B)  19.56%
C)  20.54%
D)  21.57%
E)  22.65%F) A) and B)
G) A) and C)

Question 12

Which of the following bank accounts has the highest effective annual return?

Accepted Answer

A)  An account that pays 8% nominal interest with daily (365-day)  compounding.
B)  An account that pays 8% nominal interest with monthly compounding.
C)  An account that pays 8% nominal interest with annual compounding.
D)  An account that pays 7% nominal interest with daily (365-day)  compounding.
E)  An account that pays 7% nominal interest with monthly compounding.F) None of the above
G) A) and B)

Question 13

If you plotted the returns of a company against those of the market and found that the slope of your line was negative,the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor,assuming that the observed relationship is expected to continue in the future.

Accepted Answer

A) True 
 B)False

Question 14

One year ago Lerner and Luckmann Co.issued 15-year,noncallable,7.5% annual coupon bonds at their par value of $1,000.Today,the market interest rate on these bonds is 5.5%.What is the current price of the bonds,given that they now have 14 years to maturity?

Accepted Answer

A)  $1,077.01
B)  $1,104.62
C)  $1,132.95
D)  $1,162.00
E)  $1,191.79F) C) and D)
G) B) and D)

Question 15

Joel Foster is the portfolio manager of the SF Fund,a $3 million hedge fund that contains the following stocks.The required rate of return on the market is 11.00% and the risk-free rate is 5.00%.What rate of return should investors expect (and require) on this fund?   Stock  Amount  Beta  A $1,075,0001.20B675,0000.50C750,0001.40 D 500,0000.75$3,000,000‾\begin{array}{l}\begin{array} { c c c } 	ext { Stock } & 	ext { Amount } & 	ext { Beta } \ 	ext { A } & \$ 1,075,000 & 1.20 \B & 675,000 & 0.50 \C & 750,000 & 1.40 \	ext { D } & 500,000 & 0.75\end{array}\\quad\quad\quad\quad\underline{\$ 3,000,000}\end{array} Stock  A BC D ​ Amount $1,075,000675,000750,000500,000​ Beta 1.200.501.400.75​$3,000,000​​

Accepted Answer

A)  10.56%
B)  10.83%
C)  11.11%
D)  11.38%
E)  11.67% F) B) and E)
G) B) and D)

Question 16

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

Accepted Answer

A)  $4,750
B)  $5,000
C)  $5,250
D)  $5,513
E)  $5,788F) A) and B)
G) B) and E)

Question 17

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information,which of the following statements is CORRECT?

Accepted Answer

A)  If a stock has a negative beta, its required return must also be negative.
B)  An index fund with beta = 1.0 should have a required return less than 11%.
C)  If a stock's beta doubles, its required return must also double.
D)  An index fund with beta = 1.0 should have a required return greater than 11%.
E)  An index fund with beta = 1.0 should have a required return of 11%.F) A) and B)
G) All of the above

Question 18

Data for Atwill Corporation is shown below.Now Atwill acquires some risky assets that cause its beta to increase by 30%.In addition,expected inflation increases by 2.00%.What is the stock's new required rate of return?   Initial beta 1.00 Initial required return (rs) 10.20% Market risk premium, RPM 6.00% Percentage increase in beta 30.00% Increase in inflation premium, IP 2.00%\begin{array} { l r } 	ext { Initial beta } & 1.00 \	ext { Initial required return } \left( \mathrm { r } _ { \mathrm { s } } ight)  & 10.20 \% \	ext { Market risk premium, RPM } & 6.00 \% \	ext { Percentage increase in beta } & 30.00 \% \	ext { Increase in inflation premium, IP } & 2.00 \%\end{array} Initial beta  Initial required return (rs​)  Market risk premium, RPM  Percentage increase in beta  Increase in inflation premium, IP ​1.0010.20%6.00%30.00%2.00%​

Accepted Answer

A)  14.00%
B)  14.70%
C)  15.44%
D)  16.21%
E)  17.02% F) C) and D)
G) B) and D)

Question 19

The store where you bought new home furnishings offers you two alternative payment plans.The first plan requires a $4,000 immediate up-front payment.The second plan requires you to make monthly payments of $137.41,payable at the end of each month for 3 years.What nominal annual interest rate is built into the monthly payment plan?

Accepted Answer

A)  12.31%
B)  12.96%
C)  13.64%
D)  14.36%
E)  15.08%F) B) and C)
G) A) and E)

Question 20

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity.(Assume that the bonds have equal default risk and equal coupon rates,and they cannot be called.)

Accepted Answer

A) True 
 B)False

Exam 29: Basic Financial Tools: a Review

Managers should under no conditions take actions that increase their firm's risk relative to the market,regardless of how much those actions would increase the firm's expected rate of return.

Correct Answer
verified

One year ago Lerner and Luckmann Co.issued 15-year,noncallable,7.5% annual coupon bonds at their par value of $1,000.Today,the market interest rate on these bonds is 5.5%.What is the current price of the bonds,given that they now have 14 years to maturity?

Correct Answer
verified

Correct Answer
verified

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity.(Assume that the bonds have equal default risk and equal coupon rates,and they cannot be called.)

Correct Answer
verified

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT?

Correct Answer
verified

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%,compounded monthly?

Correct Answer
verified

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information,which of the following statements is CORRECT?

Correct Answer
verified

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?

Correct Answer
verified

Which of the following bank accounts has the highest effective annual return?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

Correct Answer
verified

Correct Answer
verified

Hirshfeld Corporation's stock has a required rate of return of 10.25%,and it sells for $57.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend,D₁?

Correct Answer
verified

If a stock's dividend is expected to grow at a constant rate of 5% a year,which of the following statements is CORRECT? The stock is in equilibrium.

Correct Answer
verified

Diversification will normally reduce the riskiness of a portfolio of stocks.

Correct Answer
verified

Correct Answer
verified

American Express and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements.If the APR is stated to be 18.00%,with interest paid monthly,what is the card's EFF%?

Correct Answer
verified

Correct Answer
verified

If D₀ = $2.25,g (which is constant) = 3.5%,and P₀ = $50,what is the stock's expected dividend yield for the coming year?

Correct Answer
verified

Exam 29: Basic Financial Tools: a Review

Managers should under no conditions take actions that increase their firm's risk relative to the market,regardless of how much those actions would increase the firm's expected rate of return.

Correct AnswerverifiedShow Answer

One year ago Lerner and Luckmann Co.issued 15-year,noncallable,7.5% annual coupon bonds at their par value of $1,000.Today,the market interest rate on these bonds is 5.5%.What is the current price of the bonds,given that they now have 14 years to maturity?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity.(Assume that the bonds have equal default risk and equal coupon rates,and they cannot be called.)

Correct AnswerverifiedShow Answer

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT?

Correct AnswerverifiedShow Answer

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%,compounded monthly?

Correct AnswerverifiedShow Answer

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information,which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Which of the following bank accounts has the highest effective annual return?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Hirshfeld Corporation's stock has a required rate of return of 10.25%,and it sells for $57.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend,D1?

Correct AnswerverifiedShow Answer

If a stock's dividend is expected to grow at a constant rate of 5% a year,which of the following statements is CORRECT? The stock is in equilibrium.

Correct AnswerverifiedShow Answer

Diversification will normally reduce the riskiness of a portfolio of stocks.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

American Express and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements.If the APR is stated to be 18.00%,with interest paid monthly,what is the card's EFF%?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If D0 = $2.25,g (which is constant) = 3.5%,and P0 = $50,what is the stock's expected dividend yield for the coming year?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Hirshfeld Corporation's stock has a required rate of return of 10.25%,and it sells for $57.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend,D₁?

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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If D₀ = $2.25,g (which is constant) = 3.5%,and P₀ = $50,what is the stock's expected dividend yield for the coming year?

Correct Answer
verified