Q&A Hero

Q: The expected return on Natter Corporations stock is 14%. The stocks dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT? a. The stocks dividend yield is 7%. b. The stocks dividend yield is 8%. c. The current dividend per share is $4.00. d. The stock price is expected to be $54 a share one year from now. e. The stock price is expected to be $57 a share one year from now.

Q: Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? X Y Price $25 $25 Expected dividend yield 5% 3% Required return 12% 10% u200b a. Stock Y pays a higher dividend per share than Stock X. b. Stock X pays a higher dividend per share than Stock Y. c. One year from now, Stock X should have the higher price. d. Stock Y has a lower expected growth rate than Stock X. e. Stock Y has the higher expected capital gains yield.

Q: Stock X has the following data. Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT? Expected dividend, D1$3.00 Current Price, P0$50 Expected constant growth rate 6.0% u200b a. The stocks required return is 10%. b. The stocks expected dividend yield and growth rate are equal. c. The stocks expected dividend yield is 5%. d. The stocks expected capital gains yield is 5%. e. The stocks expected price 10 years from now is $100.00.

Q: Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? X Y Price $30 $30 Expected growth (constant) 6% 4% Required return 12% 10% u200b a. Stock X has a higher dividend yield than Stock Y. b. Stock Y has a higher dividend yield than Stock X. c. One year from now, Stock Xs price is expected to be higher than Stock Ys price. d. Stock X has the higher expected year-end dividend. e. Stock Y has a higher capital gains yield.

Q: 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? A B Price $25 $25 Expected growth (constant) 10% 5% Required return 15% 15% u200b a. Stock A's expected dividend at t = 1 is only half that of Stock B. b. Stock A has a higher dividend yield than Stock B. c. Currently the two stocks have the same price, but over time Stock B's price will pass that of A. d. Since Stock As growth rate is twice that of Stock B, Stock As future dividends will always be twice as high as Stock Bs. e. The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist.

Q: If a stocks dividend is expected to grow at a constant rate of 5% a year, then which of the following statements is CORRECT? The stock is in equilibrium. a. The expected return on the stock is 5% a year. b. The stocks dividend yield is 5%. c. The price of the stock is expected to decline in the future. d. The stocks required return must be equal to or less than 5%. e. The stocks price one year from now is expected to be 5% above the current price.

Q: Which of the following statements is CORRECT? a. The constant growth model takes into consideration the capital gains investors expect to earn on a stock. b. Two firms with the same expected dividend and growth rate must also have the same stock price. c. It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. d. If a stock has a required rate of return rs = 12%, and if its dividend is expected to grow at a constant rate of 5%, then the stocks dividend yield is also 5%. e. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

Q: A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = -5%). If the company is in equilibrium and its expected and required rate of return is 15%, then which of the following statements is CORRECT? a. The companys current stock price is $20. b. The companys dividend yield 5 years from now is expected to be 10%. c. The constant growth model cannot be used because the growth rate is negative. d. The companys expected capital gains yield is 5%. e. The companys expected stock price at the beginning of next year is $9.50.

Q: Which of the following statements is CORRECT, assuming stocks are in equilibrium? a. The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield. b. Assume that the required return on a given stock is 13%. If the stocks dividend is growing at a constant rate of 5%, then its expected dividend yield is 5% as well. c. A stocks dividend yield can never exceed its expected growth rate. d. A required condition for one to use the constant growth model is that the stocks expected growth rate exceed its required rate of return. e. Other things held constant, the higher a companys beta coefficient, the lower its required rate of return.

Q: Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT? a. The two stocks must have the same dividend per share. b. If one stock has a higher dividend yield, then it must also have a lower dividend growth rate. c. If one stock has a higher dividend yield, then it must also have a higher dividend growth rate. d. The two stocks must have the same dividend growth rate. e. The two stocks must have the same dividend yield.

Q: Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT? a. If Stock A has a lower dividend yield than Stock B, then its expected capital gains yield must be higher than Stock Bs. b. Stock B must have a higher dividend yield than Stock A. c. Stock A must have a higher dividend yield than Stock B. d. If Stock A has a higher dividend yield than Stock B, then its expected capital gains yield must be lower than Stock Bs. e. Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B.

Q: 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? A B Price $25 $40 Expected growth 7% 9% Expected return 10% 12% u200b a. The two stocks should have the same expected dividend. b. The two stocks could not be in equilibrium with the numbers given in the question. c. A's expected dividend is $0.50. d. B's expected dividend is $0.75. e. A's expected dividend is $0.75 and B's expected dividend is $1.20.

Q: 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? A B Required return 10% 12% Market price $25 $40 Expected growth 7% 9% u200b a. These two stocks should have the same price. b. These two stocks must have the same dividend yield. c. These two stocks should have the same expected return. d. These two stocks must have the same expected capital gains yield. e. These two stocks must have the same expected year-end dividend.

Q: Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT? a. All common stocks fall into one of three classes: A, B, and C. b. All common stocks, regardless of class, must have the same voting rights. c. All firms have several classes of common stock. d. All common stock, regardless of class, must pay the same dividend. e. Some class or classes of common stock are entitled to more votes per share than other classes.

Q: If markets are in equilibrium, which of the following conditions will exist? a. Each stock's expected return should equal its realized return as seen by the marginal investor. b. Each stock's expected return should equal its required return as seen by the marginal investor. c. All stocks should have the same expected return as seen by the marginal investor. d. The expected and required returns on stocks and bonds should be equal. e. All stocks should have the same realized return during the coming year.

Q: The preemptive right is important to shareholders because it a. allows managers to buy additional shares below the current market price. b. will result in higher dividends per share. c. is included in every corporate charter. d. protects the current shareholders against a dilution of their ownership interests. e. protects bondholders and thus enables the firm to issue debt with a relatively low interest rate.

Q: If a given investor believes that a stocks expected return exceeds its required return, then the investor most likely believes that a. the stock is experiencing supernormal growth. b. the stock should be sold. c. the stock is a good buy. d. management is probably not trying to maximize the price per share. e. dividends are not likely to be declared.

Q: An increase in a firms expected growth rate would cause its required rate of return to a. increase. b. decrease. c. fluctuate less than before. d. fluctuate more than before. e. possibly increase, possibly decrease, or possibly remain constant.

Q: Which of the following statements is CORRECT? a. The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years. b. If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, then the stocks dividend yield is also 5%. c. The stock valuation model, P0 = D1/(rs - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate. d. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. e. The constant growth model cannot be used for a zero growth stock, wherein the dividend is expected to remain constant over time.

Q: Two conditions are used to determine whether a stock is in equilibrium: (1) Does the stock's market price equal its intrinsic value as seen by the marginal investor, and (2) does the expected return on the stock as seen by the marginal investor equal his or her required return? If either of these conditions, but not necessarily both, holds, then the stock is said to be in equilibrium. a. True b. False

Q: For a stock to be in equilibrium, two conditions are necessary: (1) The stock's market price must equal its intrinsic value as seen by the marginal investor, and (2) the expected return as seen by the marginal investor must equal his or her required return. a. True b. False

Q: If a stock's market price exceeds its intrinsic value as seen by the marginal investor, then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value. a. True b. False

Q: If a stock's expected return as seen by the marginal investor exceeds his or her required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return. a. True b. False

Q: From an investor's perspective, a firm's preferred stock is generally considered to be less risky than its common stock but more risky than its bonds. However, from a corporate issuer's standpoint, these risk relationships are reversed: bonds are the most risky for the firm, preferred is next, and common is least risky. a. True b. False

Q: Preferred stock is a hybrida cross between a common stock and a bondin the sense that it pays dividends that normally increase annually (like a stock), but its payments are contractually guaranteed (like interest on a bond). a. True b. False

Q: Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the firms total corporate value. a. True b. False

Q: The corporate valuation model cannot be used unless a company pays dividends. a. True b. False

Q: The corporate valuation model can be used only when a company doesn't pay dividends. a. True b. False

Q: According to the nonconstant growth model discussed in the textbook, the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period. a. True b. False

Q: The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities. a. True b. False

Q: When a new issue of stock is brought to market, the marginal investor determines the price at which the stock will trade. a. True b. False

Q: According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock. a. True b. False

Q: The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond. a. True b. False

Q: The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold. a. True b. False

Q: Founders' shares, a type of classified stock owned by the firm's founders, generally have more votes per share than the other classes of common stock. a. True b. False

Q: Classified stock differentiates various classes of common stock. Using it is one way companies can meet special needs, such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control. a. True b. False

Q: If a firm's stockholders are given the preemptive right, then they can call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders must seek a change in management through a proxy fight. a. True b. False

Q: The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm. This right helps protect current stockholders against both dilution of control and dilution of value. a. True b. False

Q: A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock. Proxies can be important tools relating to control of firms. a. True b. False

Q: Portfolio A has only one stock, while Portfolio B consists of all stocks that trade in the market, each held in proportion to its market value. Because of its diversification, Portfolio B will by definition be riskless. a. True b. False

Q: Portfolio A has but one security, while Portfolio B has 100 securities. Because of diversification effects, we would expect Portfolio B to have the lower risk. However, it is possible for Portfolio A to be less risky. a. True b. False

Q: It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm is negative. a. True b. False

Q: A stock with a beta equal to -1.0 has zero systematic (or market) risk. a. True b. False

Q: If the returns of two firms are negatively correlated, then one of them must have a negative beta. a. True b. False

Q: A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio. a. True b. False

Q: A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms. a. True b. False

Q: Someone who is risk averse has a general dislike for risk and a preference for certainty. If risk aversion exists in the market, then investors in general are willing to accept somewhat lower returns on less risky securities. Different investors have different degrees of risk aversion, and the end result is that investors with greater risk aversion tend to hold securities with lower risk (and therefore a lower expected return) than investors who have more tolerance for risk. a. True b. False

Q: If investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10. However, if stocks are held in portfolios, it is possible that the required return could be higher on the stock with the lower standard deviation. a. True b. False

Q: "Risk aversion" implies that investors require higher expected returns on riskier than on less risky securities. a. True b. False

Q: Because of differences in the expected returns on different investments, the standard deviation is not always an adequate measure of risk. However, the coefficient of variation adjusts for differences in expected returns and thus allows investors to make better comparisons of investments' stand-alone risk. a. True b. False

Q: Variance is a measure of the variability of returns, and since it involves squaring the deviation of each actual return from the expected return, it is always larger than its square root, the standard deviation. a. True b. False

Q: Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets. The relevant risk of each asset should be measured in terms of its effect on the risk of the firm's stockholders. a. True b. False

Q: If investors become less averse to risk, the slope of the Security Market Line (SML) will increase. a. True b. False

Q: According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio. a. True b. False

Q: One key conclusion of the Capital Asset Pricing Model is that the value of an asset should be measured by considering both the risk and the expected return of the asset, assuming that the asset is held in a well-diversified portfolio. The risk of the asset held in isolation is not relevant under the CAPM. a. True b. False

Q: 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. a. True b. False

Q: An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held. a. True b. False

Q: Market risk refers to the tendency of a stock to move with the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0. a. True b. False

Q: The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio. a. True b. False

Q: In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are really interested in ex ante (future) data. a. True b. False

Q: Diversification will normally reduce the riskiness of a portfolio of stocks. a. True b. False

Q: When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk. a. True b. False

Q: Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse. a. True b. False

Q: The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly. a. True b. False

Q: The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return. a. True b. False

Q: The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation. a. True b. False

Q: CCC Corp has a beta of 1.5 and is currently in equilibrium. The required rate of return on the stock is 12.00% versus a required return on an average stock of 10.00%. Now the required return on an average stock increases by 37.5% (not percentage points). Neither betas nor the risk-free rate change. What would CCC's new required return be? Do not round your intermediate calculations. a. 19.92% b. 17.10% c. 17.45% d. 17.63% e. 20.09%

Q: Assume that you are 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 2.00%. What rate of return should investors expect (and require) on this fund? Do not round your intermediate calculations. Stock Amount Beta A $525,000 1.20 B $675,000 0.50 C $1,300,000 1.40 D $500,000 0.75 $3,000,000 u200b a. 11.49% b. 13.67% c. 9.88% d. 10.68% e. 9.53%

Q: A mutual fund manager has a $40.00 million portfolio with a beta of 1.00. The risk-free rate is 4.25%, and the market risk premium is 6.00%. The manager expects to receive an additional $22.00 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? Do not round your intermediate calculations. a. 2.29 b. 2.86 c. 2.75 d. 2.64 e. 1.72

Q: 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 2.20%. You now receive another $8.75 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.) Do not round your intermediate calculations. a. 7.13% b. 8.12% c. 9.59% d. 7.30% e. 8.20%

Q: Assume that your uncle holds just one stock, East Coast Bank (ECB), which he thinks has very little risk. You agree that the stock is relatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the following returns data for West Coast Bank (WCB). Both banks have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by how much would your uncle's risk have been reduced if he had held a portfolio consisting of 57% in ECB and the remainder in WCB? (Hint: Use the sample standard deviation formula.) Do not round your intermediate calculations. Year ECB WCB 1 40.00% 40.00% 2 -10.00% 15.00% 3 35.00% -5.00% 4 -5.00% -10.00% 5 15.00% 35.00% u200b Average return = 15.00% 15.00% Standard deviation = 22.64% 22.64% u200b a. 3.85% b. 4.87% c. 3.57% d. 3.93% e. 3.06%

Q: Carson Inc.'s manager believes that economic conditions during the next year will be strong, normal, or weak, and she thinks that the firm's returns will have the probability distribution shown below. What's the standard deviation of the estimated returns? (Hint: Use the formula for the standard deviation of a population, not a sample.) Do not round your intermediate calculations. Economic Conditions Prob. Return Strong 30% 32.0% Normal 40% 10.0% Weak 30% -16.0% u200b a. 18.62% b. 16.75% c. 19.92% d. 18.06% e. 16.94%

Q: 3908 Sum / (N - 1) SQRT = u03c3 = 18.41% 18.41% with Excel

Q: Returns for the Dayton Company over the last 3 years are shown below. What's the standard deviation of the firm's returns? (Hint: This is a sample, not a complete population, so the sample standard deviation formula should be used.) Do not round your intermediate calculations. Year Return 2013 21.00% 2012 -12.50% 2011 17.50% u200b a. 21.36% b. 21.18% c. 18.97% d. 18.78% e. 18.41%

Q: Suppose you hold a portfolio consisting of a $10,000 investment in each of 8 different common stocks. The portfolio's beta is 1.25. Now suppose you decided to sell one of your stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.05. What would the portfolio's new beta be? Do not round your intermediate calculations. a. 1.11 b. 1.26 c. 1.14 d. 1.24 e. 1.41

Q: Mulherin's stock has a beta of 1.23, its required return is 10.00%, and the risk-free rate is 2.30%. What is the required rate of return on the market? (Hint: First find the market risk premium.) Do not round your intermediate calculations. a. 9.59% b. 10.02% c. 8.56% d. 7.96% e. 8.99%

Q: Data for Dana Industries is shown below. Now Dana acquires some risky assets that cause its beta to increase by 15.0%. In addition, expected inflation increases by 1.10%. What is the stock's new required rate of return? Do not round your intermediate calculations. Initial beta 1.00 Initial required return (rs) 10.20% Market risk premium, RPM6.00% Percentage increase in beta 15.00% Increase in inflation premium, IP 1.10% u200b a. 12.20% b. 14.03% c. 9.64% d. 13.18% e. 10.13%

Q: 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 16.50%, the risk-free rate is 3.00%, and the Fund's assets are as follows (Do not round your intermediate calculations.): Stock Investment Beta A $ 200,000 1.50 B 300,000 -0.50 C 500,000 1.25 D $1,000,000 0.75 u200b a. 13.29% b. 15.55% c. 14.89% d. 15.42% e. 12.23%

Q: Nagel Equipment has a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The T-bill rate is 4.00%, and the T-bond rate is 5.25%. The annual return on the stock market during the past 4 years was 10.25%. Investors expect the average annual future return on the market to be 12.50%. Using the SML, what is the firm's required rate of return? Do not round your intermediate calculations. a. 11.63% b. 12.44% c. 12.68% d. 12.33% e. 10.35%

Q: 25% RPM Use the SML to determine Linke's required return using the RPM calculated above: rs= rRF+ RPMb u200b = 6.50% + 4.25% 1.30 u200b = 12.03% u200b LOCAL STANDARDS: United States - OH - Default City - Tier 2: - Capital structure