FIN 370 Week 4 Apply: Risk and the Cost of Capital Homework

Review the Week 4 “Practice: Risk and the Cost of Capital Quiz” in Connect®.

Complete the Week 4 “Apply: Risk and the Cost of Capital Homework” in Connect®.

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Rx Corp. stock was $60.00 per share at the end of last year. Since then, it paid a $1.00 per share dividend last year. The stock price is currently $62.50. If you owned 400 shares of Rx, what was your percent return?

Multiple Choice

1.67 percent

4.17 percent

5.83 percent

5.60 percent

TechNo stock was $25 per share at the end of last year. Since then, it paid a $1.50 per share dividend last year. The stock price is currently $23. If you owned 300 shares of TechNo, what was your percent return?

Multiple Choice

6 percent

−2 percent

6.5 percent

−8 percent

Which of these is a measure summarizing the overall past performance of an investment?

Multiple Choice

Dollar return

Market return

Average return

Percentage return

Rank the following three stocks by their level of total risk, highest to lowest. Rail Haul has an average return of 8 percent and standard deviation of 10 percent. The average return and standard deviation of Idol Staff are 10 percent and 20 percent; and of Poker-R-Us are 6 percent and 15 percent.

Multiple Choice

Idol Staff, Rail Haul, Poker-R-Us

Rail Haul, Poker-R-Us, Idol Staff

Poker-R-Us, Idol Staff, Rail Haul

Idol Staff, Poker-R-Us, Rail Haul

Rank the following three stocks by their total risk level, highest to lowest. Night Ryder has an average return of 14 percent and standard deviation of 30 percent. The average return and standard deviation of WholeMart are 12 percent and 25 percent; and of Fruit Fly are 25 percent and 40 percent.

Multiple Choice

WholeMart, Fruit Fly, Night Ryder

Night Ryder, WholeMart, Fruit Fly

WholeMart, Night Ryder, Fruit Fly

Fruit Fly, Night Ryder, WholeMart

MedTech Corp. stock was $50.95 per share at the end of last year. Since then, it paid a $0.45 per share dividend. The stock price is currently $62.50. If you owned 500 shares of MedTech, what was your percent return?

Multiple Choice

22.67 percent

23.55 percent

8.83 percent

7.20 percent

FedEx Corp. stock ended the previous year at $113.39 per share. It paid a $0.40 per share dividend last year. It ended last year at $126.69. If you owned 300 shares of FedEx, what was your dollar return and percent return?

Multiple Choice

$4,110; 12.08 percent

$4,250; 12.29 percent

$2,009; 9.13 percent

$3,990; 11.73 percent

A stock has an expected return of 15 percent and a standard deviation of 20 percent. Long-term Treasury bonds have an expected return of 9 percent and a standard deviation of 11 percent. Given this data, which of the following statements is correct?

Multiple Choice

The stock investment has a better risk-return trade-off.

The bond investment has a better risk-return trade-off.

Both investments have the same diversifiable risk.

The two assets have the same coefficient of variation.

Which of these is the portion of total risk that is attributable to overall economic factors?

Multiple Choice

Firm specific risk

Total risk

Market risk

Modern portfolio risk

Which of these is the term for portfolios with the highest return possible for each risk level?

Multiple Choice

Modern portfolios

Efficient portfolios

Optimal portfolios

Total portfolios

Modern portfolio theory is:

Multiple Choice

a concept and procedure for combining securities into a portfolio to minimize risk.

a concept and procedure for combining securities into a portfolio to maximize volatility.

a concept and procedure for combining securities into a portfolio to maximize return.

a concept and procedure for combining securities into a portfolio to maximize dollar return.

If the risk-free rate is 8 percent and the market risk premium is 2 percent, what is the required return for the market?

Multiple Choice

8 percent

6 percent

2 percent

10 percent

Compute the expected return given these three economic states, their likelihoods, and the potential returns:

Economic State      Probability          Return

Fast Growth    0.40      25    %

Slow Growth  0.55      12    %

Recession       0.05      −50  %

________________________________________

Multiple Choice

29.0 percent

−4.3 percent

19.1 percent

14.1 percent

If the risk-free rate is 10 percent and the market risk premium is 4 percent, what is the required return for the market?

Multiple Choice

14 percent

4 percent

10 percent

7 percent

Which of the following is typically considered the return on U.S. government bonds and bills and equals the real interest plus the expected inflation premium?

Multiple Choice

Required return

Market risk premium

Risk-free rate

Risk premium

Which of the following is a model that includes an equation that relates a stock’s required return to an appropriate risk premium?

Multiple Choice

Asset pricing

Efficient markets

Behavioral finance

Beta

The annual return on the S&P 500 Index was 18.1 percent. The annual T-bill yield during the same period was 6.2 percent. What was the market risk premium during that year?

Multiple Choice

6.2 percent

11.9 percent

18.1 percent

24.3 percent

Which of the following are the stocks of small companies that are priced below $1 per share?

Multiple Choice

Penny stocks

Hedge fund stocks

Stock market bubble stocks

Bargain stocks

A company has a beta of 0.50. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is the company’s required return?

Multiple Choice

6.0 percent

11.0 percent

13.5 percent

8.5 percent

If the Japanese stock market bubble peaked at 37,500, and two and a half years later it had fallen to 25,900, what was the percentage decline?

Multiple Choice

−30.93 percent

−69.07 percent

−27.63 percent

−10.31 percent

A company’s current stock price is $84.50 and it is likely to pay a $3.50 dividend next year. Since analysts estimate the company will have a 10 percent growth rate, what is its expected return?

Multiple Choice

14.14 percent

10.00 percent

4.26 percent

4.14 percent

Shares of stock issued to employees that have limitations on when they can be sold are known as:

Multiple Choice

executive stock options.

stock market bubble.

restricted stock.

privately held information.

Which of the following will directly impact the cost of equity?

Multiple Choice

Expected growth rate in sales

Stock price

Expected future tax rates

Profit margins

Which of these makes this a true statement? The WACC formula:

Multiple Choice

uses the after-tax costs of capital to compute the firm’s weighted average cost of debt financing.

is not impacted by taxes.

focuses on operating costs only to keep them separate from financing costs.

uses the pre-tax costs of capital to compute the firm’s weighted average cost of debt financing.

When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing their firm’s cash flows as:

Multiple Choice

a simple average of the capital components costs.

a sum of the capital components costs.

they apply to each asset as they are purchased with their respective forms of debt or equity.

a weighted average of the capital components costs

Which of the following is a true statement?

Multiple Choice

To estimate the before-tax cost of debt, we use the coupon rate on the firm’s existing debt.

To estimate the before-tax cost of debt, we need to solve for the Yield to Call (YTC) on the firm’s existing debt.

To estimate the before-tax cost of debt, we need to solve for the Yield to Maturity (YTM) on the firm’s existing debt.

To estimate the before-tax cost of debt, we use the average rate on the firm’s existing debt.

JackITs has 5 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 20 thousand bonds. If the common shares are selling for $28 per share, the preferred shares are selling for $13.50 per share, and the bonds are selling for 98 percent of par, what would be the weight used for equity in the computation of JackITs’ WACC?

Multiple Choice

83.08 percent

80.88 percent

91.19 percent

33.33 percent

TellAll has 10 million shares of common stock outstanding, 20 million shares of preferred stock outstanding, and 100 thousand bonds. If the common shares are selling for $32 per share, the preferred shares are selling for $20 per share, and the bonds are selling for 106 percent of par, what would be the weight used for preferred stock in the computation of TellAll’s WACC?

Multiple Choice

55.55 percent

66.45 percent

48.43 percent

33.33 percent

ADK has 30,000 15-year 9 percent semi-annual coupon bonds outstanding. If the bonds currently sell for 90 percent of par and the firm pays an average tax rate of 32 percent, what will be the before-tax and after-tax component cost of debt?

Multiple Choice

11.19 percent; 7.61 percent

9.85 percent; 6.70 percent

10.12 percent; 6.88 percent

10.32 percent; 7.02 percent

Flotation costs are:

Multiple Choice

commissions to the underwriting firm that floats the issue.

insignificant and can be assumed away.

the difference between the bid-ask spread on the sale of the security.

None of the options are correct.