FIN 370 Week 4 Practice: Risk and the Cost of Capital Quiz

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

Note: You have unlimited attempts available to complete practice assignments. The highest scored attempt will be recorded.

These assignments have earlier due dates, so plan accordingly.

Grades must be transferred manually to eCampus by your instructor. Don’t worry, this might happen after your due date.

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

Night Ryder, WholeMart, Fruit Fly

WholeMart, Night Ryder, Fruit Fly

WholeMart, Fruit Fly, Night Ryder

Fruit Fly, Night Ryder, WholeMart

Which of these is the dollar return characterized as a percentage of money invested?

Multiple Choice

Dollar return

Percentage return

Market return

Average return

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

4.17 percent

5.83 percent

5.60 percent

1.67 percent

Which of these includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment?

Multiple Choice

Portfolio

Average return

Dollar return

Market return

Which of the following is defined as the volatility of an investment, which includes firm specific risk as well as market risk?

Multiple Choice

Standard deviation

Total risk

Diversifiable risk

Market risk

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

Multiple Choice

Dollar return

Average return

Percentage return

Market return

Which of these statements is true?

Multiple Choice

When people purchase a stock, they know exactly what their dollar and percent return are going to be.

When people purchase a stock, they do not know what their return is going to be-either short term or in the long run.

Many people purchase stocks as they find comfort in the certainty for this safe form of investing.

When people purchase a stock, they know the short-term return, but not the long-term return.

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

−2 percent

6 percent

−8 percent

6.5 percent

Which statement is true?

Multiple Choice

The larger the standard deviation, the lower the total risk.

The larger the standard deviation, the more portfolio risk.

The standard deviation is not an indication of total risk.

The larger the standard deviation, the higher the total risk.

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

7.20 percent

8.83 percent

23.55 percent

Sprint Nextel Corp. stock ended the previous year at $25.00 per share. It paid a $2.57 per share dividend last year. It ended last year at $18.89. If you owned 650 shares of Sprint, what was your dollar return and percent return?

Multiple Choice

$2,960; 11.13 percent

−$3,960; −15.13 percent

−$2,301; −14.16 percent

−$4,960; −16.13 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

$2,009; 9.13 percent

$4,250; 12.29 percent

$4,110; 12.08 percent

$3,990; 11.73 percent

Rank the following three stocks by their risk-return relationship, best to worst. Rail Haul has an average return of 10 percent and standard deviation of 15 percent. The average return and standard deviation of Idol Staff are 15 percent and 25 percent; and of Poker-R-Us are 12 percent and 35 percent.

Multiple Choice

Idol Staff, Poker-R-Us, Rail Haul

Poker-R-Us, Idol Staff, Rail Haul

Rail Haul, Idol Staff, Poker-R-Us

Idol Staff, Rail Haul, Poker-R-Us

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

Both investments have the same diversifiable risk.

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

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

The two assets have the same coefficient of variation.

A stock has an expected return of 12 percent and a standard deviation of 20 percent. Long-term Treasury bonds have an expected return of 9 percent and a standard deviation of 15 percent. Given this data, which of the following statements is correct?

Multiple Choice

The two assets have the same coefficient of variation.

Both investments have the same diversifiable risk.

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

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

Year to date, Company Y had earned a 7 percent return. During the same time period, Company R earned 9.25 percent and Company C earned −2.25 percent. If you have a portfolio made up of 35 percent Y, 40 percent R, and 25 percent C, what is your portfolio return?

Multiple Choice

5.5875 percent

4.6667 percent

6.1667 percent

12.6625 percent

Which of these is the investor’s combination of securities that achieves the highest expected return for a given risk level?

Multiple Choice

Total portfolio

Modern portfolio

Optimal portfolio

Efficient portfolio

If you invested $30,000 in Disney and $10,000 in Oracle and the two companies returned 6 percent and 12 percent respectively, what was your portfolio’s return?

Multiple Choice

9.0 percent

7.5 percent

18.0 percent

10.5 percent

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

18.1 percent

11.9 percent

24.3 percent

Which of the following is a true statement?

Multiple Choice

The risk and return that a firm experienced in the past is also the risk level for its future.

Firms can quite possibly change their stocks’ risk level by substantially changing their business.

If a firm takes on less risky new projects over time, the firm itself will become more risky.

If a firm takes on riskier new projects over time, the firm itself will become less risky.

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

Economic State      Probability          Return

Fast Growth    0.3        40    %

Slow Growth  0.4        15    %

Recession       0.3        −15  %

________________________________________

Multiple Choice

40.0 percent

18.3 percent

22.5 percent

13.5 percent

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

Economic State      Probability          Return

Fast Growth    0.1        50    %

Slow Growth  0.6        8     %

Recession       0.3        −10  %

________________________________________

Multiple Choice

12.8 percent

6.8 percent

16.0 percent

22.7 percent

Which of the following is the average of the possible returns weighted by the likelihood of those returns occurring?

Multiple Choice

Expected return

Required return

Efficient return

Market return

Which of these is the set of probabilities for all possible occurrences?

Multiple Choice

Stock market bubble

Probability

Market probabilities

Probability distribution

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

Behavioral finance

Efficient markets

Beta

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

14.1 percent

19.1 percent

29.0 percent

−4.3 percent

The average annual return on the S&P 500 Index from 1986 to 1995 was 17.6 percent. The average annual T-bill yield during the same period was 9.8 percent. What was the market risk premium during these 10 years?

Multiple Choice

8.8 percent

7.8 percent

8.2 percent

9.8 percent

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

6 percent

8 percent

2 percent

10 percent

You have a portfolio consisting of 20 percent Boeing (beta = 1.3) and 40 percent Hewlett-Packard (beta = 1.6) and 40 percent McDonald’s stock (beta = 0.7). How much market risk does the portfolio have?

Multiple Choice

This portfolio has 28 percent more risk than the general market.

This portfolio has 18 percent more risk than the general market.

This portfolio has 28 percent less risk than the general market.

This portfolio has 18 percent less risk than the general market.

Which of these refers to something that has not been released to the public, but is known by few individuals, likely company insiders?

Multiple Choice

Insider trading

Privately held information

Restricted stock

Audited financial statements

Which of the following is the asset pricing theory based on a beta, a measure of market risk?

Multiple Choice

Efficient market hypothesis

Behavioral asset pricing model

Capital asset pricing model

Efficient markets asset pricing model

Netflix, Inc. has a beta of 3.61. If the market return is expected to be 13.2 percent and the risk-free rate is 7 percent, what is Netflix’s risk premium?

Multiple Choice

29.38 percent

25.72 percent

22.38 percent

20.91 percent

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

Multiple Choice

Stock market bubble stocks

Bargain stocks

Penny stocks

Hedge fund stocks

A company has a beta of 2.91. If the market return is expected to be 16 percent and the risk-free rate is 4 percent, what is the company’s risk premium?

Multiple Choice

11.64 percent

34.92 percent

12.00 percent

22.91 percent

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

Multiple Choice

restricted stock.

privately held information.

stock market bubble.

executive stock options.

ABC Inc. has a dividend yield equal to 3 percent and is expected to grow at a 7 percent rate for the next seven years. What is ABC’s required return?

Multiple Choice

11 percent

10 percent

4 percent

5 percent

Which of the following is a true statement?

Multiple Choice

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.

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.

Which of the following will impact the cost of equity component in the weighted average cost of capital?

Multiple Choice

The risk-free rate

Expected return on the market

Beta

All of the above

Which of the following statements is correct?

Multiple Choice

All of the statements are correct.

The weights of debt and equity should be based on the balance sheet because this is the most accurate assessment of the valuation.

The weighted average cost of capital is calculated on a before-tax basis.

An increase in the market risk premium is likely to increase the weighted average cost of capital.

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

Multiple Choice

Profit margins

Stock price

Expected growth rate in sales

Expected future tax rates

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 weighted average of the capital components costs.

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

a sum of the capital components costs.

a simple average of the capital components costs.

ADK has 30,000 15-year 9 percent annual coupon bonds outstanding. If the bonds currently sell for 111 percent of par and the firm pays an average tax rate of 36 percent, what will be the before-tax and after-tax component cost of debt?

Multiple Choice

9 percent; 5.76 percent

7.91 percent; 5.06 percent

8.05 percent; 5.15 percent

7.74 percent; 4.95 percent

Uptown Inc. has preferred stock selling for 102 percent of par that pays a 6 percent annual coupon. What would be Uptown’s component cost of preferred stock?

Multiple Choice

5.88 percent

1.02 percent

6.12 percent

6.00 percent

OMG Inc. has 4 million shares of common stock outstanding, 3 million shares of preferred stock outstanding, and 50 thousand bonds. If the common shares are selling for $21 per share, the preferred shares are selling for $10 per share, and the bonds are selling for 111 percent of par ($1,000), what weight should you use for debt in the computation of OMG’s WACC?

Multiple Choice

25.79 percent

21.86 percent

29.86 percent

32.74 percent

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

91.19 percent

33.33 percent

80.88 percent

An average of which of the following will give a fairly accurate estimate of what a project’s beta will be?

Multiple Choice

Pure-play proxies

Flotation beta

Proxy beta

Weighted average beta

Marme Inc. has preferred stock selling for 137 percent of par that pays an 11 percent annual dividend. What would be Marme’s component cost of preferred stock?

Multiple Choice

8.03 percent

11.00 percent

8.17 percent

10.16 percent

FarCry Industries, a maker of telecommunications equipment, has 6 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $27 per share, the preferred shares are selling for $15 per share, and the bonds are selling for 119 percent of par ($1,000), what weight should you use for debt in the computation of FarCry’s WACC?

Multiple Choice

4.93 percent

5.81 percent

5.07 percent

6.30 percent

Which of these are fees paid by firms to investment bankers for issuing new securities?

Multiple Choice

Interest expense

User fees

Flotation costs

Seller financing charges

Which of the following is a principle of capital budgeting which states that the calculations of cash flows should remain independent of financing?

Multiple Choice

Generally accepted accounting principle

Financing principle

WACC principle

Separation principle