FIN 370 Week 4 Practice: Week 4 Knowledge Check

Complete the Week 4 “Knowledge Check” in Connect®.

Note: You have unlimited attempts available to complete this practice assignment. 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.

Which of the following is correct?

Multiple Choice

If you observe a high variability in a stock’s returns you can infer that the stock is very risky.

All of the statements are correct.

There is a positive relationship between risk and return.

Total risk is measured by the standard deviation.

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

Multiple Choice

Dollar return

Market return

Percentage return

Average return

Which of the following is a measurement of the co-movement between two variables that ranges between -1 and +1?

Multiple Choice

Standard deviation

Correlation

Coefficient of variation

Total risk

Which of these is defined as a combination of investment assets held by an investor?

Multiple Choice

All of the options

Portfolio

Market basket

Bundle

Modern portfolio theory is:

Multiple Choice

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

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 return.

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

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

Multiple Choice

Modern portfolio

Total portfolio

Optimal portfolio

Efficient portfolio

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

10 percent

2 percent

The annual return on the S&P 500 Index was 12.4 percent. The annual T-bill yield during the same period was 5.7 percent. What was the market risk premium during that year?

Multiple Choice

5.7 percent

12.4 percent

18.1 percent

6.7 percent

A company has a beta of 0.25. If the market return is expected to be 8 percent and the risk-free rate is 2 percent, what is the company’s required return?

Multiple Choice

3.50 percent

4.00 percent

13.50 percent

1.50 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

−10.31 percent

−30.93 percent

−27.63 percent

−69.07 percent

Whenever a set of stock prices go unnaturally high and subsequently crash down, the market experiences what we call a(n):

Multiple Choice

irrational behavior.

financial meltdown.

none of the options.

stock market bubble.

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

5 percent

4 percent

11 percent

10 percent

A company’s current stock price is $65.40 and it is likely to pay a $2.25 dividend next year. Since analysts estimate the company will have an 11.25 percent growth rate, what is its expected return?

Multiple Choice

14.69 percent

3.61 percent

3.44 percent

11.25 percent

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

Multiple Choice

All of the above

The risk-free rate

Expected return on the market

Beta

Apple’s 9 percent annual coupon bond has 10 years until maturity and the bonds are selling in the market for $890. The firm’s tax rate is 36 percent. What is the firm’s after-tax cost of debt?

Multiple Choice

6.95 percent

10.86 percent

9.81 percent

3.91 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

5.81 percent

4.93 percent

6.30 percent

5.07 percent

Diddy Corp. stock has a beta of 1.0, the current risk-free rate is 5 percent, and the expected return on the market is 15.5 percent. What is Diddy’s cost of equity?

Multiple Choice

14.20 percent

15.50 percent

18.50 percent

16.30 percent

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

7.74 percent; 4.95 percent

7.91 percent; 5.06 percent

8.05 percent; 5.15 percent

When we adjust the WACC to reflect flotation costs, this approach:

Multiple Choice

raises only the cost of external equity.

reduces each capital source’s effective cost.

raises each capital source’s effective cost.

reduces the cost of debt.

Which of these is an estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular division?

Multiple Choice

Divisional WACC

Pure-play WACC

Average WACC

Proxy WACC