Exam III Review II Questions

Exam III Review II Questions in $6 Only (Instant Download)Exam III Review II Questions

Use the following information for Questions 1 and 2:

A stock has a required return on 11 percent.  The risk-free is 7 percent, and the market risk premium is 4 percent.

  1. What is the stock’s beta?
  • 1.2
  • 1.1
  • 1.0
  • 0.9

2. If the market risk premium increases to 6 percent, what will happen to the stock’s required rate of return?

  • 6.00%
  • 7.00%
  • 11.00%
  • 13.00%

3. Stock R has a beta of 1.5, Stock S has a beta of 0.75, the expected rate of return on an average stock is 13 percent, and the risk-free rate of return is 7 percent.  By how much does the required return on the riskier stock exceed the required return on the less risky stock?

  • 2.5%
  • 3.0%
  • 3.5%
  • 4.5%

4. An investment has a 50% chance of producing a 20% return, a 25% chance of producing an 8% return, and a 25% chance of producing a -12% return. What is its expected return?

5. Stocks X & Y have the following probability distributions of expected future returns:

Probability             X                      Y   

0.1                         (10%)              (35%)

0.2                            2                      0

0.4                           12                    20

0.2                           20                    25

0.1                           38                    45

  1. Calculate the expected rate of return, rY, for stock Y.
  2. Calculate the standard deviation of expected returns, for Stock X.

6. Suppose you are the money manager of a $4 million investment fund. The fund consists of 4 stocks with the following investments and betas:

                    Stock                 Investment                 Beta    

A                             $400,000                     1.50

B                               600,000                     (.50)

C                             1,000,000                    1.25

D                             2,000,000                    0.75

If the market’s required rate of return is 14% and the risk-free rate is 6%, what is the funds required rate of return?

7. Warr Corporation just paid a dividend of $1.50 a share (that is, D0 = $1.50). The dividend is expected to grow 7% a year for 3 years and then at 5% a year thereafter. What is the expected dividend per share for each of the next 5 years?

8. Thomas Brothers is expected to pay $0.50 per share dividend at the end of the year (that is, D1 = $0.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, Rs, is 15%. What is the stock’s value per share?

9. Harrison Clothiers’ stock currently sells for $20 a share. It just paid a dividend of $1.00 a share (that is, D0 = $1.00). The dividend is expected to grow at a constant rate of 6% a year. What stock price is expected 1 year from now? What is the required rate of return?

10. Smith Technologies is expected to generate $150 million in free cash flow next year, and FCF is expected to grow at a constant rate of 5% per year indefinitely. Smith has no debt or preferred stock, and its WACC is 10%. If smith has 50 million shares of stock outstanding, what is the stock’s value per share?

11. Fee Founders has perpetual preferred stock outstanding that sells for $60 per share and pays a dividend of $5 at the end of each year. What is the required rate of return?

12. The real risk-free rate is 3 percent. Inflation is expected to be 3 percent this year, 4 percent next year, and then 3.5 percent thereafter. The maturity risk premium is estimated to be 0.05 X (t-1)%, where t = number of years to maturity. What is the yield on a 7-year Treasury note?

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