# Exam III Review II Questions

September 21, 2017

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

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.

- 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

- Calculate the expected rate of return, rY, for stock Y.
- 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, D_{0} = $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, D_{1} = $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, D_{0} = $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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