1. Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. According to Capital Asset Pricing Model (CAPM), which of the following statements is CORRECT?
A. B
Beta. 1.10. 0.90
a. Stock A must have a higher expected return than Stock B.
b. Stock A must have a lower expected return than Stock B.
c. The expected return of Stock A is equal to that of Stock B.
d. None of the above is correct.
2- 1. When considering the time value of money in making an investment decision, an investor would purchase a property when:
I. Present Value < purchase price
II. IRR (Internal Rate of Return) < discount rate (investor's required return)
a. I only
b. II only
c. both I and II
d. neither I nor II
3- 1. You are considering the purchase of a small income-producing property for $150,000 that is expected to produce the following net cash flows:
End of Year. Cash Flow
1. $50,000
2 $50,000
3. $50,000
4. $60,000
1. What is the internal rate of return (IRR) on this investment?
a. 14.29%
b. 14.51%
c. 14.90%
d. 22.56%
4- 1. You are hoping to buy a new boat 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% annual interest and compounded quarterly. How much will you have just after you make the 3rd deposit, 3 years from now?
a. $11,973
b. $12,603
c. $13,267
d. $13,280
5- 1. How many years will it take for your funds to triple if a bank pays you an annual rate of 3.8% and compounded monthly?
a. 26.26
b. 27.58
c. 28.96
d. 29.46
6- 1. Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 7 years at $1,050. What is their yield to call (YTC)?
a. 5.39%
b. 6.72%
c. 7.45%
d. 8.57%
7- 1. A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?
a. $17.39
b. $17.84
c. $18.29
d. $18.75
8- 1. Of the following investments, which would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.
a. Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments).
b. Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).
c. Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).
d. Investment D pays $2,500 at the end of 10 years (just one payment).