1.Macy's paid a dividend today of $5 per share. The dividend is expected to grow at a constant rate of 6.5% per year. If Macy's stock is selling $50 per share, what is the shareholder's expected rate of return?
2.The risk-free rate if interest is 4% and the market premium is 9%. Lee Corp has a beta of 2.0, and last year generated a return of 16% with a standard deviation of return of 27%. What is the required return on Lee Corp
3.The return on the market portfolio is currently 12%. Tmobile stockholders require a rate of return of 30% and the stock has a beta of 3.2. According to CAPM, determine the risk free rate
4. Stock W has the following returns for various states of the economy:
recession 9% - 72%
below avg. 16%-15%
avg. 51% 16%
above avg. 14% 35%
boom 10% 85%
What is the standard deviation of return of stock W?
5. If market interest rate decline, which will rise or decline more than the other? long term and short term bonds
6. Which of the following affect an asset's value to an investor? Select all that applies
a. Amount of an asset's expected cash flow
b. The riskiness of the cash flows
c. Timing of an asset's cash flows
D. Investor's required rate of return
7.preferred stock is riskier than long-term debt because its claim on assets and income come after those bonds. True or false
8. Studio Place has an issue of preferred stock that pays a dividend of $4. The preferred stock holders require a rate of return on this stock of 9%. At what price should the preferred stock sell for?
9. Stake Corp net income this year is $800,000. the company generally retains 35% of net income for reinvestment. The company's common equity currently has a book value of $5,000,000. They just paid a dividend of $1.37, and the required rate of return on this stock is 12%. Compute the value of this stock if dividends are expected to continue growing indefinitely at the company's internal growth rate.
10. Which of the following statements is most correct concerning diversification of risk?
a. Asset allocation is important for pension funds but not for individual investors.
b. Large company stocks and small company stocks together in a portfolio lead to dramatic reductions in risk because their returns are negatively correlated.
c. Diversification is mainly achieved by the asset allocation decision, not the selection of individual securities within each asset category.
d. Diversification is mainly achieved by the selection of individual securities for each type of asset held in a portfolio.
11. Historically, investments with the highest returns have the lowest standard deviations because investors do not like risk. True or false
12. The portfolio beta is simply the sum of the betas of the individual stocks in the portfolio. True or False
13. The expected yield on junk bonds is higher than the yield on AAA - rated bonds because of the higher default risk associated with junk bonds. True or False
14. Shell Corp has two bonds outstanding. Both bonds mature in 10yrs, have a face value of $1000 and have a yield to maturity of 8%. One bond is a zero coupon bond and the other bond has a coupon rate of 8%. Which of the following statements is true?
a. Both bonds must sell at the same price if the markets are in equilibrium
b. All rational investors will prefer the 8%bond because it pays more interest
c. The zero coupon bond must have a higher price because of its greater capital gain potential
d. The zero coupon bond must sell for a lower price than the bond with an 8% coupon rate.
15. Assume that a firm has such serious financial problems that it was about to be liquidated after a bankruptcy. All of the firm's assets are about to be sold in order to pay the following claims against the firm: bondholders, preferred stockholders, common stockholders and federal income taxes. Of the claims mentioned, what priority would common stockholders have?
a. first
b. second
c. third
d. fourth