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FIN 370 Week 4 Practice: Week 4 Knowledge Check

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

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