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FIN 370 Week 4 Apply: Risk and the Cost of Capital Homework

FIN 370 Week 4 Apply: Risk and the Cost of Capital Homework
 

Review the Week 4 “Practice: Risk and the Cost of Capital Quiz” in Connect®.

Complete the Week 4 “Apply: Risk and the Cost of Capital Homework” in Connect®.

Note: You have only one attempt available to complete assignments. Grades must be transferred manually to eCampus by your instructor. Don’t worry, this might happen after your due date.

 

Rx Corp. stock was $60.00 per share at the end of last year. Since then, it paid a $1.00 per share dividend last year. The stock price is currently $62.50. If you owned 400 shares of Rx, what was your percent return?

Multiple Choice

 

 

 

 
 

 

 

1.67 percent

 

 

 

 
 

 

 

4.17 percent

 

 

 

 
 

 

 

5.83 percent

 

 

 

 
 

 

 

5.60 percent

 

 

TechNo stock was $25 per share at the end of last year. Since then, it paid a $1.50 per share dividend last year. The stock price is currently $23. If you owned 300 shares of TechNo, what was your percent return?

Multiple Choice

 

 

 

 
 

 

 

6 percent

 

 

 

 
 

 

 

−2 percent

 

 

 

 
 

 

 

6.5 percent

 

 

 

 
 

 

 

−8 percent

 

 

Which of these is a measure summarizing the overall past performance of an investment?

Multiple Choice

 

 

 

 
 

 

 

Dollar return

 

 

 

 
 

 

 

Market return

 

 

 

 
 

 

 

Average return

 

 

 

 
 

 

 

Percentage return

 

 

Rank the following three stocks by their level of total risk, highest to lowest. Rail Haul has an average return of 8 percent and standard deviation of 10 percent. The average return and standard deviation of Idol Staff are 10 percent and 20 percent; and of Poker-R-Us are 6 percent and 15 percent.

Multiple Choice

 

 

 

 
 

 

 

Idol Staff, Rail Haul, Poker-R-Us

 

 

 

 
 

 

 

Rail Haul, Poker-R-Us, Idol Staff

 

 

 

 
 

 

 

Poker-R-Us, Idol Staff, Rail Haul

 

 

 

 
 

 

 

Idol Staff, Poker-R-Us, Rail Haul

 

 

Rank the following three stocks by their total risk level, highest to lowest. Night Ryder has an average return of 14 percent and standard deviation of 30 percent. The average return and standard deviation of WholeMart are 12 percent and 25 percent; and of Fruit Fly are 25 percent and 40 percent.

Multiple Choice

 

 

 

 
 

 

 

WholeMart, Fruit Fly, Night Ryder

 

 

 

 
 

 

 

Night Ryder, WholeMart, Fruit Fly

 

 

 

 
 

 

 

WholeMart, Night Ryder, Fruit Fly

 

 

 

 
 

 

 

Fruit Fly, Night Ryder, WholeMart

 

 

MedTech Corp. stock was $50.95 per share at the end of last year. Since then, it paid a $0.45 per share dividend. The stock price is currently $62.50. If you owned 500 shares of MedTech, what was your percent return?

Multiple Choice

 

 

 

 
 

 

 

22.67 percent

 

 

 

 
 

 

 

23.55 percent

 

 

 

 
 

 

 

8.83 percent

 

 

 

 
 

 

 

7.20 percent

 

 

FedEx Corp. stock ended the previous year at $113.39 per share. It paid a $0.40 per share dividend last year. It ended last year at $126.69. If you owned 300 shares of FedEx, what was your dollar return and percent return?

Multiple Choice

 

 

 

 
 

 

 

$4,110; 12.08 percent

 

 

 

 
 

 

 

$4,250; 12.29 percent

 

 

 

 
 

 

 

$2,009; 9.13 percent

 

 

 

 
 

 

 

$3,990; 11.73 percent

 

 

A stock has an expected return of 15 percent and a standard deviation of 20 percent. Long-term Treasury bonds have an expected return of 9 percent and a standard deviation of 11 percent. Given this data, which of the following statements is correct?

Multiple Choice

 

 

 

 
 

 

 

The stock investment has a better risk-return trade-off.

 

 

 

 
 

 

 

The bond investment has a better risk-return trade-off.

 

 

 

 
 

 

 

Both investments have the same diversifiable risk.

 

 

 

 
 

 

 

The two assets have the same coefficient of variation.

 

 

Which of these is the portion of total risk that is attributable to overall economic factors?

Multiple Choice

 

 

 

 
 

 

 

Firm specific risk

 

 

 

 
 

 

 

Total risk

 

 

 

 
 

 

 

Market risk

 

 

 

 
 

 

 

Modern portfolio risk

 

 

Which of these is the term for portfolios with the highest return possible for each risk level?

Multiple Choice

 

 

 

 
 

 

 

Modern portfolios

 

 

 

 
 

 

 

Efficient portfolios

 

 

 

 
 

 

 

Optimal portfolios

 

 

 

 
 

 

 

Total portfolios

 

 

Modern portfolio theory is:

Multiple Choice

 

 

 

 
 

 

 

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 volatility.

 

 

 

 
 

 

 

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 dollar return.

 

 

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

 

 

 

 
 

 

 

8 percent

 

 

 

 
 

 

 

6 percent

 

 

 

 
 

 

 

2 percent

 

 

 

 
 

 

 

10 percent

 

 

 

Compute the expected return given these three economic states, their likelihoods, and the potential returns:

 

Economic State      Probability          Return

Fast Growth    0.40      25    %

Slow Growth  0.55      12    %

Recession       0.05      −50  %

________________________________________

Multiple Choice

 

 

 

 
 

 

 

29.0 percent

 

 

 

 
 

 

 

−4.3 percent

 

 

 

 
 

 

 

19.1 percent

 

 

 

 
 

 

 

14.1 percent

 

 

If the risk-free rate is 10 percent and the market risk premium is 4 percent, what is the required return for the market?

Multiple Choice

 

 

 

 
 

 

 

14 percent

 

 

 

 
 

 

 

4 percent

 

 

 

 
 

 

 

10 percent

 

 

 

 
 

 

 

7 percent

 

 

Which of the following is typically considered the return on U.S. government bonds and bills and equals the real interest plus the expected inflation premium?

Multiple Choice

 

 

 

 
 

 

 

Required return

 

 

 

 
 

 

 

Market risk premium

 

 

 

 
 

 

 

Risk-free rate

 

 

 

 
 

 

 

Risk premium

 

 

Which of the following is a model that includes an equation that relates a stock’s required return to an appropriate risk premium?

Multiple Choice

 

 

 

 
 

 

 

Asset pricing

 

 

 

 
 

 

 

Efficient markets

 

 

 

 
 

 

 

Behavioral finance

 

 

 

 
 

 

 

Beta

 

 

The annual return on the S&P 500 Index was 18.1 percent. The annual T-bill yield during the same period was 6.2 percent. What was the market risk premium during that year?

Multiple Choice

 

 

 

 
 

 

 

6.2 percent

 

 

 

 
 

 

 

11.9 percent

 

 

 

 
 

 

 

18.1 percent

 

 

 

 
 

 

 

24.3 percent

 

 

Which of the following are the stocks of small companies that are priced below $1 per share?

Multiple Choice

 

 

 

 
 

 

 

Penny stocks

 

 

 

 
 

 

 

Hedge fund stocks

 

 

 

 
 

 

 

Stock market bubble stocks

 

 

 

 
 

 

 

Bargain stocks

 

 

A company has a beta of 0.50. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is the company’s required return?

Multiple Choice

 

 

 

 
 

 

 

6.0 percent

 

 

 

 
 

 

 

11.0 percent

 

 

 

 
 

 

 

13.5 percent

 

 

 

 
 

 

 

8.5 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

 

 

 

 
 

 

 

−30.93 percent

 

 

 

 
 

 

 

−69.07 percent

 

 

 

 
 

 

 

−27.63 percent

 

 

 

 
 

 

 

−10.31 percent

 

 

A company’s current stock price is $84.50 and it is likely to pay a $3.50 dividend next year. Since analysts estimate the company will have a 10 percent growth rate, what is its expected return?

Multiple Choice

 

 

 

 
 

 

 

14.14 percent

 

 

 

 
 

 

 

10.00 percent

 

 

 

 
 

 

 

4.26 percent

 

 

 

 
 

 

 

4.14 percent

 

 

 

Shares of stock issued to employees that have limitations on when they can be sold are known as:

Multiple Choice

 

 

 

 
 

 

 

executive stock options.

 

 

 

 
 

 

 

stock market bubble.

 

 

 

 
 

 

 

restricted stock.

 

 

 

 
 

 

 

privately held information.

 

 

Which of the following will directly impact the cost of equity?

Multiple Choice

 

 

 

 
 

 

 

Expected growth rate in sales

 

 

 

 
 

 

 

Stock price

 

 

 

 
 

 

 

Expected future tax rates

 

 

 

 
 

 

 

Profit margins

 

 

Which of these makes this a true statement? The WACC formula:

Multiple Choice

 

 

 

 
 

 

 

uses the after-tax costs of capital to compute the firm’s weighted average cost of debt financing.

 

 

 

 
 

 

 

is not impacted by taxes.

 

 

 

 
 

 

 

focuses on operating costs only to keep them separate from financing costs.

 

 

 

 
 

 

 

uses the pre-tax costs of capital to compute the firm’s weighted average cost of debt financing.

 

 

When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing their firm’s cash flows as:

Multiple Choice

 

 

 

 
 

 

 

a simple average of the capital components costs.

 

 

 

 
 

 

 

a sum of the capital components costs.

 

 

 

 
 

 

 

they apply to each asset as they are purchased with their respective forms of debt or equity.

 

 

 

 
 

 

 

a weighted average of the capital components costs

 

 

Which of the following is a true statement?

Multiple Choice

 

 

 

 
 

 

 

To estimate the before-tax cost of debt, we use the coupon rate on the firm’s existing debt.

 

 

 

 
 

 

 

To estimate the before-tax cost of debt, we need to solve for the Yield to Call (YTC) on the firm’s existing debt.

 

 

 

 
 

 

 

To estimate the before-tax cost of debt, we need to solve for the Yield to Maturity (YTM) on the firm’s existing debt.

 

 

 

 
 

 

 

To estimate the before-tax cost of debt, we use the average rate on the firm’s existing debt.

 

 

JackITs has 5 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 20 thousand bonds. If the common shares are selling for $28 per share, the preferred shares are selling for $13.50 per share, and the bonds are selling for 98 percent of par, what would be the weight used for equity in the computation of JackITs’ WACC?

Multiple Choice

 

 

 

 
 

 

 

83.08 percent

 

 

 

 
 

 

 

80.88 percent

 

 

 

 
 

 

 

91.19 percent

 

 

 

 
 

 

 

33.33 percent

 

 

TellAll has 10 million shares of common stock outstanding, 20 million shares of preferred stock outstanding, and 100 thousand bonds. If the common shares are selling for $32 per share, the preferred shares are selling for $20 per share, and the bonds are selling for 106 percent of par, what would be the weight used for preferred stock in the computation of TellAll’s WACC?

Multiple Choice

 

 

 

 
 

 

 

55.55 percent

 

 

 

 
 

 

 

66.45 percent

 

 

 

 
 

 

 

48.43 percent

 

 

 

 
 

 

 

33.33 percent

 

 

ADK has 30,000 15-year 9 percent semi-annual coupon bonds outstanding. If the bonds currently sell for 90 percent of par and the firm pays an average tax rate of 32 percent, what will be the before-tax and after-tax component cost of debt?

Multiple Choice

 

 

 

 
 

 

 

11.19 percent; 7.61 percent

 

 

 

 
 

 

 

9.85 percent; 6.70 percent

 

 

 

 
 

 

 

10.12 percent; 6.88 percent

 

 

 

 
 

 

 

10.32 percent; 7.02 percent

 

 

Flotation costs are:

Multiple Choice

 

 

 

 
 

 

 

commissions to the underwriting firm that floats the issue.

 

 

 

 
 

 

 

insignificant and can be assumed away.

 

 

 

 
 

 

 

the difference between the bid-ask spread on the sale of the security.

 

 

 

 
 

 

 

None of the options are correct.

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